The revised German law on the status determination procedure

The revised law on the status determination procedure as of 1 April 2022

The engagement of freelancers is associated with legal risks for companies and their representatives. If it later turns out, as it may in the course of an audit focussed on social security law, that the individual is to be qualified as an employee rather than a freelancer, the company must retroactively refund social security contributions. The consequences can be even more serious for the responsible decision-makers: In addition to claims for damages by the company and a termination of their employment relationship for gross misconduct, they may, in a worst-case-scenario, face a criminal conviction for withholding social security contributions.

Distinction between self-employment and dependent employment remains difficult

In many cases, it is not possible to reliably assess whether freelancers are in fact self-employed or whether they are to be qualified as employees under German social insurance law since clear criteria are lacking. Instead, the distinction must be made on the basis of an overall assessment of all circumstances of the individual case. Legal certainty can only be achieved by way of a so-called status determination procedure (Statusfeststellungsverfahren). The German legislator made significant changes to this procedure. The changes will come into force on 1 April 2022 and will initially only apply until 30 June 2027. They will speed up the procedure and will make it more attractive overall.

Acceleration of the status determination procedure

The determination made by the German pension insurance (Deutsche Rentenversicherung Bund) in the status determination procedure will be limited to the employment status only rather than determine the existence of an insurance obligation for different types of social insurance. The scope of examination is thus reduced to the essential question of whether the person is an employee or freelancer. In addition, the parties are not to be heard if a concurrent application is granted. These two changes will accelerate the process.

Forecast decision

The reform introduced the option of obtaining a forecast decision, which enables the parties to obtain clarity about the employment status before taking up the activity. This change is remarkable as the status assessment depends on how the contractual relationship is actually executed rather than on the contractual provisions. When making a forecast decision, the parties' expectations in this regard must be taken into account. Often, however, it only becomes clear after the person started to provide services how he/she will be integrated into the customer’s work organisation and what instructions he/she will be subject to. The new provision takes this into account to some extent: If the circumstances of the performance of the contract change within one month after the commencement of work, the parties must inform the German pension insurance immediately.

Determination of status in triangular relationships

Status determination will also be possible in triangular relationships. Such constellations can especially be found in the IT consulting business if the consultancy firm engages a specialised IT consultant that provides services at the premises of the consultancy firm’s client. An employment relationship with the IT consultant (rather than a freelance contract) can exist both in relation to the consultancy firm as well as to the client (as a consequence of an illegal commercial lease of employee). If there are indications that the IT consultant is integrated into the client's work organisation and is subject to the client's instructions, the German pension insurance would also determine whether an employment relationship exists with the client or not.

Statement on freelancers in the same contractual relationships

If the German pension insurance decides on the employment status in an individual case, it will, if requested, also issue an expert opinion on the employment status of freelancers that provide the same activities on the basis of uniform contractual agreements. In the aforementioned example of the engagement of an IT consultant, the consultancy firm could thus obtain an opinion on the employment status of other IT consultants. Since the German pension insurance only gives an opinion, a deviating status assessment could still be passed later.

Oral hearing in objection proceedings

Finally, if the decision of the German pension insurance is challenged in objection proceedings (Widerspruchsverfahren), the parties may request an oral hearing. This is also a sensible change, since decisions often lacked a thorough examination of the arguments put forward. It is to be hoped that oral hearings will have a positive effect on the decision-making process and the quality of the decisions.