The geopolitical upheavals of recent years have led to a dramatic change in defence strategy. The accelerated development of security-relevant capabilities demands a technological edge, innovative strength and production capacities and therefore highly qualified personnel, particularly in the fields of engineering and IT. This entails the often-underestimated risk of bogus self-employment. However, this can be easily managed with the application of a compliance process.
Critical factor: qualified personnel
The permanent workforce available to industrial companies in Germany is often insufficient in terms of quality and quantity to realise projects at the required levels of speed and expertise. Many companies are therefore increasingly looking for experts - such as engineers, software developers, logistics planners and military experts - who generally only want to work on a freelance basis due to their particular expertise.
Risk factor: use of freelancers
Companies at this turning point will therefore be increasingly forced to utilise freelancers. However, the commissioning and use of such freelancers is legally tricky, especially for companies in the defence sector whose main client is the public sector. If the legal requirements for a self-employed contractual relationship are not met in practice, and the services provided are more like those of an employee, the consequences can be serious or even jeopardise the existence of the company:
- Creation of an employment relationship with the freelancer instead of a contract for work/services (including retroactive claims arising from this, e.g. holiday entitlements, continued payment of remuneration.)
- Obligations to make back payments for social insurance as well as wage tax and VAT back payment obligations
- Criminal liability risks due to evasion of social security contributions in accordance with Section 266a Criminal Code and tax evasion in accordance with Section 370 General Tax Code
- Sanctions under public procurement law up to and including exclusion from public contracts
If social security contributions and taxes totalling one million euros are evaded, the company management may even face a prison sentence. For this, it is sufficient if three to four freelancers have not been used in a legally compliant manner on a permanent basis during the period not subject to the statute of limitations under social security law (i.e. since 1 January 2021).
The social security risk is not inhibited by the fact that the contractor is a company. If this company uses freelancers to provide services, the contractor and client are jointly and severally liable for the payment of social security contributions for misclassified freelancers. However, IT and engineering service providers generally subcontract freelancers so that this risk is not just theoretical.
Detection factor: increased effectiveness of the German Statutory Pension Insurance
The probability of detecting bogus self-employment has also increased significantly. Since 2025, the German Pension Insurance (DRV) has been using the AI tool KIRA in company audits, meaning that AI will search for bogus self-employment in the company’s accounts in future. In addition, the legal requirements for self-employed provision of services have increased significantly due to the rulings of the Federal Social Court, as essentially only activity-related criteria, but not person-related criteria (e.g. number of clients), are used for differentiation.
Risk minimisation factor: compliance and commissioning process
The use of freelancers is not prohibited and just needs to be organised in a legally compliant manner. Therefore, the risks can be well managed through a compliance and commissioning process. This process must check the delimitation factors based on current case law before commissioning and clearly define responsibilities in the purchasing process.
Our law firm has been assisting companies in security-relevant industries with the legally compliant structuring of their personnel and project resources for many years. We see ourselves as experts in HR compliance. We can work with you to develop pragmatic, audit-proof solutions and to deploy external expertise where it is urgently needed, without getting into legal grey areas and with the use of legal tech.
Contact us so that we can present our compliance expertise in the defence sector to you personally.
In Part II, we look at the opportunities and risks of the defence sector when insourcing production capacities from the automotive sector.
