The freelance community has been celebrating the judgment of the Federal Social Court of 31 March 2017, extolling that it had finally been made clear at last instance that those earning a relatively high fee for their work or service performance qualified as self-employed. (End) customers, notably in the IT, consulting, engineering and pharmaceutical sectors, are sighing with relief, maintaining that at long last all parties were now rid of the bothersome delimitation between contracts for work / services and labour leasing contracts, in other words, the courts finally talked sense and the yoke had been thrown off. Is that so? Unfortunately not! The aforementioned interpretation of the judgment of the Federal Social Court (BSG) of 31 March 2017 – B 12 R 7/15 R – is unfortunately wrong.
I. Decision of the Federal Social Court
The case concerned the question whether a remedial teacher working largely autonomously on the basis of fee contracts, as an educational guardian in public-sector youth welfare, and whose fee was considerably higher than that of the remuneration of employed staff had actually been self-employed or whether this had been dependent employment subject to social security contributions. The action was brought by the relevant administrative district (Landkreis) which, to perform its tasks as a provider of public-sector youth welfare, had concluded contracts with independent institutions and individuals for the provision of local youth welfare services in families. Besides his full-time job, the remedial teacher summoned to the proceedings as an interested party had worked for the plaintiff as an educational guardian for about four to seven hours a week on the basis of individual fee contracts at EUR 40.00-41.50 per consulting hour. The defendant, Deutsche Rentenversicherung Bund (German Federal Pension Insurance Agency), maintained that in the abovementioned capacity the remedial teacher had acted as an employee and had therefore been subject to an obligation to make social insurance contributions. The administrative district’s action had been upheld at the lower instances. The BSG dismissed the federal agency’s appeal on points of law and thus confirmed the judgments of the lower courts. According to the BSG, the remedial teacher had not been a dependent employee of the district administration. The fee contracts concluded between him and the district administration had stipulated that he would be largely free from instructions and would not be integrated into the district administration’s work organisation. The contracts had been implemented in practice exactly as agreed in writing, i.e. had been lived to the letter. In the context of an overall weighing of all circumstances the fee was of special importance: where the agreed fee was significantly higher than the salary of a comparable employee subject to social security contributions, such as a permanently employed educational guardian, such fee serving for self-provision, then this was an important indication of self-employed activity (see BSG press release of 31 March 2017).
II. Impact of the decision
The last sentence of the grounds quoted above has been praised by interested circles as a novelty finally freeing the freelance profession, to such an extent that this could lead to the assumption of self-employment being acquired by simply agreeing a “fee serving for self-provision”. What tends to be missed is the clause “in the context of an overall weighing of all circumstances”. In actual fact, the BSG has not abandoned its past evaluation regarding the delimitation of self-employed and employed activities, but has merely taken into account the amount of the agreed fee as an additional criterion. But how exactly is such delimitation to be effected in the individual case? A brief summary is given herein below. Pursuant to Sec. 7 SGB IV (German Social Code Book 4) “employment is non-self-employed work, notably under an employment contract. Indications of employment include activities under instructions and integration into the instruction giver’s work organisation”, i.e. instructions by the customer (or end customer in the case of the agency model) and integration into the customer’s / end customer’s work organisation. The frequently quoted overall weighing of circumstances in the concrete case requires an examination and assessment of all characteristics of the individual case. Where an activity has characteristics suggesting both dependency and self-employment, the decisive criterion is which characteristics predominate (see BSG in NJW 1994, p. 2974). Hence, all circumstances of the individual case must be taken into account. What counts is the overall picture of the work performed, having due regard for generally accepted standards.
The following are recognised characteristics (All characteristics taken from: Kasseler Kommentar zum Sozialversicherungsrecht – Seewald, 93rd instalment March 2017, § 7 SGB IV, no. 50 ff.) of dependent employment in the context of the requisite overall weighing of circumstances:
- right of a customer / end customer to issue directives on the basis of which the worker cannot essentially perform work independently, but is subject to a comprehensive right of direction – and to resultant monitoring and supervision – as to the time, duration, place and type of work performance;
- no freedom to dispose of own working capacity (manifold requirements of customer / end customer need to be complied with);
- existence of a supervisor controlling work procedures and giving instructions;
- no free choice of the place of work;
- no genuinely free organisation of working hours (including factual compliance with operational requirements);
- no own business premises;
- no assumption of entrepreneurial risk, whereby such risk is not limited to entrepreneurial investment of funds for achieving a yet uncertain corporate profit, but also includes potential (or manifest) insolvency;
- purpose and motivation of the relevant activity as subordinate criteria;
- most importantly, integration into any kind of work organisation (not just a company hierarchy). Such integration is of special importance in distinguishing (dependent) employment from self-employment. This is one of the statutory criteria for dependent employment without constituting a definitive assessment. The key question is whether the worker is part of an external organisation or the central figure of his or her own business;
- external control (whereas own control characterises self-employment). It should be noted that, especially in the context of higher-level services, integration alone may entail personal dependency;
- lack of investing own capital;
- lack of vicarious agents, whereas using third parties (as subcontractors) or own staff tends to indicate self-employment;
- economic dependency on the customer / end customer;
- lack of use of own working materials; and
- integration into the customer’s / end customer’s operational procedures by way of functional participation in the work process.
- The BSG’s recent case law emphasises the relevance of contractual agreements, making clear however that an assessment under social security law is not to focus on such contractual stipulations, but on the circumstances of their implementation. Although the contract design is of importance, the actual realization is what ultimately counts.
So, the above (non-exhaustive) catalogue of criteria serves for an overall weighing of circumstances in the individual case. Only where such a comprehensive assessment concludes that the characteristics speaking for self-employment predominate is an assumption of self-employment justified.
It should be noted that two or more different type activities pursued by an individual must be assessed separately when it comes to the question whether the relevant activity is subject to social security contributions. This means that under one legal relationship a person may certainly be an employee subject to social security contributions, while under another legal relationship the same person may be self-employed and acting as a freelancer or external advisor. What needs to be evaluated is the concrete legal relationship in each case.
What is new in this overall assessment is that the amount of remuneration paid is now to be taken into account as well. This is to be regarded as expedient, since this particular criterion had been neglected in the past. So, if the amount of the fee is sufficient for suggesting self-provision, i.e. if it is significantly higher than the remuneration of a comparable permanent employee, this can now serve, besides other criteria, as an indication of genuine self-employment.
III. Practical hint
When commissioning freelancers, notably under an agency / contracting model, an advance compliance check is recommended. In this context one should specifically inquire about the proposed manner of project execution to find out whether the project can indeed be implemented using freelancers or whether, for example, the customer / end customer requires such tight interaction with own personnel that it is simply impossible, without changing the mode of project implementation, to design the legal relationship in terms of freelance work. Only where an appropriate upstream and downstream compliance system is in place will it eventually be possible to minimise liability risks such as sanctions under criminal law, administrative fines, and retroactive payment of taxes and social security contributions.