What is Scheinselbstständigkeit or fake self-employment in Germany? Every freelancer in Germany should avoid Scheinselbstständigkeit or ‘fake self employment’ at all costs. Here is what you should know about it.
Scheinselbstständigkeit or fake self-employment in Germany is an inadvertent trap for freelancers and businesses. When caught – the status of the freelancer can be withdrawn and the client can be asked to pay social security contributions retroactively, which can sometimes run into massive figures.
The regulation of freelancers with fake-self-employment in Germany has increased considerably in recent years. Despite this, it remains a grey area.
So how do you know if you are involved as a fake-freelancer or scheinselbstständigkeit in Germany?
Important criteria by which you can distinguish freelancers or freelancers from employees are very complex and vary from dependence on instructions from the client to integration into the client’s organisation.
So gather round and let’s talk about one of the most boring but very critical aspects of freelancing in Germany.
What is scheinselbstständigkeit or Fake Self-Employment in Germany?
Fictitious self-employment or Scheinselbstständigkeit is the term for an employment relationship in which a contractor contractually titled as self-employed is actually an employee. Scheinselbstständigkeit or fake self-employment in Germany is a serious social security fraud and is taken very seriously by the tax authorities.
Working as a fake-freelancer or hiring one can cost both parties involved dearly. In extreme cases, the client and the contractor can lose their livelihoods if one of the relevant bodies uncovers bogus self-employment.
A verification of bogus self-employment can be carried out by the German Pension Insurance Association, any labour court, the tax office or social insurance companies. You as a freelancer or a client can also demand an examination of suspected fake-self-employment.
For example, if a contractor wants to sue for protection against dismissal or a client wants to terminate a contractual relationship. In many cases, however, both parties are uninvolved in initiating a test for bogus self-employment and a third party, e.g. the health insurance company, demands a test for bogus self-employment because, for example, it wants to demand additional contributions.
Who is Affected by Scheinselbstständigkeit in Germany?
All self-employed people who do commissioned work can be affected by pseudo-self-employment. Freelancers can also have a contractual relationship with the client, but this does not constitute an employment relationship. In addition, self-employed people usually registered their trade, whereas freelancers do not have to register trade and do not have to pay a trade tax.
Examples of affected professions and industries in which bogus self-employment in Germany can occur are
- Employees in the film and television industry
- graphic designer, copywriter
- Craftsmen, Building industry
- fee-based physicians, nurses/nursing staff, health care professionals
- real estate agent
- Courier driver
- Teaching staff (lecturers, coaches)
- Cleaning staff
- Forwarding industry (drivers, logistics)
What Qualifies as Fake Self-Employment in Germany?
In an investigation of suspected of bogus self-employment, both the contracts and the circumstances and conditions in everyday working life are examined. The authorities have to find evidence of the pseudo-self-employment and prove it.
The following criteria make up the pseudo-self-employment:
- In principle, bogus self-employment exists if a self-employed person does not regularly employ an employee who is subject to compulsory insurance and
- is permanently working for a single client, and
- whose orders provide him with 5/6 of their turnover
According to German labour laws, the above conditions influence the working capacity of a freelancer. In addition, the authority to issue instructions is a criterion for bogus self-employment.
This may be the case if the self-employed person works in a working environment in which the client has control and steering options that restrict the self-employed person’s entrepreneurial freedom of decision.
Are You a Fake Freelancer or Not?
So if you want to check whether you fall into the muddled zone of bogus self-employment, you should ask yourself the following questions:
- Do you receive work instructions from the client?
- Can you determine your own working hours?
- Are your tasks different from those of the permanent employees of your client?
- Are you free from regular reports on performance?
- Are you (mainly) free to choose your workplace?
- Do you use tools or software that allow your client to control your work?
- Do you market yourself as a self-employed person to other businesses?
- Do you use your own stationery, business cards with the name of your own company etc.?
- Are you active in customer acquisition and advertising for your own business?
If you can answer most of these questions with a YES, then you are unlikely to fall into the category of bogus self-employment.
Scheinselbständigkeit is a sliding scale.
There are a number of criteria for being a “genuine” freelancer. The more you violate, the more likely it is that the Finanzamt will look at your business, decide you’re actually Scheinselbständig, and impose the appropriate sanctions.
Here is a checklist for working as a self-employed person or a freelancer in Germany:
Being free to decide how to deliver a product/service.
Being paid by deliverable as opposed to by time.
Being free to accept or turn down work.
Not wearing your client’s uniform.
Being identified as your own legal entity (eg having an email address in your own domain, as opposed to your client’s domain).
Being free to set your own working hours.
Having several clients, with no one client making up more than 80% of your revenue.
Not being included on your client’s “all employees” mailing list.
Your client not employing people (as employees) who are doing the same work as you.
BUT…but there are some exceptions
Depending on the business you’re in, you can slip through a few of these criteria.
For example, a freelance language teacher at a language school can’t choose to start classes ten minutes early or late, so they are not completely free to set their own working hours – but as long as they meet most of other requirements (e.g. they work for several language schools, they are free to choose whether to teach a course or not, etc), then they would almost certainly still be considered a freelancer.
Or you could freelance for just one client – but as long as you could potentially take on other clients (an employee can’t just decide to work for a second employer) and/or have had multiple clients in the recent past, and meet most of the other criteria, then you’d still likely be considered a freelancer.
Consequences of Fake-Self-Employment for the Client
If bogus self-employment is proven, both client and contractor must expect legal and financial consequences.
In the case of the client, all liability and payment obligations apply retroactively in the case of bogus self-employment as for normal employees. This means that the client must pay social security contributions retroactively for up to four years.
This also includes late payment surcharges if an application for status determination by one of the two parties does not produce a positive result within one month of the start of work. Otherwise, social insurance obligation only comes into effect when there is an unappealable decision.
In the case of fake self-employment, the tax office can also demand back payments of wage tax retroactively. Here too, the regulation of up to four years retroactively applies. If deliberate bogus self-employment is proven, fines, prison sentences and repayment claims for up to 30 years are possible.
Also, the VAT on the invoices of the bogus self-employed person becomes invalid, i.e. the input tax deduction made is considered inadmissible and the deducted input tax amounts must be corrected and repaid. From the time the bogus self-employment is established, the previous contractor is subject to all rights that the employees of the company have.
Read More: A Guide to VAT for Freelancers in Germany
Consequences of Fake Self-Employment for the Freelancer
The contractor must also deal with the consequences of the pseudo-self-employment.
In the first step, their self-employment status is withdrawn and they receive employee status. This gives him numerous employee benefits, such as protection against dismissal, holiday entitlement, or the obligation to continue to pay wages in case of illness.
In addition, in the case of bogus self-employment, they receive net salary payments in the amount of the previous fee.
However, this also means that a self-employed person must deregister with the trade office and end their membership in the Chamber of Industry and Commerce.
Both client and contractor are legally regarded as joint parties in the case of bogus self-employment. The previous client can, therefore, deduct the employee’s share of back payments of social security contributions for the past three months from his future salary. The amount of the contributions depends on the fee or net salary.
Previously issued invoices must be corrected by the contractor if bogus self-employment is proven. For example, the VAT shown must be declared invalid. The input tax deduction may not have been carried out or the input tax must be refunded to the tax office.
5 Tips to Avoid Scheinselbstständigkeit or Fake Self-Employment in Germany
In order to protect yourself from the consequences of bogus self-employment, we give you the following five tips to help you on your way:
1. Ignorance is no excuse
If you are on this page, you have already taken the first step: Find out about bogus self-employment!
Even in the case of bogus self-employment, ignorance does not protect you in the event of a criminal offence. As a self-employed person, you are obliged to inform yourself about fake-freelancing and how to avoid it. If you are not sure, you can find a lawyer or consultant who can help you with your specific questions.
2. Check the service contract carefully
You should compare the above criteria with your daily work routine and your employment contract. In particular, you should check whether you still bear your entrepreneurial freedom of decision and entrepreneurial risk yourself when you sign the contract.
The contract should contain a reference to the fact that the freelancer is not obliged to give instructions. In addition, it can also be stated there that the contractor regularly provides proof of further assignments and independent insurance. The following aspects of your employment contract can protect you from bogus self-employment:
- The contractor is responsible for the payment of statutory contributions (taxes, social security).
- The exact fee for precise activities.
- The contractor is allowed to refuse assignments and accept those of other clients.
- The contractor may use their own employees.
- The contractor does not provide more than half of his work capacity.
- Determine the exact amount of the fee for the use of work equipment.
3. Separate hardware and software or premises
The so-called freedom of choice is also increased by the fact that different software programs are used for placing orders, recording time and effort or invoicing, etc. Even if you have an (additional) own workplace, this can underline the entrepreneurial freedom and protect you from bogus self-employment.
4. Registration with the Deutsche Rentenversicherung Bund
It is advisable to apply to the Deutsche Rentenversicherung Bund within the first three months of starting work for exemption from the obligation to pay pension insurance for the first 3 years of self-employment. Both sides can apply there for clarification of the status query in the event of a dispute.
5. Keep taking on new projects and clients
You see the whole complication of Scheinselbstständigkeit rises from having a single long term client. As a freelancer, you are expected to work with multiple clients over the course of your career.
Generating your income from various clients will solve any potential fake-freelance issues for you. But how to find clients in Germany, you as? I have written a short guide on how and where to find (remote) clients and projects in Germany. Read it here.
Are you an expat freelancer in Germany? Do you have any experience of dealing with Scheinselbstständigkeit or fake self-employment in Germany? Let us know in comments below.