How is freelancer misclassification enforced in Germany?

Deutsche Rentenversicherung conducts employer audits under § 28p SGB IV. These audits generally examine whether the employer has correctly:

• classified workers;

• submitted social-security notifications;

• calculated remuneration subject to contributions; and

• paid the required contributions.

The pension-insurance institutions generally audit employers at least once every four years. They may issue binding administrative decisions concerning insurance liability and the amount of contributions payable.

The Financial Control of Undeclared Work unit of the customs administration, known as Finanzkontrolle Schwarzarbeit, may investigate illegal employment and failures to comply with social-security obligations.

Other authorities may become involved, including:

• the competent health-insurance collection body;

• tax authorities;

• public prosecutors;

• employment and labour courts; and

• financial courts.

Information may be exchanged between competent authorities where the statutory conditions for cooperation are met.

When an independent Assignment is reclassified as employment, the Client may be required to pay the total social-security contribution, including the employer and employee components.

The employer’s ability to recover the employee component from the worker is restricted by § 28g SGB IV. Recovery through payroll deductions is ordinarily limited to the next three salary payments unless a statutory exception applies.

Contribution claims generally expire four years after the end of the calendar year in which they became due. Under § 25 SGB IV, intentionally withheld contributions are subject to a 30-year limitation period.

Late-payment surcharges may be imposed under § 24 SGB IV. The authority may also recalculate the relevant remuneration where inadequate records prevent an exact assessment.

Reclassification can additionally affect:

• wage-tax withholding;

• paid annual leave;

• minimum-wage rights;

• continued remuneration during illness;

• working-time protection; and

• dismissal protection.

The precise financial result depends on the relevant social-insurance branches and the circumstances of the worker.

Section 111 SGB IV treats specified failures relating to social-security registration, reporting, records and cooperation as administrative offences. Depending on the particular infringement, substantial administrative fines may be imposed.

Section 266a StGB creates criminal liability where an employer withholds employee social-security contributions from the competent collection body. Liability may also arise where the employer provides incorrect or incomplete information or fails to disclose relevant facts and thereby withholds employer contributions.

The ordinary penalty under § 266a may be:

• imprisonment for up to five years; or

• a criminal fine.

In particularly serious cases, the statutory range may increase to imprisonment from six months to ten years.

Criminal liability is not an automatic consequence of every incorrect classification. The required elements of the offence, including the relevant mental element, must be established.

The Act to Combat Undeclared Work and Illegal Employment may create additional administrative or enforcement consequences where the conduct falls within its scope.

Relevant evidence may include:

• the Direct Client–Vendor Service Agreement;

• individual Assignments;

• invoices and payment records;

• working-time records;

• access and system logs;

• instructions and communications;

• organisational charts;

• reporting arrangements;

• substitution records;

• evidence of other Clients;

• status-determination decisions;

• tax documents; and

• social-security records.

A Client identifying material classification risk should consider:

• obtaining German employment and social-security advice;

• examining whether a § 7a SGB IV procedure remains appropriate;

• correcting working arrangements;

• engaging the individual as an employee where required;

• correcting registrations and contribution reports; and

• assessing whether voluntary disclosure or cooperation with the competent authority is appropriate.

Documents should be preserved. Records must not be created retrospectively to present an inaccurate picture of the Assignment.