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Freelance contracts offer many advantages to the principal at first sight. There is no legal dismissal protection for the freelancer. The freelancer is also not part of the operating unit in terms of the dismissal protection law. The freelancer does not obtain continued remuneration in the case of illness and has no right to paid vacation. The maternity protection law and other regulations which protect employees are not applicable to freelancers as well as collective agreements or company arrangements are not. In addition to these advantages pertaining to the labour law, the principal saves the expensive contributions to the social security and is entitled to the VAT pre-tax deduction. 

These advantages for the principal are contrary to the legislator's will. Because of the precarious financial situation of the social securities, the legislator wants to prevent an avoiding of the social security rights and to receive contributions to the social security system by as many persons as possible. The principals are interested in working as economically as possible and in saving the contributions to the social security. Besides, working with freelancers offers the advantage that the principal can react flexibly to production points because the law of dismissal protection is not applicable. In a high degree, the freelancer does not benefit from the social security. 

The examination of the freelances on their actual independence for questions of the social security is incumbent to the social security administration exclusively. The demands for the conditions of a freelance are basically high.

Most different legal results go back to the concept of the employee. The problems of the determination between freelancer and employee are not limited to the labour law. There also result problems in tax law and law of the social securities. This means that three different court branches deal with the topic of sham freelance. Though every court branch carries out an own judgement, however, the jurisdiction of the Federal Labour Court (Bundesarbeitsgericht) to the employee?s quality is the basis for all courts. In particular cases, there are different judgements possible, because every law branch pursues own goals and their specific characteristics can require another judgement.

The freelance shall not constitute an employment. The contracting parties want to avoid this. The freelance is contrary to an employer-employee relationship an independent business activity on service or work contractual basis. A written agreement should always be concluded. The designation as ?freelance contract? does not protect against the courts might consider the contract as an employer-employee relationship that is liable to the social security system. After the jurisdiction, it does not depend on the name but on the actual execution of the contractual relation.

The courts will proceed on the assumption of an employer-employee relationship, if a personal dependence is given. A financial dependence can serve at least as indicator. The concept of ?integration into an external working organisation? is of central relevance.

For the evaluation of a concrete contractual relation as independent business activity or as personal dependent activity and therefore as an employee, different criteria are consulted. Only the single case matters. Other former or simultaneous activities and their assessment do not have a predictable role to the assessment to the single case. The following criteria should be absolutely considered when drafting a contract for freelance.

Criteria indicating an independent activity

• Own entrepreneurial risk
• Own cost calculation
• Own employees
• Own time management
• Right to notice also other orders
• Free choice of principals
• Several principals
• Reimbursement risks while down-times
• Business occurrence outward
• Free choice of the place of activity, as far as this is not caused by contents and type of the activity

Criteria indicating a personal dependence and therefore an employee's quality:

• Treatment equal to employees
• Integration into the flow chart
• Necessary cooperation with other employees
• No absorption of the costs
• Obligation of personal furnishing of the achievement
• Prohibition of hiring own employees
• Prohibition of pricing
• Obligation of accepting all orders
• Obligation of comprehensive reports
• Subject to directives with regard to place, time and duration of the deployment of work
• Subject to directives with regard to technical instructions and to the contents of work
• Exclusive use of external working material
• Dependence on technical facilities of the principal
• Permanent presence in the enterprise
• Temporal and local connection (admission into the roster)
• Obligation to announce vacation and to let approve
• Obligation to notification of sickness
• Holiday allowance, compensation with time absents
• Exercised working controls

How we can assist you:

In consequence, it is very difficult to provide generally accepted criteria. Hence, it is hardly predictable how a court will classify a contractual relation. Judicial insecurities are inevitable. Only a minimization of risk can be achieved.

The indications are brought into a whole by the jurisdiction. It is then examined whether in the single case more is in favour for an independent business activity or a dependent employment. The criteria do not have any universal validity. Even the incorporation of a limited company or the registration of a business are not indications for an independent activity. The principal should adhere as much as possible to the criteria developed by the jurisdiction.

Risks that may occur for the principal, if a freelance situation will be considered an employment due to an official audit

• Very high financial risks
• Liability for the employer?s and the employee's parts of the social security contributions
• First-line liability for the employee?s income tax
• Reversal of VAT payment and pre-tax deduction
• Criminal Law: e. g. Tax fraud
• Possible consequences with regard to labour law

We can help you to minimize the risks of your contractual situation. Do not hesitate to contact us.