Employee or Not?
Employee status has significant consequences. On the one hand, this affects the rights and obligations of the parties involved: Employment relationships grant, among other things, claims to payment, vacation, and continued remuneration in case of illness, and may offer protection against dismissal-benefits that are denied to self-employed entrepreneurs.
On the other hand, employee status determines whether and who must pay social security contributions, and to what extent. If a self-employed individual is reclassified as an employee – a case of “bogus self-employment” – this can have considerable financial, tax, and even criminal consequences for the employer.
“Partner” Operates a Car Wash
The operator of a car wash wanted to clarify whether he was an employee or not. For several years, he had been running it for a company that owns around 300 car washes throughout Germany.
The basis of their collaboration was a “Partner Agreement” in which the man was described as a partner and an independent business owner. The partner was permitted to operate the car wash for a fee on behalf of the owner and received a sales commission.
He was allowed to hire his own employees independently. In return, he was obligated, among other things, to register a business, pay VAT (Value Added Tax), and maintain an operating log. The product prices were set for the partner. Furthermore, the car wash was to be maintained according to specific guidelines. Opening hours were not dictated but mutually agreed upon.
Employee, Not an Entrepreneur!
After more than ten years of collaboration, the “partner” took the view that he was an employee of the car wash owner and not an entrepreneur, despite operating the business with his own staff.
He sought a court declaration that the collaboration constituted an employment relationship and demanded payment of remuneration. He argued that the extensive regulations governing his work, in particular, led to a personal dependence – a key indicator of his employee status.
Authority to Delegate to Own Staff Argues Against Employee Status
However, neither the Hamburg Labor Court, the Hamburg Regional Labor Court, nor the Federal Labor Court (BAG) found sufficient evidence of an employment relationship.
All courts classified the car wash operator as an independent service provider and a self-employed entrepreneur.
The decisive factor for this classification was Section 611a (1) of the German Civil Code (BGB) and the assessment of the specific circumstances of the individual case. These predominantly argued against the personal dependence required for an employment relationship.
Even in the “Partner Agreement,” the courts found no evidence of a contractual obligation to follow instructions typical of an employment relationship, despite the sometimes-strict guidelines for the car wash operator. The man was able to organize his work largely independently and was obligated, among other things, to register his own business and pay VAT.
Finally, the contract stipulated that he could employ his own personnel and delegate his duties to them – which he had done. For the BAG, this was a decisive criterion proving the “partner” was not an employee.
A certain degree of being bound by instructions in this contract does not automatically indicate employee status:
“Being bound by instructions and the corresponding rights to issue them can also exist outside of an employment relationship,” stated the BAG.
Instructions given to independent contractors are project-related and result-oriented, whereas those for employees are person-related and process-oriented.
The Partner Agreement primarily set a framework to ensure a uniform, nationwide offering for the car washes. For all other matters, the “partner” was ultimately in control of his work organization and was not personally obligated to perform the work himself.
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Summary of the key facts
- The key provision for classifying a collaboration as an employment relationship or contract is Section 611a (1) of the German Civil Code (BGB).
- The right to issue instructions in a collaboration does not, in itself, automatically indicate an employment relationship.
- An individual who is contractually authorized to delegate their own contractual duties to third parties is likely not an employee.
