Hiring Employees and Freelancers in Germany – What’s the Difference?
The labour law in Germany may seem complicated to an outsider, so it’s important to understand the basics so that you can navigate the rules when deciding to hire employees or freelancers based in Germany for your business.
The first and most important decision is whether you will hire someone as a freelancer (Selbständiger) or as a regular employee (Arbeitnehmer). This decision is mostly determined by the conditions of the working relationship between you and the person you’re looking to hire, and a decision to make lightly. The main consequences are that for hiring an employee you have to register as an employer (Arbeitgeber) and pay social security (Sozialabgaben), income tax (Einkommenssteuer) and employer liability (Unfallversicherung). At the same time, the employee will benefit from protection from termination (Kündigungsschutz). Freelancers, on the other hand, are not protected from termination and have to take care of health insurance etc. by themselves. Also, while an employee will receive their salary on a regular basis, a freelancer needs to first provide proper invoices in order to get paid.
What’s the Difference Between Hiring an Employee or a Freelancer?
To start first in legalese: An employment relationship is distinguished from a freelancer relation by the degree of personal dependency. If the business owner can make demands towards the service provider regarding tasks to be completed, methods and procedures to be followed, time, length and place of the job to be accomplished, then the service provider is clearly an employee. This can be further broken down into the integration of the hired person into the company workflow (Arbeitsorganisation) and the entitlement of the employer to give orders (Weisungsrecht) regarding how, when, and where to do the job. All of these factual and practical circumstances must be considered when making the distinction between an employee or freelancer relationship.
What does that mean in practical terms? Well, a classic 9 to 5 job is employment. If the employee has to show up in the office at a certain time she/he is without a doubt an employee. But it does not stop there. Giving regular tasks to one service provider, providing a company email address and access to all other company tools as any other employee, and even requesting exclusive work for you (contractually, or just in practice through a full-time workload): all this may indicate an employment relationship with the person.
On the other side, indications of a freelancer relationship are: only occasional tasks, the right and real possibility to work with other clients, and the freedom to work when and where they want to. However, a simple deadline to deliver results does not make a freelancer an employee.
Unfortunately, none of these facts alone is decisive. For instance, if a freelancer only works for you one month per year, when and where they want, has other clients, but you allow them to join your team Slack: no problem. So it’s important to consider the overall working situation, where place and time of work are the single most important criteria.
Contrary to what some may think, it is NOT decisive how you call your contract (i.e. “freelance agreement” or “employment agreement”). If it turns out that your “freelancer” had to show up in the office regularly, you may still have to pay social security retroactively and even be subject to penalties.
To summarize the differences between hiring a freelancer or an employee according to German labour law:
Facts indicating an employee relationship:
- has to show up in the office regularly
- all tools provided by the company (computers, software, etc.)
- full integration in the company workflow: official company email, other company accounts, company business card, company phone number, treated like any other employee in general
- requirement to call in sick and follow the rules set by the company regarding being absent from work
- paid holidays
Facts indicating a freelancer relationship:
- no company office space
- no regular working hours (setting deadlines is of course OK)
- uses and pays for own tools and equipment
- review of work results only, no orders on how to achieve such results
- right to delegate work to third parties
- right and the possibility to have other clients
Now that you know the differences between an employee and a freelancer, let’s dive into each employment type for more details: