At the end of the last legislative period, a reform of the status determination procedure under social security law (Sec. 7a German Social Code Book IV [Sozialgesetzbuch IV - SGB IV]) was passed - almost unnoticed. This reform lies behind the so-called German Act Strengthening Barrier-Free Accessibility [Barrierefreiheitstärkungsgesetz - BFSG]. The new regulations come into force on 1 April 2022. The purpose of the amendments is to provide the parties involved with quicker and simpler certainty in future as to whether dependent employment or self-employment exists. For evaluation purposes, the reform will initially apply for a limited period until 30 June 2027.
Status determination procedure: what is going to change?
The amended status determination procedure pursuant to Sec. 7a SGB IV, new version, will enable the parties to a contractual relationship to obtain clarity at an early stage on the so-called employment status (no longer the insurance status, as before) of the contractor and any third parties involved. It determines whether the person concerned is in a dependent employment relationship or is self-employed, which has so far only been examined as a preliminary question by the German Pension Insurance Association [Deutsche Rentenversicherung - DRV Bund]. This means that the new status determination procedure will be decoupled from the question of compulsory insurance. This should expedite the proceedings as regards what is usually the only disputed issue of dependent employment. This is because, unlike in the past, extensive information and checks on social security obligations will no longer be necessary in the future.
New, above all, is the fact that the examination in triangular relationships will in future extend not only to the contractual relationship between the contractor and the client, but also to the agreement between the client and the end customer. Especially in constellations in which a service provider (client) employs a specialist (contractor) at a third party (end customer) within the framework of a contract for services or work, in future a status determination can thus be made with regard to all of the parties involved. Previously, this required two separate status determination procedures.
Hence, in the case of dependent employment, in the future this will simultaneously answer the follow-up question of with whom the employment relationship exists: with the end customer or the client. Prerequisite for this is that there are indications to suggest that the contractor is integrated into the end customer’s work organisation and is bound by the latter's instructions. This means that in the future, under certain conditions, the hiring companies as third parties will themselves also be entitled to file an application and initiate such a status determination procedure. This could be relevant, for example, in cases of illegal personnel leasing resulting in a fictitious employment relationship between the contractor and the end customer. In this case, the client may be involved in such a procedure against its will and be bound by the outcome regarding the employment status.
The newly introduced possibility of a group determination is expressly to be welcomed. Previously, in cases where several similar contractual relationships existed, a separate status determination procedure had to be carried out for each contractor. As of 1 April 2022, it is now possible to obtain an expert opinion from the clearinghouse of the DRV Bund on the employment status of multiple contractors in similar contractual relationships. Unfortunately, this instrument does not constitute a legally binding decision for the DRV Bund or other insurance carriers. However, the procedure does have the advantage that the expert opinion can be used as evidence in a later tax audit and can give the parties involved a bit more certainty. However, the extent to which auditors will ultimately feel bound by the expert opinion of the DRV Bund remains to be seen.
From when can an application be made?
Whereas it was previously only possible to submit an application once the activity to be examined had commenced, a new right to apply already prior to commencement of the activity is now being created as of 1 April 2022. This is intended to clarify legal doubts about the classification of the employment status by providing an early predictive decision. If the agreement or the circumstances surrounding the performance of the contract change within one month of the commencement of the activities, an immediate reporting obligation exists. If this leads to an amendment of the predictive decision, then in order to protect the parties involved this is fundamentally only effective for the future. However, this naturally does not apply in the case of intent or gross negligence.
If, on the other hand, the changes do not occur until after the one-month period, the general provisions apply. Such a predictive decision thus provides the persons involved with clarity at an early stage on whether they wish to carry out the contractual relationship with the corresponding consequences under social security law. Furthermore, the initiation of such status determination proceedings may, under certain circumstances, postpone the obligation to pay insurance and contributions until issuance of the status determination notice. Depending on the duration of the contractual relationship, therefore, there may be cases in which an insurance obligation never arose, irrespective of the existence of dependent employment.
At this point, we would like to point out that the status determination procedure is mandatory for certain groups of persons. If the registered employee is the spouse, partner or descendant of the employer, or a managing partner of a limited liability company, the collection agency is obliged to submit an application to determine the employment status.
Does anything change in the substantive delineation?
The new regulations do not introduce any changes with regard to the substantive legal criteria for distinguishing between dependent and self-employed activities. Here, however, "clarity" in the sense of a legally secure determination of whether dependent employment or self-employment exists would have been desirable. Thus, the reform only contains procedural innovations.
Penalties for misclassification of the employment status
The reform can nevertheless be welcomed in principle, since a great deal depends on the legal assessment of a person's employment status. If, for example, a self-employed activity is wrongly assumed and social security contributions are not paid, the client faces the possibility of back payments of employer and employee contributions for the last four years in case of an incorrect determination, and even up to 30 years in cases of wilful intent. On top of this, the late-payment charges are considerable. These are only dropped if the client was not aware of the payment obligation through no fault of its own. However, if the client refrains from initiating the status determination procedure, “no fault” can generally no longer be assumed. The employer may also face a custodial sentence under Section 266a of the German Criminal Code [Strafgesetzbuch – StGB], in particularly serious cases of as much as ten years.
Particularly in cases of external staff deployment and especially in triangular constellations, the accelerated status determination procedure should therefore be used at an early stage in future to obtain legal clarity.