3. How to Structure an Independent Contractor Relationship
a. How to Properly Document the Relationship
Under German law, it is not necessary to conclude a service agreement in written form. For purposes of evidence, however, it is recommended to agree upon a service agreement in writing.
Furthermore, all documents suitable as proof for the status as independent contractor should be collected and maintained. This may include inter alia invoices, declarations/ representations from the independent contractor, the contractor’s business card, references on the contractor’s marketing activities or employment with other principals, etc.
It is necessary to understand that the status of an independent contract cannot be determined or chosen by mutual agreement between contractor and principal. Instead, it is generally decisive how the contractual relationship is exercised in the day-to-day business. However, the service agreement with an independent contractor should still be properly drafted: it should include typical provisions of an independent contractor’s contract and avoid any provisions that are indicative of an employment relationship.
b. Day-to-Day Management of the Relationship
When managing the contractual relationship with an independent contractor, it is highly important to observe the criteria detailed below. This means especially, that the independent contractor should not receive:
i. Instructions on when to work
• Better: Give a time line, when the project must be finished.
ii. Instructions on how to work
• Better: Give instructions on what characteristics the final work product shall have.
iii. Provide equipment
• Better: Let the independent contractor work with his own equipment.
iv. Provide a regular work place, telephone line, e-mail address
• Better: Let the independent contractor work at home or at a flexible work place in the office.
v. Fixed payment every month
• Better: Payment per day/hour actually worked in a month, or a lump sum payment upon the achievement of milestones of the work product.
By such management of the contractual relationship, it is possible to demonstrate that the independent contractor is not integrated into the principal’s business organization. The allegation of an employment relationship can thus be disproved.