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The employment status challenge: Key considerations for employers in Germany

20 April 2022

With labour supply a top priority for employers, our employment experts in Germany consider the importance of the distinction between different employment statuses. 

When engaging the workforce how does the law distinguish between different categories of employment status?

German law makes a very strict distinction between employees and self-employed persons. The decisive factor is in particular how the contractual relationship is lived and less which regulations are contained in the contract itself.

  • Employee: A person who works under the conditions of a contract of employment under private law
    • Section 611a of the German Civil Code (BGB) defines that an employee is anyone who, on the basis of a contract under private law, is obliged to perform work in the service of another person under instructions and under the control of a third party and in personal dependence. This means, that the employee is integrated into the employer's business and by the employer's right of direction (see sec. 106 German Commercial Code ("Gewerbeordnung"), which includes the time, duration, place and performance of the service.
    • Employment within the meaning of Section 7(1) of the German Social Code (SGB), Book IV "is non-independent work, in particular in an employment relationship. Indications for an employment are an activity according to instructions and an integration into the work organization of the employer"

Nevertheless, civil servants, judges and soldiers are not employees, because they are in a public service relationship established by an administrative act, which is subject to its own rules of public law.

  • Self-employed: In accordance with the general legislative assessment, which § 84 I 2 HGB contains beyond its direct scope of application, a person is self-employed if he is essentially free to organize his activity and determine his working hours.
    • They can also be the subject to certain instructions within a service or work contract, but they can decide on their own, whether and under which conditions they perform
    • therefore, they are not personally dependant (in contrast to an employee) 

Overall, a variety of criteria must be used to determine whether employment is as an employee or as a self-employed person. In doing so, all criteria that speak for or against a dependency are to be weighted altogether. 

Typical criteria are:

Employee Self-employed
employment contract (§ 611a of the German Civil Code) determination of working time and place of work, range of self-determination
is subject to instructions with regard to the time, duration and location of the work owed (§ 106 GewO) free arrangement of employment, especially organization and procedure
contractual assurance of leave entitlement invoicing in one's own name
regular detailed reporting requirements self-promotion of activity
use of the tools of the employer/company person enjoys entrepreneurial freedom of choice
obligation to use certain hardware and software trade registration including payment of trade and sales taxes
obligatory working hours for the employee could also work for other companies
continued payment in the event of illness bearing an entrepreneurial risk
commitment to accept all work orders independent acquisition of customers
fixed income irregular income
application of collective bargaining provisions own pricing and advertising
performs task only for one particular instructor could possibly have own staff
participation in works council elections
payment of wage tax and social security contributions by the employer

Procedure for determining the employment status:

In case of uncertainty regarding the employment status, the status determination procedure in social insurance pursuant to Section 7a of the Fourth Book of the German Social Security Code (SGB IV) enables the parties involved in an employment relationship to obtain clarity about their employment status at an early stage. With this procedure, the parties involved in a contractual relationship can have a legally binding determination made as to whether an insurable employments status exists or not.

What are the different rights and protections for each different employment status?

The shown distinction between an employee and a self-employed person is important, as it has implications for taxation, vacation entitlements, pension contribution payments, insurance issues and intellectual property.

Employees:

In general, Employment Law is employee protection law. This means, that the numerous protective provisions of the labor law apply only to employees and not to self-employed persons.

Employee rights include, in particular, the following:

  • continued payment of wages in the event of incapacity for work (e.g. illness) or during vacation
  • minimum number of guaranteed vacation days per year
  • protection against unfair dismissal (e.g. minimum notice period in case of dismissal)
  • compliance with occupational health and safety regulations
  • right to unemployment benefits
  • maternity and paternity protection 
  • rights to preferred payments in the event of an employer’s insolvency
  • There is an obligation to participate in social insurance (health, unemployment and nursing care insurance). The contributions are to be paid in equal shares by employers and employees.
  • The employer is responsible for deducting tax and national insurance at source from the salary paid to employees
  • The employer must take out employer`s liability insurance to cover the risk of employees injuring themselves at work
  • The employer is liable for acts done by an employee in the course of their employment

What are the current themes with regard to employment status?

  • Especially in the rapidly growing branch of the gig economy (labour market characterized by the prevalence of short-term contracts or freelance work as opposed to permanent jobs, e.g. Uber, Uber Eats, Lieferando), businesses need to know their responsibilities depending on what type of worker they employ to avoid legal complications.
    • Recently, some companies within the gig economy (e.g. Uber in the UK) have been claiming their staff were self-employed, when in fact, they were workers in the law, and therefore entitled to workers' rights.
    • The German Federal Labour Court has dealt with this question in a controversial judgement in December 2020. For platform operators, this means that the limits set out in this ruling must be strictly observed.
  • Also the IT-industry faces an enormous lack of specialists, and often employs people as self-employed. Studies have shown that only 31% of businesses are looking for IT-specialists who work under the conditions of a contract of employment, as they mainly operate with external specialists regarding smaller or bigger projects. Nevertheless, the problem of bogus self-employment often becomes apparent here; the independence is often too low (especially due to a comprehensive time commitment) to affirm self-employment. For this reason, political discussions are being held on whether an adjustment is necessary in this area.

Overall, it can be seen that the issue of demarcation between employees and the self-employed becomes particularly relevant in the context of new, modern forms of employment.

Get an insight into the current situation in other jurisdictions from our global legal team.

 

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