Hiring External Experts in the Modern Age (Part 1): Navigating Legal Risks to Avoid Criminal Liabilities

In the rapidly evolving defense sector, companies are grappling with the intricacies of employing freelancers. With geopolitical changes reshaping strategies and the demand for security-relevant capabilities, it's crucial for organizations to navigate this landscape while minimizing legal and financial risks.

Many experts prefer freelance work, and this trend is becoming increasingly prevalent in the defense sector. However, the use of freelancers can be legally tricky, with criminal liability risks due to evasion of social security contributions and tax evasion. To avoid such pitfalls, defense companies must implement a robust compliance process.

The German Statutory Pension Insurance has strengthened its ability to detect bogus self-employment, and companies may face obligations to make back payments for social insurance, wage tax, and VAT. To ensure legally compliant use of freelancers in engineering and IT, companies should structure freelance agreements to reflect true self-employment, avoid the legal pitfalls of "bogus self-employment," and use a formal compliance process.

Contracts must clearly establish that freelancers operate independently, without typical employment characteristics such as fixed hours, subordination, or integration into the company’s permanent workforce. The work should be project-based and allow the freelancer autonomy in how they deliver services.

Avoiding the legal pitfalls of "bogus self-employment" is crucial. If freelancers provide services in a manner indistinguishable from employees, companies face severe consequences, including retroactive payment of social security contributions, taxes, and even criminal liability for company management.

A formal compliance process includes thorough due diligence during freelancer onboarding, ongoing monitoring of contractual relationships, and ensuring all legal prerequisites for self-employment are satisfied in practice, not just on paper. This process should cover verifying freelancer registration, confirming the absence of exclusive dependency, and audit trails for freelancer invoicing and deliverables.

Since many defense companies primarily serve public clients, adherence to legal requirements is critical not only to avoid penalties but also to meet contractual and regulatory standards imposed by government authorities. In addition, incorporating data protection and privacy compliance is essential, especially for sensitive defense projects.

Our law firm offers expertise in HR compliance in the defense sector and assists companies in security-relevant industries with the legally compliant structuring of personnel and project resources. By systematically applying these measures, defense companies can leverage the high expertise of freelance engineers and IT specialists while minimizing legal and financial risks associated with misclassification and evasion of social obligations.

From 2025, the German Pension Insurance will use AI tool KIRA for company audits, further emphasizing the importance of a robust compliance process. Failing to meet legal requirements can result in the creation of an employment relationship, leading to retroactive claims such as holiday entitlements and continued payment of remuneration. Sanctions under public procurement law, including exclusion from public contracts, can also be imposed.

By navigating these challenges, defense companies can maintain a competitive edge in the sector, ensuring they meet the demand for innovative strength, production capacities, and highly qualified personnel, particularly in engineering and IT.

To bolster the defense sector's employments, companies must address legal risks associated with freelance work, such as tax evasion, criminal liability due to social security contributions evasion, and the avoidance of 'bogus self-employment.'
To legally comply with freelancers in engineering and IT, defense companies should craft contracts emphasizing freelancer self-employment status, offering project-based work with autonomy, and structuring relationships through a formal compliance process.
Robust compliance processes are vital for defense companies, ensuring due diligence during freelancer onboarding, monitoring relationships, verifying freelancer registration, and ensuring all legal prerequisites for self-employment are satisfied in practice.
Given the importance of legal requirements in the defense sector, which serves public clients, defense companies must adhere to regulations not only to avoid penalties but also to comply with contractual and regulatory standards imposed by government authorities, including data protection and privacy standards.

Hiring External Experts in the Modern Age (Part 1): Navigating Legal Risks to Avoid Criminal Liabilities