One of the most important things to understand about doing business in Germany is the term “disguised employee,” which is essentially a “misclassified employee” in many other countries.
In Germany, an actual independent contractor can either be someone who is directly engaged by the company, or an employee leveraged by an employer by way of an employee leasing agency for temporary jobs. But critically, know that either engagement may be subject to misclassification exposure by authorities—something that brings with it a high degree of financial risk organizations should bear in mind when considering hiring workers in Germany.
Independent Contractor Risks in Germany: Definitions and Penalties
The specific nature of work instructions, coupled with organizational integration, can lead to what is officially known as an “employee relationship.” This means that employers may not be working with the independent contractor they thought they were; the decision to use an independent contractor should always be determined in Germany by the nature of the work in question. Sanctions cannot only include fines, but also imprisonment, arrears (with interest, no less), and the forced permanent employment of that independent contractor or agency worker.
It’s equally important to know that German authorities actively seek out misclassified employees, arguably more so than any other country. Whether an employer believes they are in compliance or not, they must be aware of the risks involved. It’s also essential to know that payment for those independent contractors is subject to Value Added Tax, also known as VAT.
All told, the question of whether or not someone is actually an employee or an independent contractor can come up in a variety of situations, including but not limited to ones like:
- The audit of either the company or the individual
- Social Security payment investigations
- Termination disputes
Likewise, an independent contractor can always help launch an official investigation into his or her employment status of they choose to do so, and most rulings favor the worker in question.
Important Considerations for Avoiding Misclassified Contractor Risks in Germany
Generally speaking, leased employees can only be used for 18 months at a time, though relationships can also be renewed for another 18 months following a three-month waiting period. This will, however, come with some of the same risks associated with independent contractors and can easily be more expensive.
There are no such limits on how an employer can use independent contractors.
It’s also essential to note that Germany has a few extra assessments that determine whether or not someone is an independent contractor that are not seen in other countries. These include factors like how much time someone spends working for one company in particular, and whether or not the worker attends regular internal events like company events.
Each of these factors makes it more likely for someone to be deemed an employee, not less.
Other factors that courts might consider include but are not limited to things like:
- Whether or not the “independent contractor” can use his or her own staff to perform the project in question
- Whether the independent contractor has the bandwidth available to work for other clients, or if they’re exclusive to this one in particular
- Whether or not the independent contractor uses his or her own equipment
- Whether the independent contractor receives fixed remuneration or if they’re paid directly for the services they’re providing
- What percentage of the independent contractor’s total income comes directly from a single company (if that number is over 83%, there could be a significant problem)
Avoid Misclassified Contractor Risks by Partnering with an International PEO
These types of complexities are one of the many reasons why many expanding organizations choose to enlist the help of a partner like an International Professional Employer Organization (PEO). Not only do they continue to gain access to top local talent, but they do so without any of the risks associated with hiring independent contractors—thus paving the way for a compliant expansion.
If you’d like more information about avoiding independent contractor risks in Germany, or if you have any additional questions about how Velocity Global’s International PEO solution can help you compliantly establish a presence in more than 185 countries, reach out to us today.