The question of how to deploy external staff in a legally secure manner has become increasingly important for companies in recent years. In addition, the authorities are dealing with this issue more and more intensively. In principle, all companies that have external service providers or contractors working for them are affected, regardless of whether natural or legal persons are commissioned.
From the point of view of the authorities, the question that arises in unfortunate constellations is whether there has been a tax evasion and thus possibly a tax evasion (§ 370 AO) or a reckless tax evasion (§ 378 AO) and whether, if applicable, the failure to pay social security contributions has resulted in the withholding or embezzlement of remuneration, which may be punishable under § 266a StGB (German Criminal Code). As a result, investigations are often initiated in these cases against the persons responsible within the company. This may affect legal representatives such as board members or managing directors as well as authorized persons (e.g. head of taxes, purchasing, HR, etc.). In the event of a conviction under Section 266a of the German Criminal Code, board members and managing directors may be banned from practicing their profession for five years (Section 76 of the German Stock Corporation Act (AktG), Section 6 of the German Limited Liability Companies Act (GmbHG)). In addition, proceedings for administrative offenses, such as violations of supervisory duties (Section 130 OWiG) or violations of the German Personnel Leasing Act (Section 16 AÜG), may be considered, which can be directed against both the management staff and the company itself (Section 30 OWiG). Finally, the responsible persons in the company also run the risk of being held personally liable.
II. current development
According to the most recently published annual statistics of the General Directorate of Customs for 2018, 53,491 employers were inspected, a loss amount of approximately 835 million euros was determined, and more than 1,700 years of imprisonment were imposed as a result of the violations found.
To avoid risks, companies should prepare themselves for the legal framework and its intensive scrutiny by the authorities. This means that the use of external personnel should be controlled in a targeted manner along legally compliant processes and monitored on an ongoing basis. To ensure this, an effective compliance management system (CMS) is recommended, which ideally enables efficient monitoring and control through IT-based solutions.
III. Constellations in focus
When it comes to the use of external personnel, the authorities essentially focus on two basic constellations. By far the best-known constellation is the use of external personnel with a direct contractual relationship with the company. A self-employed person, also called a freelancer (e.g. software developer, graphic designer, artist, web designer, engineer or also interim manager) concludes a service or work contract with the company and provides the service personally. In our experience, the proportion of such contractual relationships with external personnel in companies is around 15%.
Most frequently (approx. 85%), external personnel are used without a direct contractual relationship with the company. The service or work contract is concluded between the company and a legal entity. The service under the contract is provided by a third person who is either self-employed or an employee of the contractor. In the latter case, the employee is not deployed on the basis of a permitted employee leasing arrangement. This type of external staffing is also frequently found in the area of software development, but also in the areas of payroll accounting as well as reception, janitorial and cleaning services.
IV. Demarcation from employees
When using external personnel in the company, it is particularly important that the external personnel is not integrated into the company organization like an employee and is also not subject to any instructions. If mistakes are made in this process, there is a high risk that the external personnel used will be treated as a dependent employee (so-called bogus self-employment or covert employee leasing).
Such dependent employment may exist, for example, if the external personnel are given a start, end or duration of working hours, a workstation or company resources (CAD licenses, laptop, e-mail, etc.) are made available, there is cooperation with company employees, the external personnel work over a long period of time or a large amount of time, and/or a fixed, non-effort-related monthly remuneration is paid.
When assessing such an external personnel deployment, the overall picture of the deployment is always of decisive importance. The existing indications are to be weighted and balanced against each other on a case-by-case basis. Not only the wording of the contract, but also the actual handling of the contractual relationship in daily practice is of particular importance.
V. Impending consequences
The consequence of dependent employment under labor law is that an employment relationship has come into being between the external personnel and the commissioning company – if applicable, since the start of the activity.
If an employment relationship exists, this also has social security and tax consequences.
The Client (“Employer”) shall be liable for the total social security contributions as well as for the wage tax not properly withheld and paid, plus possible late payment penalties. In addition, the input tax wrongfully deducted from the invoices received from the contractor must be paid back to the tax authority and interest must be paid on it. The back payment period may extend up to thirty years with respect to social security and up to thirteen years with respect to wage tax and value added tax. Due to the long time periods involved, the Company may be exposed to significant financial risk. This is exacerbated when multiple contract relationships are at risk at the same time.
Finally, there is also a considerable liability risk for the client with regard to the lack of accident insurance (e.g. for medical treatment, rehabilitation or injury pension of an “employee”), which the company as “employer” should have taken out.
VI. Procedure in the event of risks being discovered
If a taxpayer subsequently realizes before the expiry of the tax assessment period that a declaration is incorrect or incomplete and that this may lead to or has led to a reduction of taxes, he is obliged under Section 153 AO to report this immediately and to make a correction. In particular, a tax return is also incomplete if the legal relevance of factual elements is doubtful. This is often the case in the area of the hiring out of external personnel, as the distinction from an employee is based on many factors and is a case-by-case decision. If the taxpayer fails to make such an adjustment, he commits tax evasion (§ 370 AO) by omission. Therefore, immediate disclosure is absolutely necessary in such cases.
Experience has shown that in cases of this kind, the tax authorities often do not carefully examine the subjective criteria of a possible criminal or administrative offense, but initially assume intentional or reckless behavior in the past. The consequence is the initiation of criminal or fine proceedings, against the management or other responsible persons in the company or fine proceedings against the company itself. It may therefore be advisable to secure disclosure to the tax authorities by means of the possibility of self-disclosure exempting from penalties or fines (Section 371 or Section 378 of the German Fiscal Code (AO)).
In parallel with the disclosure to the tax authorities, as a rule, notification should be made to the pension insurance company regarding the non-payment of social security contributions. With regard to Section 266a of the German Criminal Code (withholding or embezzlement of remuneration), it is not possible to make a voluntary disclosure without incurring a penalty, but the notification will in any case be taken into account in the assessment of a possible penalty. In addition, the authorities can exchange information among themselves, which is done in practice.
VII. our expertise
We are happy to support you with an inventory analysis as well as with the examination and delimitation of facts. If necessary, we also support you in making a precautionary disclosure to the authorities, which, if possible, also meets the requirements for a voluntary disclosure, or we defend you against the authorities. To support this, we can draw on flexible and efficient IT solutions that have already proven themselves in practice many times over.
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Munich Site Manager
Head of Criminal Tax Law
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Duesseldorf Site Manager
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tel: +49 711 781923-419
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