Compliantly Engage Contractors in Germany

Any business hiring in Germany should understand the important legal distinction between who is classified as an employee, and who can be engaged as an independent contractor. Fines or penalties may be issued to businesses who are hiring employees under the guise of  independent contractors or freelancers. 

In Germany, merely describing an individual as an independent contractor has no legal significance. Instead, various factors are taken into account to determine the true legal status of the individual. Therefore, understanding the distinctions between employees and independent contractors is critical to compliantly engaging workers in Germany. 

It is important to work with a partner like Worksuite to ensure that you have an engagement framework that properly classifies freelancers able to work as independent contractors. Alternatively, Worksuite can automatically alert you when freelance talent must be engaged directly as employees, or contractors on payroll.

In Germany, the primary criteria for distinguishing between an employee and an independent contractor is whether the individual is overly dependent on the hiring company. This applies to both direction and control of the services being provided and whether the contribution of a single client’s compensation is a dominant portion of the independent contractor’s overall income. This can involve a full assessment of personal dependency and economic dependency.

In practice, individuals are generally considered to be independent contractors if they:

• They can determine their own time and place of work.
  
• Do not need to notify, nor request permission from, the hiring company regarding periods of absence (e.g., holidays).
• Provide their own equipment (or most of their own equipment) and are not dependent on the hiring company’s resources.
• Receive payment for specific works or tasks completed rather than a fixed salary.
• Are not obliged to attend regular company meetings (such as team meetings or training sessions).
• Have a right to substitute someone else to perform the work (e.g. an employee of the independent contractor or a subcontractor).
• Work for (or have a right to work for) other clients at the same time.
• Openly advertise their services in the marketplace.
• Do not possess an email address, phone number, or business cards that are branded by the client company

In Germany, individuals who work as independent contractors generally operate under one of three categories: a Gewerbetreibender (business enterprise); a Freiberufler (professional freelancer); or a Freier Mitarbeiter (contract freelancer). The latter two are often both called ‘freelancers’, although there are differences (see below). The German tax office ultimately decides which status an independent contractor falls under.

• Freelancer / Freiberufler: Individuals operating under this status are considered to be freelancers working in ‘liberal professions’. They provide professional services on a self-employed basis, they take responsibility over their own work, and they tend to run a professional firm or practice. These freelancers generally provide services that require significant professional knowledge and expertise (including medical and financial consulting), and they are required to possess at least a university degree to qualify for this status.
• Freelancer / Freier Mitarbeiter. Individuals operating under this status are also freelancers, but they are typically hired for a specific period of time and/or for a specific project.
• Business enterprise: This is not defined in German law. However, it is generally considered to include independent contractors who do not fall into the ‘freelancer’ category and also do not operate in the agricultural or forestry sectors.

There are two primary engagement models for working with independent contractors in Germany: 

A. Direct engagement of the worker as self-employed or registered via their own limited company. To facilitate direct engagements there are two general types of contracts to use with independent contractors: using a work contract (Werkvertrag) or a service contract (Dienstvertrag)

• Work Contract (Werkvertrag): Under a work contract, the contractor is required to deliver a piece of work or certain outcome in exchange for a one-off fixed remuneration. Each contract relates to the delivery of a single ‘work’. The contractor bears the risk under this contract and is obliged to fix any errors or other defects until the contractual specifications of the work are achieved.
• Service Contract (Dienstvertrag): Through a service contract, the contractor provides services to the client during a defined period of time and under certain conditions – all of which are detailed in the contract. The contractor bears no risk if the services provided do not ultimately achieve what the client had wanted, so long as the services meet the requirements of the contract.

B. Umbrella company. These firms come in two forms and both are specially designed to vet and engage freelancers compliantly as either contract employees or independent contractors on your behalf.

• Staffing agency: Here, the hiring company engages with a staffing agency or umbrella company, which has an AUG (Arbeitsnehmerüberlassung) license to supply its own contractors to deliver the contracted services or engage pre-identified workers on their client’s behalf. The hiring company pays the staffing agency directly, in accordance with the terms of the contract with the agency. The agency will pay the independent contractor through a separate contractual arrangement. Under this model, the contract is between the hiring company and the staffing agency.
• Hiring partner: The hiring company can also work with a hiring partner who helps them vet potential independent contractors, set up contracts, ensure the contractor is properly classified, onboard and manage contractors, and pay contractors. 

In Germany, independent contractors must pay tax on all income above €9,984 (for the 2022/23 tax year). Independent contractors manage their own tax payments to the official ELSTER (Elektronische Steuererklärung) service or by using a tax software tool. Contractors might also need to pay Value Added Tax (VAT) and local trade tax. To pay their income tax and be able to issue invoices, contractors need to register with the German tax office (Finanzamt) for both an Identifikationsnummer (tax ID number) and a Steuernummer (a unique ID number for freelancers).

Social security

In Germany, independent contractors need to obtain their own social security provisions, including health insurance (Krankenversicherung). Independent contractors who do not have their own employees are required to make contributions to the national statutory pension scheme (Rentenversicherung). Clients of independent contractors are not required to withhold or pay into social security on behalf of the independent contractor.

We can simplify hiring full-time workers in Germany by acting as the Employer of Record (EOR) on your behalf, handling everything from contracts, onboarding, documentation, payroll, benefits, and workforce management. Reduce your time-to-hire by 90%, slash your overheads, and remain fully compliant.

• Quickly find, hire, and onboard talent in Germany without setting up your entity
• Prevent expensive legal, contractual, or tax mistakes in Germany
• Manage contracts, payroll, and global tax forms all in one Worksuite