Taxes & business banking for the self-employed


Freelancers: avoid the 'fake freelance' trap in Germany

Last updated on Feb 21, 2020

Kate Bailey

Freelance Editor

May 14, 2019

You’re in a good spot whereby there is a client ready to go for your services. You’ve talked through the project and you’re ready to talk contracts. Great! But, there is an alarming rise of ‘pseudo-self employment’ work arrangements and it’s good to know about this - it’s so prevalent there’s even a word in German for it Scheinselbstständigkeit. Scheinselbstständigkeit is the applicable name and legal definition of a working style which dramatically impacts the way you are taxed, paid and considered in the eyes of business law. It’s actually a lot easier to fall into the trap, which, as a basic definition would be when you conduct business as a freelancer but for a series of legal definitions, you are effectively an employee of that company.

In this case, it is important to be aware of the consequences of failing to change your status or renegotiate your contract. It is also important for freelancers to be aware of the fact companies can give them good, well paid work on a long term basis and take advantage of the fact you are paying your own insurance and overheads. The longer you work with this client the more removed from freelance opportunities you become and that is why in general it is frowned upon in the broader public arena. And besides, if the status of your role has changed so much there is a moral and legal responsibility to address the change in status - why pay business tax if you’re no longer running a business?

Basics First

Of course, as a focused freelancer you have your head wrapped around understanding the German tax year and of course you have a good understanding of how you differ from an employee in the government, tax based perspective with which you must comply. But, in short, all those basics you took a long time to master and be managing to pay every month: that’s all stuff employees get because the law defines the onus on employers to compensate not just for the hours a person works but for the value of their ongoing contribution. That is the first basic of understanding this law. Here are some of the basic signs you are not operating as you have established yourself: as a freelancer or self employed person:

  • you are working primarily in the offices of one client
  • you are not paying any statutory social contributions, e.g. you are privately health-insured
  • your client determines your working hours
  • you wear a uniform
  • you have business cards with your name and your client’s logo on them
  • you have an email address within your client’s company
  • you attend staff meetings
  • your client employs people to perform similar tasks to you
  • you have access to administrative documents or inner workings that a company normally wouldn’t give a freelancer

The law could perceive a circumstance of Scheinselbstständigkeit by

  • only one client over a longer period,
  • no employee (solo self-employed or solo entrepreneur),
  • works primarily in the rooms of the client and
  • does not pay statutory social contributions, but into private security systems
  • Is required to adhere to office rules, norms or operating hours

It should be noted that legally speaking it does not matter if a freelancer would only have one client or if they have 50 - that is not the definition of self-employment, as evidenced in some of the circumstances above. Apparent self-employment occurs when, according to the contract, someone provides independent services or works for a foreign company, but actually works as if in an employment relationship. The difference to a salaried employee is mainly that no social security contributions and payroll taxes are paid and the rights such as dismissal protection and leave entitlement are eliminated. The difference to a self-employed result from the elimination of typical entrepreneurial actions such as the provision of services in their own name and on their own account, customer acquisition, marketing measures, free time allocation, use of capital and employees.

The different interpretations in the labor and social law can lead to the difficult to explain legal situation in Germany. Which is, claiming of in-house working conditions for those who wish to do so, with a high legal risk (for example, in contracting) while conversely being forced (by the circumstances!) to abandon their free-choice life. To what extent here, especially in borderline cases such as employee-like self-employed, basic rights such as contract autonomy can be adequately assessed and ultimately will be questioned in individual cases. This applies in particular if the vulnerability of the persons affected as well as paid-in contributions to existing social security systems are not sufficiently examined before restricting freedom of contract.

The legal regulations in Germany have been revised several times. After a classification was first made on the basis of individual concrete circumstances in 1999, the law now states: "Clues for employment are an activity according to instructions and an integration into the work organization of the instruction provider." The self-employed will be in a comprehensive overall view. A lawful overall assessment requires the circumstances of the case essential, and that all elements of the context are to be taken into account, recognized in its scope and recognized correctly weighted in the overall view with this weight and then can the correct individual determination then be made.  Therefore, these criteria still include the organization of working time, the opportunity to provide the agreed services by third parties and the overall entrepreneurial performance. Thus, as mentioned before, the number of clients is relevant, even if this is not a direct criterion (more). The same applies to acquisition behavior , market presence and entrepreneurial risk.

As a good freelancer, you know your tax basics from Gewerbe to VAT for freelancers. And, you also know how serious it is when it comes to staying on top of the social security system and requirements of Germany. Anyone who is working for a company whom is not subject to social insurance must ensure that he earns more than 1/6 of the turnover with a second client in the calendar year, and in the same field of activity. For self-employed persons who perform two different independent activities (for example as a musician and personal trainer), this does not apply. But you will be required to list both professions and obtain tax approval for both professions - so there is this check in place that could lead to more trouble if you do not elect yourself to the right circumstances and due diligence with the authorities. These limits, which are explicitly provided by the German legislation, are more of a shadowy affair and are often ignored both by the pension insurance, which prefers to check for fake self-employment, and by the freelancers concerned with a client. In particular, a pension payment does not protect against the classification as a fictitious self-employed. Meaning, if it all comes into light and there are consequences you could be the one to pay what is owed to the pension fund. An exemption from the pension insurance obligation is possible on request. On the one hand, in the first three years as an entrepreneur, one can be exempted from the pension insurance obligation on request. On the other hand, a permanent exemption is possible after the age of 58, if after a previously exercised self-employment, compulsory insurance occurs for the first time . A statutory compulsory insurance does not exist if the self-employed has exceeded the mandatory limits and the age limit and before it was already privately insured. The statutory social insurance would no longer accept the person concerned as a member.

Make sure you know your rights and your legal obligations

Whether someone is an employee , employee-like person , freelancer , freelancer , self-employed person , pseudo self-employed person or entrepreneur, has considerable legal consequences for them, their clients and their maybe not employer. These relate to the labor law, social law , social security law and tax law .

New ways of working makes it possible to perceive legal options such as the development of platform-based work, for example in the gig economy, where small jobs are awarded to freelancers at short notice. There are ways we can become involved with fake self employment without even being entirely aware we are doing so.

Employer contributions follow true employment and today the fake self-employment is considered by the German legislation as a form of moonlighting and a way for businesses to avoid making their contributions. Since the underlying legal concepts are still somehow vague or at least in favour of assessing on individuals basises, they are interpreted differently by the social insurance institutions and the courts: a reliable distinction between permissible self-employment and employment subject to social insurance at the beginning of the contract is not possible in advance, except in the case of gross misuse.

In any case, it is always better to be aware of something that so closely affects people working for themselves as there are such grey definitions. The last thing you want is to find yourself in any kind of situation whereby it is not clear that you are a self employed person. The company you are working with has an obligation to provide you with the right circumstances and they themselves can be held responsible - so make sure you know your rights and your legal obligations so you avoid the fake freelance trap!