How Does the 18th Month Rule in Germany Affect Contractors?

 In Contractors

18th Month Rule in Germany

When you contract for clients in a foreign country there are many regulations that can affect the relationship.  This is true in Germany which takes a fairly strict approach to contracting, especially for those who are self-employed.  Expat contractors who are self-employed in their own country may not meet German criteria.

But there are also employment-related laws that may define how you can contract and get paid over the long term.  One of those is the 18th-month rule which may affect how long you can contract with a single client.

What is the 18th-month rule in Germany?

The 18th-month rule applies to leased temporary or contract workers who remain with the same company/client for 18 months or more.  After that point, they would have to be hired as permanent employees.  This rule is designed to prevent the use of contractors or temporary workers long term when they act more like employees.  This rule applies to workers that are ‘leased’ by limited companies or agencies with an AUG license to an end client.

How does the AUG license apply to contractors?

The AUG license is required where the worker does not qualify as self-employed and chooses to either set up their own limited company or use an agency/umbrella company.  The limited company would need an AUG license to lease the contractor to the client.  Likewise, an umbrella company would have to have an AUG license as an ‘agency’, subjecting them to the 18th-month rule.

How can contractors be affected by misclassification rules?

In general, self-employed contractors will not be affected as long as they meet self-employment criteria and are not classified as employees.  Self-employed contractors may engage with clients as long as they wish, but qualification is not automatic.

The elements of a contractor relationship should include:

  • A situation where there are fixed hours
  • No fixed work location
  • Also, no holiday/ bonus or fixed salary
  • A situation where the client does not control or supervise
  • And the contractor does not use shared workspace with employees
  • The contractor provides their own tools/equipment

If a contractor does not follow these guidelines, they might be deemed an employee of their client, which would mean payment of employer social contributions.

Does it matter how the contractor is hired and paid with the 18th-month rule?

If the contractor is using an umbrella company to be paid by clients, the 18th-month rule could be applied.  In essence, the umbrella company is leasing you as an agency to the client for the duration of the contract.  That relationship may be limited to 18 months unless the client wants to hire you as an employee.

How can Contractor Taxation help contractors with the 18th-month rule in Germany?

Contractor Taxation has a network of umbrella companies in Germany that have AUG licenses and are well-versed in the regulations.  They will help you understand how the 18th-month rule may be applied, and what your options are.  The umbrella company will also assist with facilitating client payments, withholding taxes and resolving any contract disputes.  Please contact us with questions about contracting in Germany.

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