Customs authorities are responsible for investigating unreported employment and illegal employment contracts. This mainly affects businesses in the construction industry, the cleaning industry as well as security services and forwarding companies.
Current situation: When does Customs initiate an investigation due to unreported employment?
It’s quite common that a company’s demand fluctuates. At times the order books are full, at other times orders are declining. At peak times, it may very well be the case that a company’s current workforce is not sufficient for processing all orders. In such a situation, a company is often obligated to use independent contractors to satisfy spikes in demand. Independent contractors are then used alongside regular employees. When the Customs authorities carry out an inspection, they have to verify whether or not this employment is subject to social security contributions.
Distinction between unreported employment and employment that is subject to social security contributions
According to the case law of the Federal Social Court (Bundessozialgericht), the distinction is made on the basis of whether the contractor is dependent just like an employee, i.e. whether they are integrated into the economic operations of the principal. Such integration is determined by whether the contractor is subject to a comprehensive instruction right, i.e. whether the time, duration, place, and type of work are bound by the principal. In the sectors mentioned above, the Customs authorities will quickly come to the conclusion that unreported employment is taking place. The reason being that it is difficult to imagine how an independent contractor, who is supposed to be free to choose the time, duration, place, and type of work, could be employed at a construction site. The industries described above always require people to work “hand-in-hand”. Therefore, Customs authorities, as a rule, assume that unreported employment has occurred.
What are the consequences if Customs assumes that there is evidence for a case of unreported employment?
The consequences can be life-threatening to a business. The most serious consequence is that if unreported employment is taking place, Customs assumes that you’ve entered a so-called fictitious net wage agreement. This means that social security contributions – just like income tax – have to be calculated on the basis of the remunerations paid, assuming that these were paid net, as is the case with employees. Once these remunerations are projected to gross salaries, which form the basis for calculating the social security contributions and the income tax, they can lead to absurd results. At the same time, criminal proceedings for social security fraud will be initiated against the business owner.
What can you do to protect yourself from the repercussions of unreported employment?
Unfortunately, there is no universally valid formula. The entrepreneur should decide on a case-by-case basis whether the independent contractor employs employees, whether they have their own equipment, whether they work for other principals, and whether they advertise their services on the market. This can serve as evidence that it is a “true” contractor who bears their own economic risk and is therefore not classified as an employee.
Attorney-at-law Dirk Pohl will be pleased to answer any questions you may have regarding Customs and unreported employment.
This post is also available in: German
Attorney-at-Law, Specialized Tax Attorney
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