External staff and Legal Tech

Application of IT tools to avoid pseudo self-employment

By Dr. Albrecht Muser

Download article as pdf

Introduction

The deployment of external staff (freelancers, subcontractors, agency workers) is common practice in many businesses for a variety of different reasons, such as a (temporary) staff shortage, the need for special skills or simply the pursuit of flexibility. However, in Germany it has become increasingly complex over the last decade to deploy external staff licitly. Whereas self-employment and agency work were fostered by the Hartz legislation at the beginning of the last decade, both provisions are now regarded as prone to misusage. As a consequence, legislative requirements for external staff have become rather strict (see for example the reform of the German Law on Temporary Employment [Arbeitnehmerüberlassungsgesetz, AÜG] in 2017) and the competent authorities (especially the customs authorities) have significantly increased their efforts to investigate and prosecute any violation of the respective regulations.

The consequences of illicit deployment of external staff, especially pseudo self-employment (Scheinselbständigkeit), are severe. Companies will be hit with administrative fines and those responsible (managing directors, HR officers) may be subject to criminal prosecution. Further, contributions to the social security scheme will have to be reimbursed for the entire term of the employment, and the company will be held liable for any outstanding tax payments. Since external staff usually invoice VAT, any deducted VAT must be reviewed and corrected. According to a recent ruling by the European Court of Justice, pseudo self-employed staff are even entitled to vacation claims that may be enforced with retroactive effect. To make matters worse, negative media coverage brings a significant loss of reputation in the context of pseudo self-employment.

In addition to these legal and regulatory risks (and the efforts to avoid them), employers often have to struggle with a variety of factual challenges when it comes to the deployment of external staff. Usually, resulting from a variety of contractual partners, external staff are not deployed on the basis of uniform contract formats, but on the basis of various contract formats with differing structures and content. As a consequence, in most businesses, neither a comprehensive database providing an overview of the respective contract clauses currently in use for external staffing has been established, nor can it be guaranteed that all contractual regulations regarding external staff are up-to-date.

Also, external staff will be hired for different departments with different requirements for the deployment of such staff. As a consequence, varying types of contracts (for freelancers, subcontractors or agency staff) may be required, each with differing regulatory requirements. Further, depending on the area of deployment, often different people will be in charge of the administration of external staff without one person being prima­rily responsible. In order to cope with these issues, manageable processes are required.

Functioning of IT tools in general

For the aforementioned reasons, many businesses face the necessity of reliably assessing the lawfulness of the deployment of external staff, be it on a one-time basis or repeatedly. Respective IT tools can assess whether an individual deployment is lawful or unlawful or has to be further assessed.

This assessment is based in principle on the usage of questionnaires which run through various phases, each giving either an indication for more thorough evaluation of the individual case or presenting a final result. The respective IT tools offer the possibility of digitizing the questionnaires (using MS SharePoint®), thus also making the operational procedure visible. Taking into account the employer’s individual needs, IT tools offer enough flexibility to configure all questions and answers in any phase of the assessment according to the employer’s individual circumstances. They also allow several users to work on a multitude of cases in parallel thus making the assessment process more efficient.

Functioning of IT tools in detail, using the example of KPMG’s Freelancer Tool®

KPMG’s Freelancer Tool® (henceforth Freelancer Tool) initially requires a set of generic data concerning the individual freelancer or subcontractor for the envisaged deployment. Via an import function, these data can be imported from an Excel or XML spreadsheet and can include, in a first phase, questions (such as current membership of a compulsory social security scheme) to be answered by the user for further investigation of the freelancer or subcontractor. In a subsequent step, this information will be evaluated either with the help of a points scheme provided by the IT tool, or manually by the user (or another duly assigned person) to give an assessment result. Insofar as some items in the questionnaire are not answered, the user will be given respective information and the evaluation cannot be finalized. The result can either be final (deployment critical or unlawful; uncritical) or preliminary (requires further evaluation). In the latter case, the assessment enters the next phase, requiring more detailed information to be evaluated until a final result can be indicated.

Once a final result has been achieved, it will be reported automatically to the designated recipients, also making the results of the individual phases transparent. The results may also be exported into an Excel spreadsheet for further analysis or documentation.

Usefulness of applying IT tools

Where the Freelancer Tool or comparable IT tools have been applied by businesses, a significant increase in the quality of assessments of external staff deployments has been observed.

Applying IT tools enables businesses to assess and evaluate the future or current deployment of external staff in an efficient manner and according to consistent standards, even if the assessments are conducted by several users. It is also possible for different phases of the process to be handled by different users, such as information officers, HR departments or external consultants. The quality of the results is further improved by the fact that the IT tools can be adapted to the individual circumstances of the respective business, thus providing even more precise results.

Summary

The deployment of external staff (freelancers, subcontractors, agency workers) is subject to strict statutory regulations where violation may have serious consequences. Businesses therefore require a reliable process in order to avoid illicit deployment of external staff.

IT tools can offer such a process, enabling businesses to organize the process of assessing deployments efficiently. Even if they cannot replace thorough legal analysis, these tools definitely help to put the deployment of external staff on a sound footing.

amuser@kpmg-law.com