The Death of the Freiberufler (Self-employed/Freelance) Model for Engaging Highly Skilled, Highly Paid Contractors in Germany – Changing Legislation on 1st April 2017 – Are you ready?
On the 1st April 2017, the legislation in Germany surrounding the engagement of temporary workers is changing. If you place contractors on assignments in Germany, then you need to be aware of the changes and plan in advance.
In order to fully understand the impact of the changes we must first set the scene for how contractors are engaged and ask ourselves;
What actually happens in the market now?
There are currently two ways in which contractors are engaged in Germany which are deemed acceptable in terms of compliance and risk. These are the Freiberufler (Freelance/Self-Employed) Model and an Employed Model supported by a company who holds an AÜG Licence. Let’s cover these off in turn;
Under the Freiberufler (Freelance/Self-Employed) Model the individuals are registered as self-employed with the German authorities for wage tax and VAT. They are engaged via a contract for services and are paid their rate gross usually against an invoice. As the payment of social security contributions can legitimately be mitigated under this model the overall NET retention of the contractor is higher than that of the ‘Employed AÜG Model’.
Under the Employed AÜG Model the individual is directly employed by a company that holds an AÜG Licence. The temporary worker is then ‘leased’ to the client/hirer and their services are delivered. The individual will have a contract of employment with the licence holder, wage tax and social security will be deducted at source and they will be provided with a payslip. Holiday pay and sick pay are also accounted for. In addition, the company has to account for Employers Social Security. Finally, the AÜG Licence Holder, under the terms of their licence, is legally required to hold the contract directly with the client in order to ‘lease’ these workers.
So how is it determined which model should be used to engage a contractor?
According to German case law the courts look at the following criteria to determine whether a worker should be classified as self-employed:
· The contractor can freely determine how they perform their services. I.e. they do not have to report to a line manager or company hierarchy and follow instructions.
· The contractor can freely determine when they perform their services. e. they do not have to adhere to fixed hours or working schedule (e.g. 9 AM – 5 PM Monday to Friday).
· The contractor can freely determine where they perform their services. I.e. they do not have a particular place of work or fixed place of work. The contractor is separate from the client’s organisation, they do not have to work at the client’s premises and they use their own equipment and materials.
· The contractor does not depend on a single client for their income or large part of their income. e. they have multiple clients and only one client does not account for the vast majority of income earned in a tax year.
So, if the contractor meets all the criteria then the client can engage the worker under the Freiberufler (Freelance/Self-Employed) Model without issues either directly or through a staffing supplier. If they do not meet all the criteria, then the worker should be structured by a staffing supplier via the Employed AÜG Model.
So, it is pretty clear how a contractor should be engaged according to German case law.
There is also no doubt that currently there are genuine self-employed relationships that exist in the market. However, it is our opinion, when specifically considering the structures of highly skilled, highly paid contractors working in Germany, the vast majority are set up as Freiberufler when they should be structured as Employed AÜG.
On making an assessment the courts will look at the contract with the worker but also consider what actually happens in reality. Therefore having a contract that is structured to present a self-employed relationship is no defence. This is because many contractors working in Germany have to report to a line manager, have to attend the employer’s premises at specific times and according to specific schedules, use the employer’s equipment (such as IT resources) and rely on the contract as their main source of income in the same way a permanent employee would.
The benefits of using Freiberufler over Employed AÜG are clear. The worker can ‘take-home’ more of the contract pay rate, the employer does not have to account for holiday, sick and employer’s social security which further improves cost-effectiveness of this relationship for staffing suppliers and their clients and it is also a very flexible way of working. Additionally, the risk to the client is perceived to be lower, as currently, if the worker is deemed to be misclassified by the authorities or client as self-employed, when they should have been structured as an employee, then the worker can be transferred by the supplier to the Employed AÜG Model for the remainder of their assignment. Perhaps this is why many companies operating in Germany currently insist on only engaging staffing suppliers who hold an AÜG Licence during their procurement process?
So what is changing on the 1st April?
1. The staffing supplier and the client have to decide in advance whether a contract for services or contract of employment should be used to engage each worker. If it is determined a contract of employment should be used then the contract has to be entitled explicitly as “Employment Contract for Temporary Assignment”, the worker must be informed that they will be a ‘Temporary Agency Worker’ and the contract between the staffing supplier and client has to confirm this type of contract as well. Additionally, the works council needs to be informed about the length of the assignment, location of the assignment and tasks when hiring external staff. If a check or investigation decides that a contract of employment should have been used rather than a contract for services, then it will no longer be possible to declare that there is no problem and avoid the consequences of misclassification because the staffing supplier holds an AÜG Licence.
2. Under the current legislation only an AÜG Licence Holder can employ a worker and then lease them to the client to deliver the services. This has not changed. Previously, in cases where workers were engaged to clients illegally (i.e. there was no valid AÜG Licence) the worker was automatically considered to be a permanent employee of the client. Now the employee can choose to become a permanent employee of the supplier instead.
3. It is not possible to lease a temporary agency worker from another AÜG Licence Holder. When a worker is engaged and employed by an AÜG Licence Holder then the licence holder must conclude the contract directly with both the client and the worker. The licence holder cannot lease a worker from another licence holder and then ‘chain lease’ them to the client.
4. Employment of a worker under an AÜG Licence has been limited to 18 months with the same client and the same worker. This applies to the individual employed, not the ongoing requirement of the client for a temporary worker to fulfil a role. If the Individual has a break in the employment of at least 3 months, then they can be ‘leased’ again to the same client. If the break is not more than three months, then the period of the first assignment is counted toward the 18-month time limit.
As long as current workers engaged are correctly structured as AÜG Employed prior to 1st April then the earliest date when a time limit will take effect is 30th September 2018.
5. No later than 9 months after the employed relationship commences the leased employee must be given the same salary as comparable employees of the client and also given the same treatment (overtime entitlement, breaks etc).
6. Clients are not permitted to use a leased workforce to break strikes in their permanent workforce.
What are the consequences of getting this wrong?
This is by no means a low risk situation as the European authorities are now auditing clients more frequently than ever before.
European authorities are desperate to increase social contributions in these economic times and the legislative environment in Europe has been getting stricter over the last 15 years. The authorities are now delving further into client-agency-contractor structures than at any time in the past. We have already seen this in Switzerland, The Netherlands, Norway, Germany, Belgium and France with the authorities imposing heavy penalties on clients, agencies and contractors where they have been structured incorrectly or have been deemed to be misclassified as self-employed when they should have been employed. The German authorities are some of the strictest in Europe in their response to tackling non-compliance and this legislation has already been postponed from the 1st January in order to provide the industry with a grace period to get it right.
The consequences of this are rather severe as the pay rate to the contractor will be considered as the NET rate, Tax and social security will be added on top and back dated to the beginning of the contract. Interest will be applied to the non-payment of tax and social security from the beginning of the contract and in addition to that heavy fines will be applied as well. Additionally, the liability does not stop at the end of the contract. Investigators have the power to go back many years and once a contractor realises that he should have been employed, rather than self-employed, they are highly likely to claim holiday pay, pension and any other benefits to be in line with the permanent employees working at the time. There are also potential civil liabilities for the directors of the businesses involved.
Workers who are deemed to be incorrectly structured from the outset and workers who exceed the 18-month time limit will be considered as permanent employees of the client and can also elect permanent employment of the supplier should they wish.
Specifically, from the staffing suppliers perspective non-compliance may come to light from a client’s own audit of their supply chain. If this happens then it is quite probable that the commercial relationship between the client and the agency will break down.
What is the solution?
In all cases a thorough assessment should be carried out before a temporary worker is placed, to determine if the relationship should be structured as employed or self-employed and to ensure correct worker classification.
From the perspective of the staffing agency the solution is to use their own AÜG Licence and make sure contractors are engaged compliantly under the terms of that licence as we have already highlighted. However, not all staffing suppliers placing contractors to clients in Germany have an AÜG Licence or want to engage AÜG workers directly due to the added financial administration, compliance administration and accepting the risk of employing the workers directly. Many simply want to focus on recruitment and not have to worry about the compliance or legal aspects. In this scenario, a neutral intermediary can be used who is prepared to bridge the gap between the client and agency allowing the agency to deliver their services to the client and at the same time absolve them from any risk of getting this wrong. As the intermediary must hold the contract with the client, then the agency will receive their margin from the intermediary and workers will be paid directly.
From the perspective of the German client the solution is to engage a supplier who holds an AÜG Licence. All their temporary workers should be classified in advance and thorough assessments should be carried out prior to placement. The licence holder should report directly to the client that each worker is correctly structured in adherence to the new legislation. A neutral third party employment business can be used to provide the platform to achieve this as they do not have a conflict of interest with recruitment agencies. They will be able to ensure compliance and report on it directly as well as process the fee payments of the staffing agencies for their recruitment services and therefore allow the client to access the whole of the market for recruitment services rather than just suppliers who hold a valid AÜG Licence.
In any case, regardless of whether you are a client or agency, the time to act is now to ensure all current and future workers are correctly structured prior to and from the 1st April 2017.