Reform of the status determination procedure – New upfront determination of employment status
Legal situation until 31.3.2022
In the context of social security, the status determination procedure makes it possible for the parties involved in an existing contractual relationship to establish, in a legally binding manner, whether or not work that is subject to mandatory social insurance contributions is deemed to exist. The status determination procedure is only available once a contract has been concluded; it is free of charge for the parties involved.
Enhancement as of 1.4.2022
The reform of the status determination procedure is intended to establish legal certainty and confidence with respect to planning for all contracting parties early on, more simply and, in particular, more swiftly.
Employment status instead of insurance obligation
The new up-front procedure will determine the employment status as part of a potential social insurance obligation, however, it will not determine if there actually is an insurance obligation. The procedure will thus determine whether a person should basically be considered as an employee or an independent contractor. As a result, the parties involved and the clearing units will be relieved of administrative red tape, moreover, the procedure will be simplified, speeded up and already possible prior to the commencement of a contract.
If a person is deemed to be an employee and therefore generally subject to mandatory social insurance contributions then the employer would be obliged to register them in accordance with the requirements. A separate determination of the insurance obligation by the collecting agency or by the DRV Bund will now only be necessary in special circumstances.
Please note: Independent contractor status does not necessarily mean exemption from social security contributions. For example, employee-like status for independent contractors – such as artists, teachers, home-based businesses and tradespeople at building and construction service companies, those who are economically dependent with no employees subject to mandatory social insurance – are subject to mandatory pension insurance contributions (Section 2 of Volume VI of the Social Security Code [Sozialgesetzbuch, SGB] ). Here, the obligation to transfer these contributions lies with the independent contractors.
Introduction of predictive decisions
In the future, it will be possible to determine employment status already prior to the start of the contract (cf. Section 7a(4a) Volume IV SGB, as amended). The aim is to limit or even prevent the creation of so-called ‘bogus self-employment’ situations. To this end, the contractual conditions will have to be sufficiently specifically clarified. If it appears that there are discrepancies with respect to the actual performance of an activity or the contractual arrangements when compared with the basis of the previous prediction then the DRV Bund may reverse the predictive decision. If there are changes in the contractual agreements or in the conditions for the performance of the contract in a period of up to one month following the commencement of any activity, then the parties involved would have to immediately notify the DRV Bund.
Please note: The DRV Bund would check whether or not this would give rise to an amended decision. Should this be the case then the decision would be adjusted with future effect. If the notification is not made immediately because of wilful intent or gross negligence then the decision would be reversed retroactively back to the date of the commencement of activities.
Introduction of a group determination procedure
Another new instrument for providing certainty about the employment status as early and as comprehensively as possible is the so-called group determination procedure pursuant to Section 7a(4b) Volume IV SGB, as amended. Such a procedure could be considered if the contracts were essentially to be implemented on the basis of uniform conditions. As a result, it would be possible to drop multiple individual decisions in similar cases.
Determination procedure in the case of triangular relationships
If the agreed work is performed for a third party then it will likewise be established whether the employment relationship is with the contracting entity or the third party. In doing so, separate status determination procedures can also be avoided.
Outlook: The changes will initially be valid until 30.6.2027. Thereafter, the DRV Bund will evaluate them and submit an in-depth report to the Federal Ministry of Labour and Social Affairs. Yet, once again, lawmakers have not formulated differentiation criteria that could provide an explicit indication for or against the employment status of an employee or an independent contractor. This will continue to be reserved for case law.