Working Life > Self-Employment > Illegal Employment

Illegal Employment

Definition, Explanation

Illegal Employment is defined as working on a freelancing or employed basis for money and without the statutory registrations and announcements. Due to this taxes and social insurance contributions are not being paid. This leads to significant losses for local tax offices and social insurance agencies. To define and avoid illegal employment, the Illegal Employment Combat Act has been passed in 2004.

Alongside prostitution and drug dealing, illegal employment is the third part of the so-called black economy. Illegal employment is widespread in the sectors of housing, cleaning and transport as well as in the sector of gastronomy.

Illegal Employment is the case, if

• an individual runs a business without registration of a business or if there is no permit for trading away from a fixed location. The company will be run on a lasting, sustainable and profit-orientated basis
• a person runs a handicrafts business without master craftsman’s diploma or guild roll registration. A lack of these documents is sufficient to cause illegal employment, no matter if taxes or social insurance contributions are paid or not.
• the job is defined as sham freelancing
• illegally working foreigners are being employed
• foreigners have to work under worse conditions than German employees
• unemployment compensation such as the German ALG I or ALG II is being received and additional money is being earned without registration, or without registering the employment or business start-up at the Federal Employment Office
• persons in partial retirement take on a job which can not be defined as a marginal employment. In general, one is not allowed to work through the exemption process in the block model
• asylum seekers are working through the process of asylum request
• jobs are completed without generating invoices and without paying the value-added tax

Illegal Employment is NOT the case, if

• commercial business is done sporadically e.g. eBay sales
• business is done on a freelancing basis and this business has been registered at the local tax office
• help is being received by relatives or partners
• ALG I or ALG II receivers work less than 15 hours per week and have reported their jobs at the Federal Employment Office. Earnings are being added to ALG benefits
• neighbourly help is being received. This includes favours for no or marginal payment which are not geared to profit but mutuality. There is no dependence between employer and employee
• the law concerning the posting of employees abroad or the law concerning the supply of temporary workers are being violated. These are regulatory offences or criminal actions
• Freelancers receiving foundation benefits or start-up benefits only work for one customer
• voluntary work is being done

Job Registration to avoid Illegal Employment

• Minimal employments, so-called Mini-Jobs have to be registered at the Mini-Job-Centre by the employer. This centre is responsible for managing all social costs, the flat-rate tax as well as accident insurance
• Unemployed persons have to register at the Federal Employment Office

Consequences of Illegal Employment

• Non-registration of a Mini-Job in private households is regarded as regulatory offence
• With persons receiving unemployment benefits and working illegally, this case can be brought to court. Unemployment benefits received wrongly have to be paid back.
• Illegal Employment causes evasion of taxes
• Illegally employed persons are being regarded as previously convicted. Penalties up to 300.000 Euros and up to 3 years of imprisonment are possible.
• Illegally employed foreign citizens will be deported.
• Illegally employed asylum seekers receive a financial penalty. The employer will be impeached in terms of tax evasion, tax violation and employment of foreigners without valid work permit. Financial penalties and imprisonment have to be taken into account.
• Sham freelancers must not face penalties but have to settle subsequent social insurance payments

Avoiding Illegal Employment

• Fighting illegal employment is incumbent upon the Bundeszollverwaltung which has the right to test companies
• No checks or tests are allowed in terms of private households. Anonymously given information is not being registered

Checking procedure

• Usually these tests are caused by Tips in terms of professional illegal employment. The consequences often are large-scale raids when foreign citizens are employed illegally, at a mostly very low hourly rate and without paying social contributions
• Necessary documents such as work and residence permits are IDs are required for controlling reasons. It will also be tested if the employees receive social contributions such as pensions or unemployment compensations or if there is a case of sham freelancing. With foreign citizens, it has to be checked if and to what extent these persons have the permit to work in Germany

Tips, Checklist

For employers and clients:

• Register all regularly done temporary jobs such as Mini-jobs
• To avoid illegal employment suspicion you should require and give out ordinary invoices even when working for private households

For employees:

• Give out invoices without VAT and pass on these earnings information to your local tax office. Since you only have to pay VAT from an income of 17.500 EUR per anno on, you remain exempted from tax up to this point
• In terms of private sales, the profit must not be over 512 EUR per year; otherwise you will have to pay speculation tax
• Annual profits of up to 410 EUR remain exempted from tax whatsoever. In terms of sideline jobs for public, educational or charity institutions, the allowed annual profit without tax or social insurance obligations is 1.848 EUR
• If you are unemployed and would like to work more than 15 hours per week, please unregister yourself at the Federal Employment Office. If you work as a freelancer you should take care of social contributions, especially when it comes to health insurance. After your job is done, you can re-register as unemployed person at the Federal Employment Office

Last update: 06/29/2010