No employment contract is no solution, either

published on 18 August 2022 | reading time approx. 3 minutes

In the past, it helped to simply keep your eyes closed. Problems that are out of sight are out of mind and cannot be bad either. The ostrich approach is rarely so strikingly seen in business life. Occasionally, however, it is discernible during due diligence if one looks more closely.

In some cases you might think that you can ignore a problem just because something did not happen: We didn't talk about a price, there is no written record, nobody saw me.

There are, however, some formal requirements which, if ignored, lead to a lack of success: For example, the assignment of shares in a German limited liability company (GmbH) must be notarised and the termination of employment contracts must be in writing. Violations of these formal requirements will then (usually) hinder success: If employees take pictures of the letters of termination they have written and signed themselves and send them to the employer via WhatsApp, no letter of termination in written form has been served upon the recipient and the employment relationship continues to exist for the time being.

A misnomer does no harm

Nevertheless, the exact wording of an agreement is not always decisive. If parties unanimously intend a purpose, it does not matter how they designate what they mean: A party that “licenses” standard software to be used permanently for a one-time fee has nevertheless concluded a purchase contract. Since it can become problematic to evidence “the agreed intended purpose”, precisely worded contracts are nevertheless useful and help avoid disputes.

And vice versa: Regulations cannot be avoided merely by calling processes by a different name. While a document designated as an “employment contract” will only in exceptional cases be deemed not to describe an employment relationship (for example, if it regulates the employment contract of the managing director), an employment relationship, on the other hand, cannot be avoided merely by naming the contract differently.

In labour law, for example, if a company hires external workers, this always raises the question of whether they should be regarded as the company’s own employees. For this, it is not relevant that “consultancy contracts” were concluded with them – false self-employment can still exist. It is also of little help that the workers are employed by a third company based on a so-called “service contract” or “contract for work and labour” – a hidden employee leasing can exist in such a case.

Decisive is rather how the services are actually rendered and whether the external workers are integrated into the company.

Features indicating an employee status

A worker is deemed to be integrated into the company and thus be its employee in particular if:

the external worker receives task- and work-related instructions – also with regard to the work process and timing;
instructions concern the subject matter, performance, timing, duration or place of the work activity;
the external worker is subject to instructions or is authorised to issue instructions within the company;
the external worker uses infrastructure provided by the company;
the external worker works with the company's employees or even a comparable activity is performed;
the external worker is required to perform the work activity in person or
the work activity to be performed is hardly specified in the contract and changes to it can easily be made by issuing instructions.

Conversely, an employee status is not ruled out merely because the work activity is to be performed for a fixed period only (also with salaried employees – even project-related fixed periods are possible) or its temporal scope is to be limited (salaried employees can work part-time – even at different companies simultaneously).

In particular, it can be seen by the scope of the agreed work activity to be performed that features indicating the existence of an employment relationship can go both ways: Agreeing to perform a job based on time-and-material contracts, i.e. billing based on time expenditure, with an obligation to provide for a huge amount of billable hours, is supposedly intended to ensure economic security, as in the case of salaried employees. This is because the contractor should no longer need to acquire any further client, which can therefore also be an indication of an employment relationship.

Finally, the assessment is made based on a case-by-case overall consideration of the various indications that may speak for and against a quasi-employee status.

Consequences of an employee status

If it turns out that the allegedly self-employed person is in fact integrated into the company, he or she must subsequently be treated as an employee.

Even in times of a shortage of qualified staff, an increase in the headcount achieved in such way is no reason for companies to rejoice. In addition to the fact that workers' claims for, e.g. holiday leave (usually counted as accruing since employment began, i.e. also many years back and without those claims being subject to any limitation period), social security contributions (the employee and employer portions of the contributions) must be paid retroactively by the company for up to four years; as a rule, the employer may not recover the amounts from the workers. Furthermore, it is possible to become criminally liable for non-payment of wage tax and late payment of social security contributions.

Occasionally, self-employed workers from other European countries with A1 certificates (which identify them as self-employed) are hired in Germany like employees. The social security status is binding in these cases and there is no risk of subsequent payment of social security contributions. According to case law, violations of duties from realms outside of social security law are nevertheless possible. This has been ruled in respective decisions where fines in the context of hidden employee leasing were levied. However, a similar risk also exists for the non-payment of wage tax.

If the company concluded a contract not with the external worker directly, but with his or her employer, the integration constitutes a hidden employee leasing. In such a case, the company (i.e. the “hirer”) may be fined up to EUR 30,000 for each individual case.