Pseudo self-employment / Employee-like self-employment

Transcription

1 This document can be found at under doc. no Pseudo self-employment / Employee-like self-employment When a trader starts their business, they should always ensure that they are actually selfemployed. A large enough number of different clients is a basic prerequisite for this. Otherwise the suspicion of pseudo self-employment may arise. In order to avoid this, each trader should observe the conditions and information set out in this leaflet, which are intended to provide an initial overview of the problems of pseudo self-employment. Content: Pseudo self-employment Who is a pseudo self-employed person? Discontinuation of the catalogue of characteristics of the old section 7... para. 4 SGB IV Significance of official entries Importance of contractual agreements Importance of the legal form (GmbH, GbR, etc.) What can the entrepreneur do? Start of compulsory insurance Consequences of pseudo self-employment Consequences under social insurance law Consequences under labour law Tax consequences Consequences under commercial law Consequences under criminal law 7 Employee-like self-employed persons... 7 Your Contact: Johannes Fritsch johannes.fritsch@berlin.ihk.de 1

2 Pseudo self-employment 1.1 Who is a pseudo self-employed person? A person is pseudo self-employed if they have registered a self-employed activity with the trade office and/or the tax office although the conditions for an employed activity are met, i.e. they are actually an employee. From 1999 onwards, if the parties in an employment relationship to be assessed refused to cooperate in clarifying the question of whether pseudo self-employment had arisen, social insurance agencies were entitled to assume that a dependent employment relationship existed and thus that the employment was subject to compulsory insurance if at least three of the five characteristics specified in the law were identified. On 1 January 2003, this presumption rule pursuant to section 7 para. 4 of the Social Security Code (SGB) IV ceased to apply. Subsequently, section 7 para. 4 SGB IV only stated that for persons who applied for a business start-up grant pursuant to section 421 para. 1 SGB III ("Ich-AG"), it was disputably assumed that they were self-employed during their (maximum three-year) grant period. On 1 July 2009, this paragraph was removed in its entirety. With the abolition of the presumption rule, the burden of proof has been returned to the collection offices and tax auditors (health insurance companies or the German Pension Insurance (DRV) organisation). Now, even in the absence of cooperation, inspectors have to prove that the employment in question is subject to social security contributions and is not self-employment. On the basis of section 7 para. 1 SGB IV usually with the cooperation of the client and contractor the social insurance institution must continue to determine on its own initiative the facts necessary for assessing the legal questions as to whether self-employment or dependent employment exists. The decisive factor is an examination within the framework of an overall assessment of the individual case. The examination may be based on facts that become known to the social insurance institution as a result of an audit or as a result of disputes between the client/employer or contractor/employee Discontinuation of the catalogue of characteristics of the old section 7 para. 4 SGB IV The following characteristics of the former presumption rule can still be an indication of pseudo self-employment, but do not by themselves establish it. The decisive factor is always the precise consideration of each individual case. The person does not employ an insurable employee in connection with their activity. They work on an ongoing basis and essentially just for one client. The client or a comparable client regularly has such activities carried out by employees that it contracts. The activity does not display the typical characteristics of entrepreneurial activity. The activity corresponds to the external appearance of the activity which they had previously carried out for the same client on the basis of an employment relationship. 2

3 Indications of dependent employment are primarily an activity carried out on the basis of instructions, and integration into the work organisation of the person giving the instructions. Point (1): No employment of employees subject to compulsory insurance In this context, all employees earning more than EUR 450 per month are subject to social insurance contributions. Point (2): Relationship with just one client The relationship with just one client must be intended to be long term. This establishes that selfemployed persons are not yet considered to be employees during their start-up phase simply because their company has not yet developed as planned. Start-ups in particular often have only one client. Start-ups must therefore strive for cooperation with several clients in line with their business plan, and the actual circumstances must not stand in the way of this. As a rule, start-ups are considered to be such during the first three years after taking up the activity to be assessed. The materiality limit is reached if the person concerned receives at least five sixths of their total income from the activities to be assessed solely from this activity (group companies within the meaning of section 18 of the German Stock Corporation Act are regarded as one client). Project-related activities: With an activity limited in advance to one client, there is generally no long-term activity for one client only if the limitation does not exceed one year. In individual cases, this also applies to longer project durations. This is intended above all to take account of professional groups which, despite their clear independence, are bound to one client by longer project times (e.g. consulting engineers). Point (3): Typical employee activities This criterion is based on the assumption that there are activities that can only be carried out as an employee. Activities such as self-employed driver (without an own vehicle), self-employed crane driver, freelance secretary and simple jobs such as shelf stackers are not suitable for a freelance employee relationship. However, this criterion is substantiated by the fact that the work typically carried out is done so in particular by a person who is subject to the client's instructions and is integrated into the client's work organisation. The phrase in particular means that further criteria can also be applied for the work typically carried out. Point (4): No typical characteristics of entrepreneurial activity Entrepreneurs are those able to take advantage of their own opportunities, bear risks and enjoy entrepreneurial decision-making freedom. Therefore, those who are unable to make their own decisions on purchase and sales prices, the procurement of goods, and the use of capital and machinery are not regularly self-employed and are in a dependent employment relationship. Further criteria can include: the company has no company sign, business premises, letterhead or business cards of its own. 3

4 Point (5): Conversion of employees to self-employed individuals Dependent employment is likely if an activity previously carried out as part of an employment relationship has been converted into an independent contract relationship by means of an amendment agreement, without the external appearance of the collaboration changing Significance of official entries If the contractor requires a special official permit or approval for their business or self-employment, this strengthens the case for self-employment. The same applies to registration in the register of craftsmen. On the other hand, business registration or entry in the commercial register is not in itself sufficient Importance of contractual agreements For the distinction between self-employment and dependent employment, the actual circumstances in which the services are provided are of primary importance, but not the name that the parties have given to their legal relationship or even the legal consequence desired by them. The respective contract category results from the actual business content, which in turn results from the actual execution of the contract and from the agreements made. It is therefore irrelevant whether the parties refer to the contract as an employment contract or a service or work contract Importance of the legal form (GmbH, GbR, etc.) If the contractor is a company (e.g. GmbH, KG or OHG), this generally excludes a dependent employment relationship. However, the exclusion of a dependent employment relationship only affects the assessment of the legal relationship between the contractor and the client, but not the question of whether the persons active in the company are employees of this company. The same applies if the contractor is a one-man limited liability company. If the contracting company is a partnership under civil law (GbR), the existence of dependent employment or self-employment must be checked on a case-by-case basis. 1.2 What can the entrepreneur do? If an order relationship gives rise to apparent pseudo self-employment, the client must inform the health insurance company of the pseudo self-employment. If in doubt about the question of pseudo self-employment, anyone i.e. client or contractor can request that the DRV carry out an assessment. To this end, a letter must be submitted requesting a decision concerning whether dependent employment exists or not. The DRV will then inform the parties of the information and documents it requires for its decision. It will set the parties a reasonable period within which the information and documents must be provided. On completion of its examination, the DRV will inform the parties of its intended decision, outline the facts on which it intends to base its decision, and give the parties the opportunity to comment on the intended decision. Once a decision has been made by the DRV or the health insurance companies, an appeal may be lodged and an action brought against this. These have a suspensive effect, i.e. no contributions can be levied until a decision on the appeal or the action has been made. 4

5 1.3 Start of compulsory insurance If the German Pension Insurance (DRV) organisation determines that a pseudo self-employed employment relationship exists without the parties involved having requested for the status to be checked, the social insurance obligation generally begins with the commencement of the activity. If an application procedure is carried out, the insurance obligation only becomes effective when the decision cannot be challenged and under the following conditions: the application to the DRV was submitted within one month of the start of the activity, the employee agrees to the subsequent start of the insurance obligation, the employee has taken out insurance against the financial risk of illness and for retirement provision for the period between taking up employment and the decision of the DRV, and this insurance provides the type of benefits provided by statutory health insurance and statutory pension insurance. If the health insurance company/drv initiates the investigation on its own initiative and determines that an insurable activity exists, the insurance obligation only becomes effective when the decision cannot be challenged and under the following conditions: the employee agrees to the subsequent start of the insurance obligation, the employee has made appropriate provision for the period between taking up the employment and the decision (see above), the employee or their employer did not intentionally or grossly negligently assume that they were self-employed. If the client is of the opinion that in a specific individual case the activity is of a freelance nature, there is no need to notify the health insurance company. A retroactive obligation for the payment of contributions can only arise if the client or contractor intentionally or through gross negligence assumed that they were self-employed. 1.4 Consequences of pseudo self-employment Consequences under social insurance law The previous client must now pay the usual employer and employee social insurance contributions to the statutory health insurance funds and register the employee as such. The health and longterm care insurance obligation depends on the respective insurance situation (including the income amount and current contribution measurement limit). In addition, they must retroactively pay all social security contributions (including the employee s share) back to the start of the employment relationship. These subsequent payment claims expire four years after the end of the calendar year in which they became due, and in the case of intentionally-withheld contributions after 30 years. In contrast, the employer may only withhold part of the employee s salary for three months. Deviating recourse provisions between the parties are ineffective. 5

6 1.4.2 Consequences under labour law The pseudo self-employed person may sue for employee status. If the labour court determines that employee status exists, the pseudo self-employed person will then be an employee with protection against dismissal, holiday entitlement and entitlement to continued pay in the event of illness Tax consequences The change in circumstances can also have tax consequences. Although the income tax is owed by the employee, the employer is liable for withholding and paying the income tax, even if the employer assumes that they are working with a self-employed person who is actually an employee. The employer and the employee are jointly and severally liable for the subsequent payments, so they can both be asked to pay the outstanding amounts in full. However, the requirement for the employer to unilaterally pay is without abuse of discretion if the employer has deliberately or recklessly failed to withhold tax (Federal Fiscal Court (BFH), judgement dated 12 December 2006) VI R 40/07). Economic reasons can also play a role in this if the employee has no financial resources. In order to reduce the client s liability risk from the outset, it is possible to clarify the employee status of certain persons and thus also their income tax liability with the local tax office (appeal information). Even if the information was objectively incorrect, the employer is released from their liability if they have complied with the information provided. A refusal to provide appeal information also has an indicative effect for self-employment under social insurance law as part of the overall assessment. Pseudo self-employed persons must bear in mind that as employees they are subject to wage- /income-tax regulations and consequently will no longer generate any income from their business operation. Whether an individual carries out an activity independently is to be determined separately for tax law and independently of social law. Natural persons are not self-employed if they are integrated into a company in such a way that they are bound by instructions. Legal entities lack independence if they are financially, economically or organisationally integrated into the company of the parent company according to the overall picture of the actual circumstances and are therefore subsidiary companies. However, the entity that includes a tax amount in an invoice despite not being authorised to do so, owes the amount shown. The invoice, however, can be invalidated and corrected once the risk to tax revenue has been eliminated. Since the employer has generally deducted input tax, the tax revenue is fundamentally at risk. This can be eliminated by requesting that the employer repay the input tax as part of a special VAT audit or by voluntarily correcting the incorrect inclusion of the input tax in the invoices. If the tax is not determined within a certain period, it is subject to an assessment limitation period. In principle, this period is four years from the end of the calendar year in which the tax arose; in the case of tax evasion or reckless tax reduction, the assessment limitation period is ten and five years respectively. Claims arising from the tax debt relationship are subject to a special payment limitation period of five years Consequences under commercial law The entrepreneurial activity for the operated trade also ends at the latest with the determination of pseudo self-employment. This means that the trade must be deregistered. Legal membership in the Chamber of Industry and Commerce and the legal obligation to become a member of the Employer s Liability Insurance Association also end at this point in time. 6

7 1.4.5 Consequences under criminal law In addition, criminal law consequences are to be expected. An employer is liable to prosecution for withholding contributions if they do not pay the employee s contributions. These can be contributions to health, pension and social insurance. Since there is no independent definition of an employer under criminal law, the concept of an employer under social law is used in criminal law. An employer is therefore a person who is entitled under a private-law contract to demand from another (employee) the provision of work services in personal dependence and who is obliged to pay them wages in return. The decisive criterion is personal dependence. This requires integration into the company and subordination to the employer s right of instruction with regard to time, duration, place and type of work execution. Of decisive importance here are the actual circumstances and not the contractual structure. The employer can therefore also be the person who hires the pseudo self-employed person. If the employer erroneously assumes that an employment relationship does not exist, although the employment is in fact pseudo self-employment, the intent can be omitted in this respect. On the other hand, (conditional) intent has to be assumed if the pseudo self-employed person contractually undertakes to pay the employee contributions in the internal relationship if an assessment classifies them as such. If corresponding taxes have not been paid or not paid in full, a reckless tax reduction (administrative offence) may also be considered. If the pseudo self-employment was deliberately constructed, there is even tax evasion (criminal offence). In both cases, however, voluntary disclosure is possible to avoid punishment (see sections 371 para. 1 and 378 para. 3 German Tax Code). However, with pseudo self-employed persons voluntary disclosure of pseudo self-employment often fails, because with a judicial order to search their premises the accused employer is informed of the initiation of criminal proceedings against them, and this has a restrictive effect that precludes impunity. The risk of withholding taxes is also of subordinate importance. Accordingly, the employer acts improperly if they intentionally or recklessly fail to fulfil an obligation to withhold and pay income tax. Employee-like self-employed persons If an entrepreneur is not a pseudo self-employed person, has no employees subject to social security contributions and only works for one client, under the new legal situation they must be treated as an employee-like self-employed person. This means that the self-employed person is generally subject to pension insurance. They must pay their contributions in full themselves and register immediately with the responsible pension insurance institution (DRV). The following can apply for exemption from the pension insurance obligation: First-time entrepreneurs: exemption for three years from the start of self-employment. Entrepreneurs (2nd attempt): exemption for a further three years from the start of the second self-employed activity (does not apply if the first activity is merely renamed or there is no significant change in the business purpose). Aged 58 or older: general exemption if the person in question is already self-employed and the insurance obligation arises for the first time due to the regulations on employee-like selfemployment. 7

8 The application can be made at any time. If it is submitted within three months of the commencement of the insurance obligation, the exemption shall take effect from the beginning. If the application is submitted after three months, the exemption shall take effect from receipt of the application. The special case of commercial agents: With the abolition of the presumption criteria, the exemption for commercial agents has also lapsed. Decisive for the determination of their independence therefore is whether they are essentially free to organise their activities and determine their working hours (section 84 para. 1 sent. 2 of the German Commercial Code). If these requirements are not met, commercial agents may also be self-employed. Indications of this are, for example, sales targets, tight controls on the part of the employer, compulsory attendance, prescribed obligatory appointments with customers, tour plans, holiday arrangements with the client as well as a ban on hiring employees. Address of the German Pension Insurance Association (DRV): Ruhrstraße Berlin Tel. (030) Fax (030) drv@drv-bund.de Internet: The publication of leaflets is a service of IHK Berlin for its member companies. This is a summary of the legal basis, contains initial information only and does not claim to be complete. It cannot replace individual comprehensive examination and advice by a lawyer/tax consultant. 8