Employer Guidance for Independent Contractors (Germany)

Topics Covered:

• What determines an independent contractor?
• Risks of hiring independent contractors
• Best practices for hiring independent contractors
• Contracts for independent contractors

The Germany Commercial Code (Handelsgesetzbuch – HGB) defines an independent contractor as having the distinction of being able to determine their performance as well as their working time freely. For the German Federal Labor Court (Bundesarbeitsgericht), determining if a person is an independent contractor depends on how personally dependent the person is on the client/employer. Therefore, when hiring an independent contractor, you must ensure you are not determining when, how, and where work is being done, and the contractor is not dependent on you to complete said work.

Criteria to determine an independent contractor for Germany would include:

• How sophisticated are the assigned tasks given to the contractor?
• Are the working hours determined by the client or the contractor?
• Who determines the workplace?
• To what extent does a contractor's work depend on the client?
• Who provides the equipment to carry out the assigned tasks?
• How significantly is the contractor integrated into the client's business organization?
• Does the contractor receive a fixed monthly salary, or only paid for the services provided?
• Does the contractor have their own trade license or registered business?
• Is the contractor free to choose other clients?

Risks:

Misclassification of employees and independent contractors can cause:

• Income tax and social security contribution liability, including 12% annualized interest.
• In cases of proven intentional misclassification, criminal liability (In some cases, involving up to 5 years in prison and paying hefty fines)

Best Practices for Hiring Independent Contractors:

• The client does not give instructions about the time, place, or method of completing the services. The contractor will determine these aspects for themself.
• The contractor should not be integrated into the company workforce.
  • This includes a lack of control of company employees; the contractor is not directing or managing employees.
• A detailed scope of the work or services needed should be provided in written detail in the form of a contract.

Contracts:

Although a verbal agreement is already considered a ‘contract’ in German law, it is a best practice to have a written contract with each independent contractor. Templates are available on the Association of German Chambers of Industry and Commerce website. It’s always best practice to have them checked and adapted by an attorney or notary. Faxes are not recognized as a written form of contract, and emails are only recognized if the digital signature complies with the Digital Signatures act.