False Self-Employment: Criteria 2023 and Checklist
False or bogus self-employment (in German known as Scheinselbstständigkeit) is an important topic in the cooperation between companies and freelancers in Germany. There are many ambiguities and false assumptions. In this article, we explain under which circumstances false self-employment might exist, what the consequences can look like, and which criteria can be used to identify it. We also provide a checklist for an initial assessment of the individual situation.
What is False Self-Employment?
False self-employment means that a freelancer works for a company as a self-employed person, but in practice is treated like an employee. In other words, the freelancers write invoices and receive a fee for their services instead of a fixed salary, and no paid vacation or sick pay, for example. But at the same time, they are firmly integrated into the company's processes, work according to instructions, and there is virtually no difference between them and the permanent employees.
This situation runs contrary to the principles of the welfare state: there is basically a dependent employment, but no social security contributions are paid, and the contractors don’t receive the privileges to which they would actually be entitled (for example, protection against dismissal). False self-employment is equated with black labor, and it’s no trivial offense. For this reason, there are audits by the German Pension Insurance (Deutsche Rentenversicherung), the tax offices or even the customs authorities to uncover such employment relationships.
Often Unintentional: When Does False Self-Employment Begin?
Often, false self-employment is not intended by the parties involved, but results from the circumstances: For example, a freelancer initially works for a company in a consulting capacity for only a few hours. The managing director is satisfied with their work and places increasingly larger orders with them. For convenience, they get a company email address and are added to the internal communication system.
Soon they have less and less time for other clients and work almost exclusively for the company. For better coordination, they attend weekly meetings with the entire company, even if they are not always about their projects. They coordinate their vacations with the employees after a while so that their absences do not overlap inconveniently. For practical reasons, they are often present on the premises of the company to better interact with the salaried employees.
In the event of an audit, it would be likely that this case would be classified as false self-employment. What started as a normal assignment can become false self-employment without the parties involved wanting or even noticing it. Companies should therefore remain alert and avoid such a situation. More detailed information is available in our article "Avoiding False Self-Employment: Tips for Clients".
Negative Consequences of False Self-Employment
Unfortunately, ignorance does not protect you from the consequences if false self-employment is discovered. The managing director in our example would have to face serious consequences. Under certain circumstances, such a situation can even threaten the existence of a company. If the company has worked with several false self-employed freelancers over a longer period of time, this can quickly result in high costs.
The client must pay social security contributions and taxes for the last four years - plus late payment penalties. The period can increase significantly in the case of intentional behavior. In addition, the previously self-employed contractor can sue the company to get salaried employee status and obtain all associated rights.
If the company has acted intentionally, there may even be a fine or imprisonment. We provide more extensive information on the consequences in our article "False Self-Employment: Consequences for Clients".
False Self-Employment: Criteria for 2023
Unfortunately, there is no definitive catalog of criteria for detecting false self-employment. During an audit, every case is considered individually, and the interaction of the various factors makes the difference. However, a company can use the following criteria as a guideline for assessing whether the freelancers it hires are false self-employed in 2023:
- Dependency: If the freelancers are economically dependent on the client and generate more than 5/6 of their income (approx. 84 percent) through the company, this is a first indication of false self-employment.
- Obligation to follow instructions: If the freelancers have to follow the instructions of the company and are treated similarly to an employee, they could be false self-employed people.
- External control: If the freelancers cannot determine their own working methods, but are integrated into internal processes, this is a further indication.
- No entrepreneurial status: If freelancers don’t act as entrepreneurs themselves (for example, with their own website, independent pricing and perhaps even their own employees), this is another indicator for false self-employment.
These criteria each have different aspects, which we look at in more detail in our checklist below.
A common misconception is that working for only one client automatically means that there’s false self-employment. However, this does not have to be the case. A large project may mean that they cannot accept other assignments at the same time. If the other criteria do not apply, this is still not false self-employment.
By the way: What is written in the contract with the freelancer is usually only of secondary importance in the assessment. Although the content is also considered during the audit, the situation in practice is decisive. Companies should therefore not try to "disguise" a possible false self-employment by deviating from reality in the contract.
Checklist: Checking False Self-Employment Yourself
A checklist can be derived from the above criteria to help with the assessment. It is not official, but only an aid to assessing the individual aspects. If a company can answer the majority of the following questions with "no", the risk of false self-employment is low. If it answers most of the questions with "yes", the respective freelancer is probably a false self-employed person.
- Is the freelancer a sole proprietor and not a corporation (GmbH, UG, etc.)?
- Do the freelancers work on the company's premises?
- Do they have access by keys, code cards or similar?
- Do they use company equipment and not their own equipment?
- Are working hours set for them?
- Do they perform the same tasks as salaried employees?
- Are they an integral part of a team that otherwise consists only of salaried employees?
- Do they receive instructions that go beyond the necessary coordination?
- Do they have to sign off when they are unable to work (e.g. in case of illness)?
- Are they integrated into the vacation planning and must coordinate absences?
- Is the freelancer not allowed to accept other assignments, or do they have to be approved first?
- Are they booked so extensively that they have no time for other assignments?
- Do they attend company meetings or events that have nothing to do with their tasks?
- Do they have company business cards?
- Do they use a company email address without any reference to their external status?
- Are they paid a fixed monthly salary?
- Do they receive sick pay or vacation pay?
- Do they work on an open-ended basis instead of on a project-by-project basis?
- Do they wear the company's work clothes?
- Do they receive perks that otherwise only employees receive?
If several questions are answered "yes" in this checklist for false self-employment, further clarification is recommended. Our false self-employment test provides an individual assessment of your situation. You will receive the result by email after answering a few questions.
Suspecting False Self-Employment: What to do?
A status determination procedure by the German Pension Insurance (Deutsche Rentenversicherung) will clarify things. The “Clearingstelle” is the point of contact for this. It is better for the company itself to initiate proceedings than for the false self-employment to come to light during a company audit.
However, it can make sense to seek advice from an expert such as a specialized lawyer beforehand. The experts at Hogan Lovells, for example, can make a professional assessment and guide you through the next steps.
Working with Freelancers Safely
Since false self-employment is a complex issue, companies should generally be cautious. They should always be aware that they should not treat freelancers like employees. A briefing at the beginning of the collaboration can make the criteria clear and also make the freelancer aware of the issue.
The contract should contain aspects that emphasize the freelancer's independence, for example the free choice of working hours and location and the fact that other assignments don’t have to be coordinated with the company. It is important that these points then also apply in practice.
If companies are unsure, they can also work with a reliable partner. 9am, for example, places freelance tech talent and helps avoid false self-employment.
Learn more about Scheinselbstständigkeit
Avoid False Self-Employment: Tips for Clients
It is important for companies to avoid false self-employment among their freelancers. We explain which factors need to be taken into account.