Employees vs Independent Contractors Germany
Updated as of 2017
The question, whether a person is an employee or an independent contractor by status may come up in various situations, e.g. during a company audit either of the contractor or the principal, during an investigation procedure by a prosecutor or by German authorities with respect to the payment of social security contributions, or – as will often be the case – in a dispute about the termination of a contract.
If employers err about the social status of their contractors, or deliberately try to avoid an employment relationship, several risks are involved. The employer will be held liable for paying social security contributions effectively for up to four years in arrears (in case of intent for up to thirty years), and employer’s managers or directors may be subject to criminal prosecution for non-payment of these contributions. Furthermore, the pseudo-contractor may claim permanent employment with the employer.
Under German law, both the principal and the contractor, whose status is in doubt, may address the competent German authority and initiate a declaratory procedure about the contractor’s social status. This procedure has the advantage of a clear and reliable assessment, whether a person must be regarded as an employee or can be treated as an independent contractor. However, in debatable cases the authority will often rule in favour of the status of an employee, where the status of an independent contractor may be very well justifiable.