(Alleged) Pseudo-Self-Employment in the IT Industry - the eternal Sword of Damocles for Companies and Freelancers

Companies and corporations often work with freelancers, especially in the ICT area. However, their activities are still repeatedly judged to be pseudo-self-employed, especially by the German Pension Insurance Association (Deutsche Rentenversicherung Bund). The consequences - especially for the commissioning party - are serious.

The matter

The term "pseudo-self-employed" (scheinselbstständig) is used to describe those who are supposed to provide services for their contractual partner on a contractually regulated basis as self-employed entrepreneurs (e.g., software development activities or as project managers), but who perform non-self-employed work according to the actual circumstances in such a way that the status of dependent employment must be assumed.

The assessment in this regard is made by the health insurance funds and by the German Pension Insurance Association. In the event of a dispute, the competent court shall decide.

The risks

The existence of dependent employment ("pseudo-self-employment"; Scheinselbstständigkeit) can have significant negative consequences for both parties to the contract, but especially for the client. For example, the client must pay social security contributions (including late payment penalties), usually retroactively. In addition, a "fictitious" employment relationship with the freelancer may arise, i.e. the freelancer may demand the benefits of an employment contract from the client. Moreover, the fictitious self-employed person is not a self-employed person, which means that the intended own entrepreneurship usually has to be terminated.

Either way, the continuation of the cooperation with the pseudo-self-employed person is out of the question for the client. Not least in view of the shortage of skilled workers in the IT industry, this in itself is a major problem.

Risk of status determination procedure

In case of doubt, an application can be made to the German Pension Insurance Association (Deutsche Rentenversicherung Bund) for a so-called status determination procedure in accordance with § 7a SGB IV (Statusfeststellungsverfahren).

This procedure actually serves to clarify the question of whether a dependent employment or a self-employed activity exists. Particularly in the area of IT freelancers, however, a status determination procedure often ends with a "surprising" result - to the advantage of the German Pension Insurance, and to the severe disadvantage of the client.

"Prevention is better than subsequent payment" - the solution method

The starting point for distinguishing self-employment from dependent employment is the provision of Section 7 (1) SGB IV. According to this provision, the indications for dependent employment are (i) an activity according to instructions and (ii) an integration into the work organization of the instructing party.

To clarify this brief wording, case law has developed a large number of criteria, each of which has an indicative effect for or against dependent employment. This is also the main starting point for a targeted mitigation of the dilemma:

Does your company repeatedly use freelancers or refer them to companies? Our "pseudo-self-employment check" helps"!

By means of an analysis of your situation with regard to the cooperation with (IT) freelancers, which is carried out according to an established procedure and is nevertheless individual for each client, we accurately determine any indications of pseudo-self-employment, evaluate the resulting risks and propose individual measures to reduce the risk for each client.

On the one hand, we convey the dos and don'ts of the cooperation between client and freelancer in a practice-oriented manner. On the other hand, we structure the contractual relationships in such a way that any risks as well as the typical argumentation approaches of, among others, the German Pension Insurance Association with regard to pseudo-self-employment are refuted from the outset in the best possible way and, at the same time, the arguments for freelance work are strengthened. We take care of any status determination proceedings that may be required or have already been initiated in a result-oriented manner.

For all of this, we draw on our many years of experience in the area of IT freelancers with a large number of cases of status determination as freelancers, which we have successfully defended towards the German Pension Insurance Association as well as towards the social courts.

Whether companies or freelancers: Through our legal consulting activities our clients gain valuable insights with regard to the design of a successful and low-risk cooperation between companies and (IT) freelancers.