Independent contractor or employee – That is the question.

Time and again the question arises whether an individual is employed as an independent contractor or as an employee. Under German law there is a thin line between an employee, ie someone who performs services under an employment contract, and an independent contractor, ie someone who performs services on an independent basis. The distinction is even more difficult since is not made on the basis of the underlying contract alone, but on the way the contract is played out. If the contract establishes an independent contractor relationship but the way the contract is executed establishes an employment relationship, the person would be classified as an employee.

According to case law the following criteria are typical factors for an employment relationship:

• Duty to comply with instructions;
• Duty to report to employees in addition to the managing director;
• Integration within an existing hierarchy;
• Observance of fixed working hours, working schedule and particular place of work;
• Prohibition on working for others;
• Prohibition of any entrepreneurial activity;
• Long term of employment;
• Entitlement to vacation;
• Tax and social insurance contributions are deducted from salary;
• Payment of salary via payroll.

The parties’ intentions are basically secondary.

Based on these criteria the Social Court in Dortmund (Sozialgericht Dortmund) ruled on 20 February 2015 (docket number: S 34 R 2152/13) that hospital doctors who are employed on a fee basis are not independent contractors but employees. The court stated that the doctors are integrated in the work processes (eg treating the patients, writing and reading reports and documentations, attending at meetings) and do not carry any entrepreneurial risk themselves since they do not use their own financial capital for the activities and receive a guaranteed hourly wage.

Since the misclassification of an employee as independent contractor may have severe consequences for the employer in respect of tax, social security and employment issues, this question should always be checked carefully prior to the employment of an independent contractor.