Service Contracts: When No Result Is Owed

Service Contracts

Under a service contract (Dienstvertrag), you pay for a service to be performed, typically on a recurring basis. Typical examples are a gym membership or a recruitment agency retainer.

A service contract differs from a work contract in that under a work contract a specific result is owed. Under a service contract it is not. That a patient recovers or a project succeeds is not what is being contracted for in a service contract – and realistically could not be. The distinction is not always obvious. If you have a website “built”, the contract could be either type depending on what was agreed. Written contracts that address this point are worth a great deal.

The difference from an employment contract is the degree of control: fixed working hours, a single client, following that client’s instructions – that pattern looks more like employment than freelancing, regardless of what the contract says.

Expat note: The German service contract concept maps roughly onto a UK or US retainer or consulting engagement. One important difference: in Germany the statutory rules on remuneration and termination apply by default and cannot be freely excluded in standard terms.

Payment Even Without the Desired Result

If you hire a service provider and are dissatisfied with the outcome, you are generally still required to pay, provided the service was actually rendered. That does not mean you are without recourse. If the provider demonstrably failed to perform at all, or engaged in fraudulent misrepresentation, other remedies exist. But “I do not like the result” is not sufficient under a service contract.

Termination

Service contracts can generally be terminated. Ongoing contracts can be terminated ordinarily or, for good cause, extraordinarily. For services involving a special relationship of trust – doctors, lawyers, advisors – § 627 BGB gives either party the right to terminate at any time without reason.

Termination should be in writing, or at minimum in text form, to be safe.

Bogus Self-Employment (Scheinselbständigkeit)

Freelancers are sometimes, in reality, employees – what German law calls Scheinselbständigkeit (bogus self-employment). The indicators of genuine self-employment are: no fixed working hours, no obligation to follow instructions, working for multiple clients, using one’s own equipment, bearing entrepreneurial risk, operating as a recognisable business. The assessment is a balancing exercise, and you should put as much weight as possible on the freelancer side of the scales. Practically: do not give freelancers a company email address or put them in a company T-shirt.

The consequences of a bogus self-employment finding fall primarily on the hiring company: back-payment of social security contributions, retroactively for up to four years, for all affected individuals. That can be very expensive.

For the freelancer who has been dismissed: if the arrangement turns out to have been an employment relationship, dismissal protection rules apply and severance may be owed. It is always worth examining carefully.

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