This Legal Q&A two pager gives an overview of the potential problems of using contractors and freelancers in Germany, in particular the risk of misclassification. Incorrectly classifying an employee as a contractor can have considerable effects on the company – from retroactive liability for taxes and social security contributions to reputation damage and even criminal liability of the company's managing directors in certain cases. It is therefore crucial to know the main criteria for determining them correctly.

What is the difference between a contractor and an employee?

A contractor or freelancer is defined as an individual performing services on an independent basis, assuming the sole entrepreneurial risk for his services or business. The performance of services is usually regulated in a service contract (Dienstvertrag), or, where they relate to a definable project to be completed, in a contract for works (Werkvertrag). An employment relationship, on the other hand, will be governed by an employment contract, requiring the employee to perform services in accordance with the direct instructions and supervision of his employer while being integrated into the employer's organization.