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23 September 2008
For a long time it has been unclear whether franchisees are required to contribute to the statutory pension insurance scheme. The pension insurers repeatedly claimed that they were and demanded the relevant contributions, relying on Section 2(9)(b) of the Social Code Book VI, according to which self-employed persons are obliged to contribute to the statutory scheme if they (i) do not normally have insurable employees, as is the case with many franchisees, and (ii) to a great extent have only one principal over a long period.
Arguing that, for practical purposes, a franchisee works only for the franchisor, the pension insurers concluded that franchisees are obliged to pay pension insurance contributions.
A number of social courts, in particular the Bavarian State Social Court in its judgment of October 17 2006, have rejected this view and found that the self-employed activity of franchisees does not make them subject to statutory pension insurance. According to the court, a franchisee is not mainly active for one principal over a long period, as it concludes contracts with many customers for goods and services in its own name and not in the name, or for the account, of the franchisor.
With this judgment, the subject seemed to be closed. However, a recent judgment of the Berlin-Brandenburg State Social Court shows that it is not.
In a declaration of status proceeding the court decided that a franchisee of the Kamps bakery franchise was obliged to be insured in the statutory pension insurance scheme. When the franchisee's appeal against this decision was rejected, he brought a claim before a social court which found in his favour, stating that he did not work for only one principal. However, the pension insurer appealed this judgment to the Berlin-Brandenburg State Social Court, which agreed with the pension insurer and found that the franchisee was obliged to pay contributions to the pension insurance scheme.(1)
Whether a self-employed person is active over a long period and mainly for only one principal is determined, according to the court, by more than just its legal or contractual position. The insurance obligation also arises if, despite the lack of a formal legal bond, the self-employed person is financially dependent mainly on one principal. The contractual provisions, actual practices and possibly the financial dependence of the franchisee are decisive on this issue.
The court assessed the Kamps franchise agreement and reached the conclusion that it left the franchisee hardly any opportunity to acquire additional earning opportunities. Overall, the franchisee's position approached that of a dependent sales contractor. The franchisee could derive income only from the sale of goods provided, through the difference between the purchase price and the limited variable sales price. Although Kamps was not a principal in the usual meaning of the term, it was so on a broader interpretation - to the extent that the franchisee was contractually appointed to sell Kamps's goods.
The court ruled that the financial dependence required to create an insurance obligation is established if an individual's income is solely dependent on "that one person being contractually bound to another and being enabled to perform business activity by the exclusive supply of goods".
The judgment seems to be completely incorrect. The court reasoned solely on the basis of a need to protect the statutory pension insurance system, stating that "[t]he erosion of the numbers of insured persons must be arrested by the ongoing inclusion of business persons in employment-like independent activities". The issue of whether the activity was performed mainly for one principal, as required by the statute, was declared to be irrelevant by the court. It therefore ignored the wording of Section 2(9)(b).
Social insurers differentiate between dependant employees and those carrying out independent activity similar to employment. Dependent employees are incorporated into a working organization and subject to instructions, and must pay social insurance contributions for all branches of social insurance (ie, health, pension, nursing care and unemployment). Their activities are characterized by personal dependency, which arises for franchisees only in the most extreme and exceptional cases.
Conversely, employment-like independent activity does not give rise to such a relationship as people performing such activities are not incorporated into the working organization and are not subject to instructions. However, the statute requires them be insured for pension purposes, subject to the conditions stated in Section 2(9).
The Berlin-Brandenburg State Social Court has shown an inclination to view franchisees as personal dependent or not truly self-employed workers.(2) Since personal dependency was not the subject of the appeal, for procedural reasons the court could not make this finding and was obliged to restrict itself to the subject of the pension insurance obligation; otherwise, it would probably have found that franchisees are subject to the insurance obligation in all areas of social insurance. It is hoped that the Federal Social Court will exorcise this ghost. The appeal on a point of law is already in progress.(3) If the federal court, contrary to expectations, agrees with the Berlin-Brandenburg court, a franchisee in a similar franchise would be advised to establish an Unternehmergesellschaft, a newly introduced form of limited liability company intended for entrepreneurs and small businesses.
For further information on this topic please contact Karsten Metzlaff or Karl Rauser at Nörr Stiefenhofer Lutz by telephone (+49 30 20 94 20 00) or by fax (+49 30 20 94 20 94) or by email (firstname.lastname@example.org or email@example.com).
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