What do I need to know about it?
What is bogus self-employment?
Bogus self-employment is a situation in which a person is actually employed by a company, but is contractually referred to as an independent contractor.
The classification of whether a person is self-employed or employed primarily has consequences under social security law.
- Dependent employees are subject to social security protection, which gives rise to an obligation to pay contributions to health, long-term care, pension, and unemployment insurance.
- Self-employed people are left to protect themselves against such risks.
Bogus self-employment therefore often results in a person who is self-employed not paying social security contributions, but is, according to the social security definition, employed and therefore subject to contributions. A (subsequent) reclassification from “self-employed” to “dependently employed” can lead to legal consequences and back payments.
When does bogus self-employment exist?
The boundaries between dependent employment and self-employment are often unclear and thus remain in a “gray area.” It should also be noted that the social security definition of an employed worker differs from the labor law and tax definitions.
The risk of bogus self-employment under social security is typically particularly high if the contractor is exclusively or predominantly dependent on the company and integrated into its work processes. The following indicators often point to bogus self-employment:
- Fixed salary
- Clearly defined (shift) working hours
- Work is performed on the client’s premises and uses their IT
- Authority of the client to issue instructions
- Vacation entitlement and involvement in the organization’s vacation planning
Other indicators, however, point to self-employment:
- Employed employees to perform the work
- Independent scheduling, vacation planning, and task allocation
- No long-term employment or dependence on the client
What are the consequences of bogus self-employment?
Bogus self-employment is usually only discovered during tax audits or due diligence procedures in the context of corporate transactions. If one or more dependent employment relationships are identified, obligations to pay back related social security contributions may arise:
- The employer is liable for both the employer’s and employee’s share for the period of retroactively determined insurance liability. This is generally retroactively equated to the start of employment, taking into account a four-year limitation period (increased to 30 years in the case of intentional feigning of self-employment).
- The employee is only liable for the employee’s share for the previous three months; any unpaid employee share prior to that is owed by the employer.
As previously mentioned, the definition of permanent employment by social security authorities does not always have tax consequences. However, if the tax office also reaches the same conclusion, the bogus self-employed person would have wrongfully declared VAT, which would lead to a retroactive reversal.
