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Social Security Audits: What are they about and what can happen?

At least every four years at the latest, the Deutsche Rentenversicherung (DRV – German State Pension Agency) has to conduct a social insurance audit. This means that the DRV gets in touch with the employer in order to check whether all obligations to report and contribute to social insurance have been observed. The time interval of 4 years is the maximum permitted by law (see Sec. 28p of the 4th Social Insurance Code), but the DRV is authorised to conduct such audits within shorter periods in certain circumstances, for example if there is evidence of the evasion of contributions or illegal employment. Details are specified in the Beitragsverfahrensverordnung (BVV – Contribution Scheme Regulation).

In the audit, the DRV will check the basis for the payment of social security contributions to health insurance, compulsory long-term care insurance, unemployment insurance, old age insurance and specific prorated contributions (in particular for cases of insolvency and maternity protection). Separate audits are governed on behalf of accident insurance and the artists' insurance (applying to specific types of freelancers). The purpose of the audit is to ensure that the contributions are calculated correctly.

Typical employer mistakes

When checking samples of the documentation for payslip, reports about entry into employment, its interruption and termination along with evidence of contributions, auditors often find reasons for complaints because in practice, employers are often negligent with the relevant paperwork or not entirely aware of their duties and obligations. This may lead to exorbitant supplementary claims, and in extreme cases, bring companies to the brink of insolvency. This is aggravated by the fact that the statutory de facto interest rate - i.e. the late payment fine - amounts to twelve per cent p.a.

Typical reasons for additional claims are:

• Incorrect classification of freelancers / false self-employment
• Treatment of dependent Managing Directors as non-employees
• Mistakes regarding temporary employment / borrowed workforce
• Incorrect use of service contracts or subcontractors (instead of employment)
• False classification of temporary and / or part-time employees
• Mistakes regarding marginal employees, for example in cases of double employment
• Misestimation of the status as employees of family members / trainees / interns / volunteers
• Incorrect calculation of contributions due to negligence of benefits subject to social insurance contribution
• Non-observance of the applicable minimum wage
• Factual errors regarding applicable waivers

Employers have to make sure that they are aware of their duties. In particular, the classification as an employee and the handling of benefits are major sources of error. In particular, the fact that a person "doing something" for the company is not regarded as an employee does not mean that the company does not have to file the correct documentation regarding the contract and the scope of tasks that are provided.

It is therefore advisable to implement proper documentation procedures which make it comprehensible for any third person on what the decision regarding the social security status, or lack thereof, had been based. In short, every employer should make sure that any notice of an upcoming audit (the typical lead time being between 2 weeks and one month) does not prompt any hectic lumping together of paperwork that should have been properly compiled in the first place.

The auditor is here - what to do?

The law stipulates that there is an obligation to cooperate and accept an examination on employer premises. It is not advisable to close the door and refuse assistance. After all, the auditor is only doing his or her job and wants to find out if the rules applying to all companies have been observed. Therefore, the auditor has to be treated accordingly, and requested information or documents have to be provided to the auditor. Any questions asked by the auditor have to be answered truthfully. If the auditor is left in the dark, he or she is permitted to replace unknown facts with estimates, which are often unfavourable for the employer.

If there is a reason for additional claims, the employer will be given an opportunity to hand in a statement explaining the decision that has led to the objection. If the auditor draws the conclusion that supplementary payments of social insurance contributions have to be made, it is advisable to seek legal advice. In extreme cases, withholding social security contributions can even be regarded as a criminal offence (see Sec. 266a of the German Criminal Code).

Experience shows that claims are often unjustified or exaggerated. Regardless of whether there is an unjustified claim or not, the legal remedies do not usually suspend obligations to balance the social contribution account. If the amount that has to be paid is higher than the liquid assets, immediate action is required, including filing for interim orders to suspend the duty of immediate payment.

Conclusion

Social security audits are a complicated issue, but in general, employers can take measures in order to be prepared. It is advisable to seek support and make sure that all matters of payroll are observed with proper care so as to avoid unpleasant surprises in case of audits.

If you have questions related to this topic please feel free to contact
Dr. Franziska von Kummer (Lawyer, LL.M., M.C.L., Licensed Specialist for Labour Law, Business and Economics Graduate)