A model familiar from every construction site
A company takes an order from a general contractor and “buys in” the labour from one-man businesses or small partnerships with their own trade licence. No social security contributions, no notice periods, no holiday-fund registrations. The model is temptingly flexible — but German social security law judges it not by the documents, only by how the cooperation actually works. If the “subcontractor” in practice supplies nothing but his own labour under someone else’s direction, he is an employee and the principal is an employer, with the full list of duties we describe in our article on the rules for foreign construction companies in Germany.
The phenomenon has a name: Scheinselbständigkeit — false self-employment. And it was this, not the quality of the works, that the principal in our case ended up paying for.
The case before the LSG Hessen: three “subcontractors” and 103,000 euros
A drywall and passive fire-protection contractor carried out orders for a larger construction company. The only person he had registered for social security was his wife. To perform the orders he engaged three partners of a civil-law partnership (GbR) — with a registered trade, an entry in the register of skilled crafts (Handwerksrolle) and a tax exemption certificate for construction services (Freistellungsbescheinigung). The “company seat” was the address of an office service that scanned incoming mail for 119 euros a month.
The parties signed an elaborate subcontractor agreement: separate order letters for every site, individual calculations, interim and final invoices, warranty under the VOB and the Civil Code. The problem: none of it ever operated. In practice the three partners performed one and the same task day in, day out — they clad columns with pre-cut, numbered fire-protection boards delivered to site. For 10–11 euros per column, at a rate proposed by the principal. The material came from the main contractor, the compressor and the essential tools from the principal. He also drove the three to the sites in his own van, showed them at the start how the work is done, kept an eye on it and demanded immediate rectification of faults. Separate order letters, calculations or acceptance protocols were never drawn up. The “company” never looked for new clients.
In February 2014 the customs authority (Hauptzollamt) inspected a site. All three were working in high-visibility vests bearing the main contractor’s logo. An investigation followed, and its outcome was a demand for back contributions for less than two years of cooperation: 103,624.46 euros, including more than 20,000 euros of late-payment surcharges alone. The principal lost before the social court in Kassel and then on appeal before the Hessian state social court (judgment of 26 January 2023, L 8 BA 51/20). The parallel criminal proceedings were discontinued only against payment of a monetary condition (§ 153a of the Code of Criminal Procedure).
How the court tests the status: practice beats paper
The starting point is § 7(1) of the Social Code IV (SGB IV): employment is non-independent work, typically indicated by working under instructions and integration into the principal’s work organisation. Self-employment, by contrast, is characterised by own business premises, an essentially free organisation of work and working time, and entrepreneurial risk. Which qualification wins is a matter of overall assessment — and here lies the core: what counts is the legal relationship as it is actually practised. The contract matters only to the extent that the parties really act on it.
In the case at hand the court held that the subcontractor agreement had hardly any evidentiary value, because not one of its essential mechanisms was implemented — reality stood, in the court’s words, in a contrast to it that could hardly be starker. And the reality was that the three partners were performing the principal’s own contractual obligation towards the main contractor. Whoever, as a helping hand, renders the very service his principal owes to a third party is as a rule integrated into the principal’s organisation. Instructions from the site manager then count as if the principal himself had given them, and materials provided by the client are treated like the employer’s own equipment.
Entrepreneurial risk — what was missing
The second pillar of the decision was the complete absence of entrepreneurial risk. The partners invested no capital, had no premises or office (a mail-forwarding address is not a seat), employed nobody, did not advertise and did not calculate their own prices — the per-column rate had been proposed by the principal. Entrepreneurial risk means investing resources in the expectation of profit with no guarantee of recovering them. The travel and accommodation costs the partners bore during assembly work did not qualify: they arose only once a specific, already secured order existed, and so were no different from the expenses of any posted worker.
The argument that the “company” had other clients did not help either. The earlier work for another contractor had ended before the disputed cooperation began, and the next client appeared only after the customs inspection — introduced, moreover, by the principal himself. The court also recalled a more general rule: every contractual relationship is assessed on its own, and several parallel employments are nothing unusual. Working for several customers does not in itself create entrepreneur status.
What does NOT protect you from employee status
This list deserves a careful read, because these are exactly the documents the industry treats as “proof” that everything is legal:
- a registered trade and an entry in the register of skilled crafts (Handwerksrolle),
- the tax office’s exemption certificate for construction services (Freistellungsbescheinigung),
- certificates from the holiday fund — we cover the SOKA-Bau scheme separately,
- a business liability policy and own bookkeeping,
- issuing invoices with a tax number,
- a company address and a stamp.
Courts treat all of this as formalities of subordinate weight. A trade registration is a declaration, not evidence — the everyday reality on site decides the status. What is more, an elaborate subcontractor agreement that nobody follows works against the principal. In the case at hand the court concluded that the contract served solely to disguise the true relationship — all the more so as it was signed only months after the actual work had begun. That finding established intent, and intent, as we will see, dramatically raises the bill.
The bill: why it gets so expensive
Less than two years of work by three men at 10–11 euros per column grew into a debt of over 100,000 euros. Four mechanisms combine to produce this.
First — the look-back period. Contribution claims become time-barred, as a rule, four years after the end of the year in which they fell due. Where contributions were withheld intentionally, the period extends to thirty years (§ 25 SGB IV).
Second — the net-to-gross extrapolation. In cases of illegal employment the amounts actually paid to the “subcontractor” are deemed net remuneration (§ 14(2) sentence 2 SGB IV) and grossed up to a fictitious gross wage, on which the contributions are then calculated — in the case at hand under tax class VI, the least favourable one. The contribution base thus ends up far higher than the sum of the invoices.
Third — late-payment surcharges. These amount to 1% of the arrears for every commenced month (§ 24 SGB IV). Over several years that alone adds tens of percent to the debt. Ignorance is no defence, since illegal employment by definition involves at least accepting that contributions go unpaid.
Fourth — the principal pays everything. The contribution debt falls on the employer in full, including the employee’s share, which as a rule can no longer be recovered from the worker afterwards. On top of that comes criminal liability for withholding social security contributions (§ 266a of the Criminal Code, punishable by up to 5 years’ imprisonment), and in construction one further risk: a general contractor can be liable like a surety for contributions his subcontractors fail to pay for their own employees (§ 28e(3a) SGB IV). The “savings” model can therefore hit the entire chain of orders.
A genuine subcontractor — how to recognise one
His own calculation and price offer instead of a rate imposed by the principal. A defined, acceptable scope of works instead of labour “from morning to evening” under someone else’s supervision. Own tools, own material or at least a real contribution in kind. Freedom as to working time, sequence of works and personnel — including the right to send his own people. A warranty that is actually enforced: defect notices, rectification at his own cost, acceptance protocols. More than one client, won through his own efforts. And a contract that both sides genuinely follow. The more of these boxes you can tick, the safer the arrangement.
Before the cooperation starts: how to protect yourself
An official status determination. The greatest certainty comes from a status determination procedure (Statusfeststellungsverfahren, § 7a SGB IV) before the clearing office of the German pension insurance — ideally before the cooperation begins or right at its start. The decision is binding and removes the risk of retroactive demands for the future.
A contract that mirrors reality. A simple agreement the parties actually perform is worth more than a perfect template from a binder of which nothing operates. Separate order letters, measurements, acceptances and warranty settlements should be practised for real — they are what documents the subcontractor’s independence.
An honest diagnosis of your needs. If what you really need is people working under your direction, the lawful routes are employment or posting your own workers. Hiring out third-party workers is severely restricted in the construction industry, so any such arrangement must be verified before the start, not after the inspection.
The inspection is already underway — what to do
In the case discussed here, the outcome was sealed by the interrogations of the workers themselves by the customs authority. That is typical: the protocols of the first interrogations become the backbone of the file and resurface in every further instance. A lawyer should therefore be consulted before statements are made, not after the decision has arrived.
The further path is formalised: a hearing (Anhörung), the contribution assessment, an objection (Widerspruch), then an action before the social court. In parallel you can apply for suspension of enforcement — in the case at hand the pension insurance suspended collection until the final judgment because immediate payment would have caused undue hardship. From day one the criminal track must be kept in mind as well, and both proceedings run under a single strategy, because explanations given in the contribution proceedings can incriminate in the criminal case.
Frequently asked questions
Do a trade licence and invoices rule out employee status?
No. A trade registration, a crafts-register entry, invoices, a liability policy or tax certificates are formalities of subordinate weight in the courts’ eyes. What decides is the real picture of the cooperation: who gives instructions, who bears the risk, whose equipment is used and who calculates the prices.
How many years back can contributions be claimed?
As a rule four years from the end of the year in which the contributions fell due. If the authority proves intent — and with fictitious subcontractor agreements courts assume it readily — the period extends to thirty years.
Why are the assessed amounts so much higher than the sum of the invoices?
Because in cases of illegal employment the amounts paid are deemed net remuneration and grossed up to a fictitious gross wage, often under tax class VI. Late-payment surcharges of 1% per month come on top. The debt can end up several times the “savings” on contributions.
Is there criminal liability?
Yes. Withholding employee social security contributions is a criminal offence under § 266a of the Criminal Code, punishable by up to 5 years’ imprisonment. In the case discussed here the criminal proceedings were discontinued only against payment of a monetary condition.
What does reclassification mean for the “subcontractor” himself?
Paradoxically, often more rights: periods of pension and health insurance, and in a dispute the ability to invoke employee protections — from sick pay to protection against dismissal. The back contributions are, as a rule, borne by the employer.
This overview draws on the judgment of the Hessian state social court of 26 January 2023 (L 8 BA 51/20) and on § 7, § 7a, § 14, § 24, § 25, § 28e and § 28p SGB IV as well as § 266a of the Criminal Code. This article is for information purposes and does not replace legal advice in an individual case.