Employee vs. contractor / freelancer

Employee vs. contractor / freelancer

01.06.2022 | Employment Law

For many companies, working with freelancers or contractors is an increasingly popular alternative to hiring employees. As flexible professionals, freelancers cover short-term peaks in workload without the company having to comply with strict employee protection regulations (e.g., rules on fixed-term contracts, holiday entitlement, protection against dismissal, etc.) or worry about social security contributions and income tax. However, if a freelancer or contractor works for a company as a self-employed person, but in practice is treated as an employee (false self-employment), the (then) employer must expect serious consequences under social security law, labour law, tax law and criminal law.

Distinction between employee and freelancer

A freelancer is - unlike an employee - not bound to fixed working hours and does not have to comply with the company's spatial and content-related requirements. A freelancer may be obliged to provide certain services specified by his or her client. However, the freelancer is responsible for the organization and planning of his work. However, this does not per se preclude an agreement between the company and the freelancer on how the work is to be done.

Unlike an employee, a freelancer decides how, when and where he works.

Furthermore, a freelancer - unlike an employee - is not integrated into the company’s organization. If, for example, the "freelancer" uses the company's premises and work equipment (e.g., laptop or other office equipment) - as employees do - this is an indication that dependent employment actually exists. The use of the company's letterhead and email signature also speaks against a freelance relationship.

A freelancer is free to refuse assignments or to work for other clients in parallel. As a rule, he or she does not have to provide the services in person but can use his or her own staff for this purpose.

The distinction is often difficult to make, since according to case law, an overall assessment of all the circumstances of the individual case must be carried out.

It is important to know that the actual collaboration in practice with the freelancer is decisive for the distinction between employee and freelancer. If a “self-employed person” is treated like an employee in practice, a well-drafted contract that reflects all relevant criteria - deviating from reality - will not help.

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Consequences of misclassification

If it turns out that the alleged freelancer is actually to be classified as an employee, he or she is entitled to all the rights and claims that the law provides for employees. He or she can demand paid leave, continued payment in case of illness and overtime pay - even retroactively for up to three years. In addition, the statutory protection against dismissal applies.

Misclassification also has considerable consequences in terms of social security contributions and wage tax. Since the company has not paid social security contributions for the alleged freelancer, it must pay them – usually the employer's as well as the employee's contributions - for the past four years, in case of intent even for up to 30 years. In addition, the company and the supposed freelancer owe unpaid wage tax - retroactively for up to ten years.

The misclassification of the freelancer also exposes companies to high fines and company representatives can even be personally liable to prosecution.

How to avoid false self-employment

Companies should be aware of the essential criteria for distinguishing between employees and freelancers and carry out a corresponding check as standard before concluding contracts with freelancers.

It must be ensured that the contracts reflect the requirements for a classification as a freelancer and, above all, that the actual implementation complies with such requirements.

If doubts in an individual case cannot be resolved even through legal advice - it is possible to obtain legal certainty by requesting a status clearance decision at the clearing office of the German statutory pension insurance (Deutsche Rentenversicherung Bund).