Fee-based contract as an alternative to an assignment under an employment contract
In practice, the question often arises as to whether the conclusion of a “fee contract” is an alternative to an employment contract in the case of an assignment abroad.
In order to be able to decide which of the two options is preferable, the differences must be presented and the advantages and disadvantages weighed up.
Before making the distinction, the terminology must first be clarified.
The term “fee contract”, which is frequently used in practice, refers to a self-employed activity on the basis of a service contract. Such a service relationship, which is not an employment relationship, is referred to as a freelance employee relationship. This term is also used below.
The demarcation between the freelance employee relationship and the employment relationship is made according to the concept of the employment contract (§611a BGB). The decisive factor is whether the employee is integrated into the work organisation of the external company and whether the owner of the company makes the decisions on the deployment of the employee, which are typical of an employment relationship, also in terms of time and place, and thus exercises sovereignty over the personnel.
The following criteria speak for the existence of an employment relationship:
- Designation of the contract and the contracting parties as employment contract and as employee/employer.
- Extensive obligation to give instructions (content, time, place)
- Integration into the company organisation
- No own permanent establishment/business organisation
- External operating resources
- Personal provision of services
- No entrepreneurial opportunities and risks
- Activity exclusively or predominantly for a company
- No warranty for damage to property or personal injury
For case law, it is not the existence of all criteria that is decisive, but the overall consideration of all circumstances that are essential for the legal classification of the contractual relationship. Furthermore, the objective content of the transaction must be taken from the explicit agreements and the practical implementation of the contract. In the event of a contradiction between agreement and actual implementation, the practical handling is decisive.
Pros and Cons
If the company is specifically interested in “controlling” the employees, an employment relationship is a suitable option. In this case, the employee provides his or her labour and the employer defines the work in terms of content, time and place by issuing instructions. The work would thus be carried out in an external company in accordance with the work organisation guidelines laid down by the employer and with the use of his technical equipment.
Another advantage of the employment relationship is the flexibility to deploy the employee at his own discretion according to the needs of the enterprise. However, the disadvantage here is the increased need for protection from the employer’s point of view for the employee. This includes the payment of taxes and social security contributions.
When establishing a freelance relationship, the special law of labour law does not apply. The freelancer can neither invoke employee protection law nor claim social security protection. He is also responsible for paying taxes.
This initially looks attractive for the company, which is why freelance employment is often chosen. However, it should be noted that then only the performance outlined in the contract can be demanded. Adjustment to new circumstances is therefore not possible unilaterally and instead requires agreement, just like any additional task. Furthermore, your close management of the employee is not possible, since controls, for example, also have to be only factual or result-oriented.
Particularly in the cases of foreign assignments, practice shows that this very decisive switch between employment relationship and free employee relationship is often not taken with sufficient care, at least not consistently. On the one hand, the employee is supposed to be closely guided and organisationally integrated and supervised by the head office. However, they do not want to be granted employee protection rights or membership in the German social security system. The client must therefore decide which advantages associated with the particular contractual arrangement are indispensable to him. At the same time, he must be prepared to accept the associated disadvantages.
The freelance relationship is an alternative to the employment relationship for foreign assignments. The advantages and disadvantages associated with each type of arrangement must be carefully weighed up. If the choice is made in favour of a freelance relationship, it is important to ensure that the model of freelance work is not only adhered to on paper but also in reality. In particular, daily work processes must not be influenced from within the country, the work between domestic and foreign employees must not be closely interlocked organisationally, and superordinate and subordinate relationships must not be created across countries. The focus must above all be on a careful and very concrete description of services, which makes further concretising instructions superfluous. In practice, too many mistakes are made here and considerable risks of bogus self-employment are created. Therefore, it must always be carefully weighed up whether freelance work is a real alternative.
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