Understanding bogus self-employment in Germany: how contractors and clients can stay compliant

Expanding into the German market introduces unique challenges, especially for businesses working with temporary workers and contractors.

With the introduction of our AUG-licensed payroll solution, we aim to help clients navigate these complexities and remain compliant.

One of the most critical issues companies face in Germany is the risk of bogus self-employment – a compliance challenge that can lead to severe financial and legal consequences.

What is bogus self-employment?

Bogus self-employment, or false self-employment, occurs when a contractor is incorrectly classified as self-employed when, under German employment law, they should be treated as an employee.

This misclassification often arises when a contractor operates under conditions that resemble an employee/employer relationship, such as:

• Being integrated into day-to-day business operations.
• Working regular hours as determined by the client.
• Being subject to the client’s control and supervision.

Germany, like many EU countries, has strict regulations to prevent this misclassification. These rules are designed to protect workers from being denied benefits and rights such as healthcare, pensions, and paid leave. Misclassifications also help businesses avoid significant liabilities for unpaid contributions and taxes.

The risks of bogus self-employment

Failing to correctly classify contractors can expose businesses to the following risks:

• Financial penalties: Misclassification may result in liability for back payments to cover social security contributions, healthcare, pension contributions, and other employee benefits.
• Holiday pay entitlements: Contractors misclassified as self-employed could claim up to 25 days of accrued holiday pay at full salary.
• Sick pay obligations: Contractors might be entitled to sick pay for the duration of their engagement if they were misclassified.
• Tax liabilities: If the worker is unreachable, for example they have finished their contract and moved out of Germany, your company could be liable for any unpaid income tax or social security payments.
• Criminal consequences: If the client or your business is found to have misclassified contractors, intentionally or not, there could be criminal consequences, including imprisonment for those responsible.

How to avoid the risks of bogus self-employment

Protecting your business, contractors, and clients from the risks of bogus self-employment is critical. These are some simple steps that can be taken:

• Verify employment status: Always ask your client to confirm that a proper assessment of the contractor’s status has been done before entering a self-employment agreement. It’s critical that the role is suitable for self-employment under German law.
• Use a trusted provider: If your client is unable or unwilling to confirm that they have assessed the contractor’s status correctly, use a provider such as Sapphire that will lease the labour to your client and remove all the risk both financially and criminally.
• Ensure compliance: Partnering with Sapphire means entrusting us with full compliance management. From payroll to employment status verification, we ensure your business operates within German labour regulations, avoiding penalties and liabilities.

Why choose Sapphire International?

At Sapphire International, we specialise in safeguarding businesses and contractors in Germany by handling compliance, managing payroll, and mitigating risks. Our AUG-licensed payroll solution ensures:

✔ Contractors are correctly classified.
✔ Financial and criminal liabilities are removed.
✔ Your business and reputation remain secure.

Contact us today to learn how we can help you navigate Germany’s labour regulations with confidence.