Compliance risks from “outdated” status determination decisions
Mistakes about the social security status of employees are quite common, but can have serious consequences and even lead to criminal liability under section 266a of the German Criminal Code (Strafgesetzbuch). Companies wishing to avoid such risks when hiring freelancers or having shareholders/partners or shareholder-managing directors work for them, for instance, can have a procedure to establish their employment status pursuant to section 7a of Book IV of the German Social Security Code (SGB IV) carried out by Deutsche Rentenversicherung Bund (DRV), Germany’s central social security authority. The DRV issues a decision establishing whether or not the person is a dependent employee and therefore whether obligations to remit social security contributions apply. This decision has binding effect for all those involved and they, especially the undertaking (company/principal), can rely on this as long as the circumstances underlying the decision continue to exist unaltered. The German Federal Social Court (Bundessozialgericht) recently decided what obligations exist if these circumstances change.
A. Legal certainty from DRV’s decision
The decision initially provides companies with clarity about whether an engagement or work relationship constitutes dependent employment or freelance activities, i.e. whether or not there is an obligation to withhold and pay social security contributions. The notice essentially applies indefinitely, providing employers with legal certainty for the time being.
B. Change of circumstances – change of decision?
However, the DRV reaches its decision on the basis of the files, taking the factual and legal circumstances submitted by those involved into account. These circumstances can of course change rapidly and continuously in day-to-day business. The decision issued is based on a snapshot of the circumstances existing at the time the application is made.
So, is a company required to report changes in the factual and/or legal circumstances to the DRV or can it rely on the principle of protection of confidence in this respect?
C. Subsequent notification requirements for companies
Section 7a of Book IV of the German Social Code itself does not contain any duty of a company to report any changes in circumstances occurring at a later date to the authority. Similarly, the typical notification requirements under social security law are not relevant here since they only apply when social security benefits are being applied for or drawn, which clearly does not cover requests to establish social security status (section 11, first sentence and section 60(1), first sentence, no. 2 Book I of the German Social Code).
However, in its judgment of 29 March 2023 (B 12 KR 1/20 R) the Federal Social Court assumes that there is an unintended loophole in the provisions of the Code and hence that an obligation to report changes in circumstances without delay arises by analogy from section 60(1), first sentence, no. 2 of Book I of the German Social Code in conjunction with section 28a(1) of Book IV of the Code. It states that changes in the factual or legal circumstances are always to be expected, meaning that companies are obliged to report such changes to the DRV without delay if they are relevant for determining employment status.
D. What do companies have to bear in mind?
Yet the duty to monitor the circumstances relevant for the decision associated with this is not always obvious or easy to manage. To take one example, increasing the share capital of a limited liability company (GmbH) can lead to the elimination of the decisive blocking minority of a shareholder-managing director and, as a result of that, to the managing director becoming an employee subject to social security contributions. Should the company fail to recognise the implications of this change and to notify the DRV, there is a risk that the “old” status determination decision will be repealed with retrospective effect if this is discovered later on. The company will then have to pay the entire social security contributions retrospectively and may even have to pay additional charges for late payment.
Bearing this in mind, companies should have an overview at all times of possible changes in the circumstances relevant for decisions regarding employment/social security status as part of their compliance processes, so that they are able to inform the DRV about these immediately. Failing to do so could turn out to be expensive.
We will provide more information on this topic in our fourth quarterly update on the deployment of external staff this November. Please register for our Newsletter if you would like to receive early invitations to our events.