The Internet economy: opportunities and risks with freelancing
By Dr. Anja Mengel, LL.M. (Columbia)
The Internet economy is virtual, fast and decentralized. And it’s global, too. Freelancers play an integral part in the operations of many Internet businesses as they, on the upside, usually deliver qualified, specialized and fast services while relieving companies of the burden of accumulating too much headcount too early. However, in Germany’s strictly regulated HR environment and labor market, there are also very significant downsides if freelancing is not properly set up and carried out: German authorities regularly review and inspect all businesses located in Germany to determine if freelancing rules have been correctly applied and will claim heavy retroactive liabilities and fines from businesses where freelancers are, in fact, treated as dependent employees and are therefore entitled to employee social security benefits. As a general rule of thumb, at least in lower income ranges, the additional payments required for “failed freelancing” can easily amount to about 70% to 100% of the original fees paid and usually have to be made retroactively for four years, regardless of any potential personal civil law and criminal law liabilities incurred by management.
New job profiles, new legal judgment?
As a result, models that heavily rely on freelancing need to be reviewed carefully. In this respect, Internet businesses are up against the rather traditional models and criteria used by the authorities and courts to make a legal distinction between dependent employment and freelancing. Diligent presentation of the new types of services provided and used within the Internet economy does, however, often pay off with new case law accepting new types of freelancers. This is reflected in a recent court decision about a “scrum coach” and another about a “web designer” collaborating on specific but long-term projects involving further development of the website of a large German Internet B2B/C2C platform. The social security authorities had found the services to have been carried out by employees mainly due to the fact that the contractors were often present at internal team meetings and also “wrote code” on the business’ own servers, but the court of first instance had reached a different conclusion. It accepted the notion that a software developer who specializes in being a coach for the “scrum method” is much less part of the internal team of developers than the comparable external business consultant who advises on a restructuring project for a while.
The practical view: relevant criteria and …
Still, these cases would have most likely turned out negatively for the businesses had the freelancing contracts not been made with specialists in their field who had their own businesses for some time already and could provide an impressive track record of (other) former clients as well as demonstrate they had use of their own office facilities away from the project’s business. Under German law, it is also essential that the freelancer not be obliged to work set hours on a daily, weekly or monthly basis and is, from the outset, free to determine the amount and scheduling of the time he or she assigns to one project. The freelancer must provide the equipment required to carry out assignments, including, for example, a laptop, computer, phone, standard software and the like, as well as his or her own office facilities. In this respect, reimbursing costs should also be avoided, and the freelancer should calculate the costs that need to be covered by remuneration.
While a lot of the relevant criteria can be addressed in the freelance contract, business liabilities often result from the noncompliant practice of carrying out the contract over time. It has therefore proved to be very useful to hold training sessions at the beginning of a new project or for an event to be set up for a business involving freelancing followed by regular compliance reviews and updated training for both HR professionals and the line managers or project coordinators who act as the point of contact with the freelancers. The general idea must be that a freelancer is to be dealt with “at arm’s length,” much like an outside counsel or architect, and not like a “team member” when it comes to all kinds of daily issues such as organizing meetings, setting deadlines, reporting and participating in social (after-work) events as well as benefits like gym discounts and the like.
… the problem of a “must-be employee”
One difficult issue for businesses participating in the Internet economy involves business models that feature a special type of software or app or website backend to be used by freelancers. While such tying in through the software is often simply impossible to avoid from the business point of view, the German authorities and courts have traditionally considered this a decisive criterion for considering the freelancer a “must-be-employee” – that is, a situation where freelancing is made simply impossible by a required daily “integration” concerning software and IT. The courts have, however, recently accepted that a web designer writing code on the business’ servers for reasons of data volume and secrecy could in this respect be compared to a traditional freelance plumber required to work on the pipes “in-house” without jeopar-dizing his or her freelance status – provided other freelance criteria are fulfilled.
While these recent case law developments are encouraging for Internet businesses in Germany and will make it easier to defend new freelancing models emerging from the virtual economy, German law always requires an assessment be made on the basis of the various circumstances of the individual case and is averse to generalizing case law too lightly. It is therefore (still) up to each business to regularly set up and review – and possibly correct – its operations for social security compliance.