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The use of freelance workers continues to be a very popular option. For this reason, when working on a company transaction, the information and docu-ments received about freelance workers need to be checked in detail so that the purchaser can better assess the risk of possible false self-employment.
Freelancers are independent workers who provide services to a third party under a service or work contract, without being employed by the third party. As a result, freelancers must be distinguished from employees.
A freelance relationship differs from an employment relationship, in particular in the de-gree of personal freedom. An employee is a person who is integrated into the activities of a third party, his employer, and to whom the employer has a comprehensive right to issue instructions in relation to the timing, duration, location and type of work to be executed. In contrast to this, freelancers can freely determine their activities and working hours.
Since a clear distinction is not usually so easy, both freelancers and those who use them are often unaware of the real status. The stronger the principal’s instructions that the services must be performed personally and/or the more tightly the person concerned is bound into the principal’s organisation, the more likely it is that an em-ployment relationship actually exists, resulting in a situation of false self-employment.
A false self-employment relationship means that social security contributions and payroll taxes must be paid.
The question of status as to whether someone is an employee as defined by social security law, can be clarified by means of a status determination procedure by the clearing office of the Deutsche Rentenversicherung Bund (German pension insurance federation). If a false self-employed status is determined, the obligation to pay social security contributions generally applies from the start of the work activity. If the work activity was started a long time ago, there is a risk that the unpaid employer and employee social security contributions will have to be paid re-trospectively for up to four years, based on the results of the status determination procedure, and if there was deliberate evasion, for up to as many as 30 years. In this case, the employer can claim back from the employee the share of the total social security contribution normally borne by the employee, but this claim must on the one hand be executed by a deduction from the remuneration and, on the other hand, may only be collected from the next three payslips. While doing this, the attachment-exempt threshold must also be ob-served. For this reason, the employer will remain liable for the majority of the retrospective contri-butions due. In addition, an interest charge can be expected. The determination of false self-employ-ment also has consequences under tax law, because the employer has a duty to withhold income tax due on a salary and to pay it to the tax office. In addition to the employer, the employee himself is liable to pay income tax. The tax office has to decide, after due consideration, from whom to collect this. The tax office can demand retro-spective payment for up to four years in the case of false self-employment. In the case of reckless (unintentional) tax evasion, this period can be extended to five years. If the false self-employed status was intentionally created, there may even be a case of deliberate tax evasion. However, the topic of false self-employment does not stop at financial risks, but can also involve criminal risks such as fines or imprisonment for the mana-gement. The risk of discovery also exists in the event of a tax audit should no status determination procedure be carried out.
The documentation and information about free-lancers must always be checked carefully, so that after the company transaction is concluded, there are no unexpected additional costs and liabilities lying in wait due to false self-employment.
Dr. Michael S. Braun
Partner
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Transaction advisory | Mergers & Acquisitions
