Bogus self-employment: Frankfurt Social Court rules bank’s “commercial agent” is employee

For decades, it has been common practice for retail banks to collaborate with (supposedly) independent financial advisors, who work on the basis of “commercial agent agreements”. Some banks have more than 100 financial agencies with over 1,000 financial advisors and millions of clients. One major advantage of this business model is that instead of paying a flat-rate salary and social insurance contributions, the banks pay the financial advisors commission, which is free of social insurance contributions, which is only due when the advisors act as intermediaries for the bank or conclude transactions on its behalf. The banks also do not pay social insurance contributions because their financial advisors are contractually self-employed. However, this is subject to the proviso that the financial advisors are actually self-employed. That is where Frankfurt Social Court got involved, reaching the opposite conclusion: It ruled that the financial advisor in question was an employee, and social insurance contributions were payable on his salary.

Facts

The financial advisor worked for the bank for just under two and half years. According to the commercial agent agreement signed at the start of his work, the financial advisor was a commercial agent pursuant to section 84(1) German Commercial Code (HGB), as a self-employed intermediary who has continuing authority to negotiate transactions on behalf of another entrepreneur (the “principal”) or to conclude transactions in the latter’s name. The commercial agent agreement also contained the corresponding wording.

The claimant agreed to register the financial advisor with BaFin (“Federal Financial Supervisory Authority”) as a contractually bound intermediary pursuant to section 2(10) German Banking Act. The financial advisor agreed to inform clients and potential clients about his status as a contractually bound intermediary before starting his intermediation work and to tell them without undue delay if that status changed.

The financial advisor agreed to report on his sales activities to the bank and adhere to the bank’s latest applicable financial information and guidelines at all times. Regarding contact with clients and potential clients, he agreed to use the stationery, business cards, accompanying notes and the like provided to him by the bank. The bank also provided him with product-related advertising materials and product descriptions free of charge for the purpose of his intermediation activities. The financial advisor agreed to take out a particular professional liability insurance policy with a certain insured sum. Every business activity had to be conducted using an account to which the bank had unrestricted access with regard to any claims for recovery of overpaid commission.

As part of the performance of the agreement, the financial advisor was free to hire employees or to work for third parties, as long as it was not a competitive activity. The financial advisor took over a defined geographical work territory which had no territorial or client protection. The financial advisor was provided with a laptop and the corresponding software free of charge, with support provided by a company commissioned by the claimant. The tables and conditions the financial advisor’s commission was based on could be changed unilaterally by the bank if required by legal provisions, official stipulations or for reasons of business policy.

The financial advisor was assigned to a financial agency, and the agency manager (who had also signed a commercial agent agreement with the claimant) received some of the commission earned by the financial advisors assigned to him.

The financial advisor claimed he had kept to the bank’s opening hours and had even had to arrive earlier on Thursdays because of team meetings. When ill, he had to report to the bank’s branch manager and organise a substitute from among his colleagues who also worked at the bank branch.

A few months before the end of his work, the financial advisor applied to the German Pension Insurance Association (DRV Bund) for an assessment that he was an employee of the bank with compulsory social insurance payable on his salary. In a status assessment procedure according to section 7a German Social Code vol. 4, DRV Bund took the same legal view and made the corresponding assessment. In its action, the bank requested that the DRV Bund’s determination be set aside and that it be found instead that the financial advisor was self-employed.

Ruling

Frankfurt Social Court dismissed the claim in its ruling on 8 March 2021 (case S 18 BA 93/18). The financial advisor was not self-employed, the Court said, but an employee.

Under the law, there is a clear rule for distinguishing between commercial agents and employees, i.e. 2nd sentence of section 84(1) German Commercial Code, and that rule existed long before the adoption of section 611a German Civil Code. According to that rule, a commercial agent can only be self-employed, i.e. someone who is essentially able to arrange their activities freely and to determine their working hours.

The court referred to the established case law of the Federal Social Court on the difference between employment and self-employment under social security law. Employment requires the employee to be integrated into the company and bound by professional instructions; the outcome of the assessment is based on the overall view of the work done. The basis is the content of the contract. However, if there are deviations between the content of the contract and its actual implementation, the latter prevails. With reference to the case law of the Federal Social Court (ruling of 29 January 1981, case 12 RK 63/79), the court stated that according to those principles, commercial agents can be required to follow instructions from the company for which they work. However, to distinguish the commercial agent from a regular employee pursuant to section 59 German Commercial Code, the instructions must not be so strict that the commercial agent’s core entrepreneurial freedom is impaired by the resulting restrictions.

In the court’s overall assessment, the indications of self-employment, primarily the title of commercial agent in the contract and the performance-based commission agreement, were less important. For example, the indication of the performance-based commission agreement was diminished by the fact that the bank was able to unilaterally change the tables and conditions the financial advisor’s commission was based on. The court found the “business policy reasons” (“geschäftspolitische Gründe”) for making such a change were “very vague” (“höchst unbestimmt”). The court also found the content of the contract was outweighed by the actual execution of the contract, meaning that the financial advisor had been integrated into the bank’s operations. The court justified this by pointing to the structures and hierarchies created by the bank (“reporting and accountability cascade”), with the result that the financial advisors in the agencies indirectly received job instructions from the regional manager. The court also considered the request to sell more of certain products and the resulting accountability incompatible with the independence of a financial advisor.

According to Frankfurt Social Court, the fact the financial advisor was able to maintain his own place of business under the contract did not stop him being integrated into the bank’s business. Without attending the agency in person, it would not have been possible for the financial advisor to earn commission as there was no territorial and client protection, since it was only his specific sales intermediation work that mattered. He was thus forced to be present during the agency’s opening hours in order to have the opportunity to come into contact with the bank’s clients and to be able to sell them products.

As the financial advisor continued to use the premises formerly used as a “branch”, according to Frankfurt Social Court the bank had created an environment in which the financial advisors appeared to clients to be representatives of the bank. The entire design of the agency, the placement of the illuminated logo on the outside and the images in the corporate design gave the impression to every customer that it was a normal bank branch. From the perspective of an average customer, the fact that a poster in the agency window stated the agents were self-employed and that they wore a name badge stating that they were self-employed was completely secondary to the other exterior and interior design features.

The financial advisor’s specialist knowledge required for selling was provided only through the bank. The financial advisor was also not free to choose either his professional liability insurance or his account. In general, there was no apparent entrepreneurial risk on the part of the financial advisor, as he had neither his own place of business nor his own staff, did not use his own operating resources or advertising materials and was not exposed to any liability risk for poor performance.

The judgment is not yet final. The bank in question has lodged an appeal against it.

Outlook and impact on advisory services

The judgment relates to the distinction between an employee and a commercial agent, which is not new in itself. It not only plays a role in the relationship between banks and their financial advisors, but whenever a commercial agency agreement is entered into with a natural person. The ruling of Frankfurt Social Court shows that the overall assessment of the circumstances of the individual case is required and that there are various individual circumstances that support or negate self-employment. Therefore, a clear categorisation is not always easy in practice.

When structuring the work of the commercial agent who is meant to work on a self-employed basis, it is important to prevent shortcomings in particular with regard to operational integration and dependence on job instructions and thus the environment the services are to be rendered in. On the other hand, the legal model of the commercial agent’s work, as set out starting from section 84 German Commercial Code, must also be taken into account. For example, in its judgment of 20 September 2000 (case 5 AZR 271/99), Germany’s Federal Labour Court ruled with regard to an insurance agent that being subject to a professional instructions does not in itself run counter to his self-employed status. This is correct because according to sections 92 and 86 German Commercial Code, an insurance agent (commercial agent) also has to follow instructions. But if there exists a person-specific and process-based right to issue instructions with regard to the circumstances the service is to be provided in, this supports the argument that the person is not self-employed. This means that it always depends on the overall circumstances in the individual case. As the bank has filed an appeal against Frankfurt Social Court’s decision, it remains to be seen how the next instance, Hesse Social Court (case L 8 BA 36/21), will rule in the specific case.

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