Hire Contractors In Germany

Since 2020, there has been a general increase in contract jobs in Germany. Almost one in thirteen jobs are based on fixed-term employment contracts, suggesting self-employment. 

Employing such independent contractors can save you on HR & payroll compliance costs usually associated with full-time employees. 

However, you must apply caution when dealing with false self-employment or ‘Scheinselbstständigkeit.’ It can lead to fines and penalties retroactively. 

Fortunately, specialized solutions like Agent of Record (AOR) can help you hire contractors in Germany with full compliance. 

The following sections will discuss various compliance factors and how you can deal with them using Skuad AOR. 

First, let’s understand how to hire independent contractors in Germany.

How to Hire Contractors in Germany

Just like any other nation with strong labor laws, you can hire contractors in Germany following these simple three steps:

1. Draft a formal contractor agreement: You must draft and execute a comprehensive contract outlining the scope of work, payment terms, intellectual property rights, confidentiality obligations, and dispute resolution mechanisms.  
2. Choose a payment method: Contractors registered for VAT in Germany will typically include it in their invoices. You may verify their VAT registration details and process payments through a bank transfer or international payment wallets. 
3. Consider Scheinselbstständigkeit: You can request an audit from German authorities to determine your and your worker's work relations. This involves assessing their level of independence, control over their work, and the nature of the working relationship.  

How to hire overseas contractors

You can hire overseas contractors via an Agent of Record in Germany (AOR). 

To avoid withholding compliance, you must ask for IRS Form W-8BEN (for individuals) or IRS Form W-8BEN-E (for entities). 

Additionally, the new EU framework agreement adds a compliance burden when hiring international workers in Germany. If agreed upon, you may have to maintain social security contributions if the employee works remotely outside Germany less than 50% of the time.  

How to pay contractors in Germany

One of the cheapest ways to pay contractors from the USA to Europe is to use an AOR. However, you may also understand other ways.

You can consider the following options to pay contractors in Germany:

1. Set up a local payroll system if you have a significant presence in Germany. 
2. To make timely payments, you can use digital wallets. 
3. Global or non-EU companies may look for payment platforms with favorable exchange rates to convert payments to Euros.
4. You can offer a variety of payment terms like:
   • Pay upfront before work begins.
   • Pay after the work or product is delivered.
   • Create a credit limit and release funds as needed.
   • Use (Net 10, Net 30, Net 60) payment terms.
   • Make payments at the end of the month.

Additionally, managing payroll becomes complex when employing multiple contractors, which results in more record-keeping compliance. 

You can consult a specialized AOR like Skuad to handle all aspects of contractor payroll, including taxes and benefits, providing a comprehensive solution.

Hiring contractors through Skuad AOR

Hiring contractors through the agent of record in Germany (AOR) can save compliance and management costs. AOR Solutions is a subset of EOR, specifically focusing on handling contractors. Leading AOR solutions like Skuad can:

• Handle all the complexities of hiring and paying contractors in Germany, including payroll, taxes, and compliance. 
• Mitigate any legal and financial risks of hiring contractors in Germany. 
• Safeguard intellectual property rights when working with global contractors. 
• Convert your loyal contractors to full-time employees, all without setting up a local entity in Germany. 

Recent Developments in Contingent Worker Regulations 

Since the 2021 Federal Labor Court ruling that gig workers are employees, the business models of crowd-working platforms have had a significant impact. 

Additionally, the Council of the European Union's recent directive protects platform workers by offering them algorithmic transparency and better employment status. 

Hiring Contractors Directly vs Hiring Contractors via Skuad

Here’s a comprehensive summary of hiring contractors in Germany directly vs AOR solutions like Skuad:

Further, you can review this checklist to avoid misclassifying employees as independent contractors.

How Much Does it Cost to Hire a Contractor in Germany

The minimum wage in Germany for employees is €12.41 per hour. You may consider this a benchmark for setting contractor fees. However, depending on the contractor's experience, skill set, industry, and project complexity, you may vary fees.

Other miscellaneous costs of hiring contractors include contract negotiation, drafting, and communication and collaboration tools.

How to Convert a Contractor into an Employee in Germany

You can convert a contractor into an employee in Germany using two common ways: 

1. Set up a legal entity in Germany

• Choose a suitable legal structure and complete the necessary registration process.
• If the contractor in Germany is a foreign national, you must sponsor their employee visa to obtain a suitable work permit followed by a residence permit.
• You must draft a new comprehensive employment contract outlining terms and conditions, work hours, applicable employee benefits, and termination procedures. 
• You must comply with German minimum wage regulations, social security, and tax withholding requirements when converting from contractor to employee salary system.

2. Use an Agent of Record in Germany

• You may partner with an AOR specializing in German employment laws to handle the conversion of contractor-to-employee status. 
• The AOR will handle the onboarding process, including contracts, payroll, and benefits in Germany.

Challenges of Hiring Contractors in Germany

The most prominent challenges of contractor management in Germany include:  

1) Striking the balance between integration and defined scope of work

Over-integration of contractors—such as providing company equipment, setting fixed working hours, or making them report to supervisors—can blur the lines and result in misclassification as employees. 

Otherwise, you may be liable to legal penalties, including backpay, social security contributions, and fines.

The best way to hire contractors in Germany is by clearly defining the scope of work, payment terms, and autonomy of the contractor. You can follow this freelance contract template in Germany. 

Alternatively, outsourcing hiring compliance to a reputed Agent of Record in Germany like Skuad can help you strike the right balance. choices-and-payment-options

2) Payroll challenges arising out of misclassification in Germany 

Typically, contractors are responsible for managing their own taxes and social security contributions. However, you could be held liable for income tax and social security contributions retroactively. The amounts could vary: 

• up to four years in cases of unintentional non-payment or 
• up to 30 years if intentional misclassification is proven. 

Additionally, you could end up with four times the unpaid social security amount in fines. Furthermore, you are also liable for any outstanding income taxes, and attempting to recover these costs from the contractor is rarely successful. 

Automated contractor payment can simplify payroll in Germany. Outsourcing it to leading solutions like Skuad will ensure compliance with tax laws and provide accurate payment documentation.

3) Dealing with false self-employment or  ‘Scheinselbstständigkeit’

As you are taking advantage of hiring contractors in Germany, it is important to avoid Scheinselbständigkeit. 

Simply translated in English to ‘false self-employment,’ German authorities follow a process called Scheinselbständigkeit to audit worker classifications and determine the contractor vs. employee status in your organization.

You can request this review and avoid being fined retroactively. At the same time, the award from authorities is binding if the contractor requests the review. 

You can eliminate this situation by outsourcing contractor management to Skuad AOR.

Hire Contractors in Germany with Skuad

Skuad can truly help you hire anyone, anywhere. We take care of localized onboarding, cross-border payroll, compliance, and everything in between—making it seamless for you to build globally distributed teams in 160+ countries.

Use our trusted Employer of Record Germany solution to convert your loyal contractors into full-time employees following due compliance. 

‍Book a demo today to get started!

FAQs

1. What is the difference between contractors and employees in Germany?

The main difference between contractors and employees in Germany lies in the degree of integration with the regular workforce and the scope of their work. Typically, contractors in Germany have full autonomy over their work schedule and location.  

2. Can I hire a foreign contractor?

Yes, you can hire a foreign contractor in Germany. The labor laws do not have separate provisions for this. And to manage them, you may utilize good contractor software, like Skuad.

3. How do you hire someone in Germany?

There are no definitive steps prescribed under the law. You can hire in Germany through job portals and direct recruits. However, there are specific compliance requirements when onboarding and managing them. Alternatively, you can hire anyone and outsource compliance requirement fulfillment to EOR solutions like Skuad. 

4. How do I pay a contractor from another country?

Using bank transfers or international payment solutions like Payoneer, you can pay contractors from another country. 

However, it could be complex if you are working with multiple contractors. Tracking invoices, cross-border currency fluctuations, tax liabilities, compliance, etc., can be overwhelming to manage in-house. 

Modern solutions like Skuad AOR cost-effectively simplify payroll and related compliance.