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Avoiding Misclassified Contractor Risks in Germany

By August 26, 2019August 21st, 2022No Comments

In Germany, the use of independent contractors comes with significant risks. Too often foreign firms are wholly unaware of the consequences for their business. Read on to discover the dangers of misclassifying contractors, or view a thorough list of German hiring considerations here.


Hiring in Germany: Avoiding Independent Contractor Risks 

“Misclassified employees” are independent contractors that authorities have deemed to have an employment relationship with a business.

Employers must understand that German authorities actively seek out misclassified workers more aggressively than any other country and do so in a variety of situations. For instance, Social Security authorities regularly check for unregistered employees for whom contributions should be due. It is also common for authorities to discover misclassified workers during termination disputes. Furthermore, any independent contractor can initiate an investigation into their employment status on their own accord.

Even employers who make earnest efforts to use independent contractors compliantly can fall victim to legal framework complexities and a system that overwhelming favors the worker.

A host of penalties await when that happens. Employers are held liable for up to four years of social security contribution arrears that includes 12% annualized interest. Things get much worse when authorities show that a firm has intentionally misused independent contractors. In these cases, they are liable for up to 30 years of back payments. Proven intent cases can also bring with them criminal charges. A company’s legal representative, usually directors or managers are subject to criminal prosecution with a max sentence of five years in prison, charged with fines, or become liable for the outstanding social security payments. Furthermore, when an employment relationship is found to exist the independent contractor is converted to an employee where the employer must abide by Germany’s burdensome labor laws.

Payments to independent contractors are subject to Value Added Tax, making independent contractors in Germany even less attractive.

Important Considerations for Avoiding Misclassified Contractor Risks in Germany

Germany has complex criteria that distinguish independent contractors from employees. The distinction is not regulated by a single law or regulation and much of it is governed by both labor court and administrative decisions, which happen to use slightly different criteria to determine the distinction.

Employers can also choose to use leased employees. However, they can only be used for 18 months at a time. After the first 18 months there must be a three-month waiting period before renewing their contract for another 18 months, which is the max duration an individual can be used. If an employer breaches these constraints then the leased employee will be converted to a permanent employee.

Avoid Misclassified Contractor Risks by Partnering with an International PEO

These types of complexities are one of the many reasons why 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.