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Industry 4.0: The Implications of a Global Phenomenon for the Austrian Social Insurance System

Industry 4.0: The Implications of a Global Phenomenon for the Austrian Social Insurance System

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The world is currently facing the Fourth Industrial Revolution – an era of technological progress that will have significant impacts on the entire labor market system.

The Revolution

The First Industrial Revolution paved the way from hand to mechanical production, while the Second enabled mass production, and the Third was all about automatization. The now-looming Fourth Industrial Revolution will enhance digital networking by blurring the lines between the physical and digital spheres in the industrial production process.

The Possibilities

As a consequence of this progressive digitalization and the possibilities of modern online platforms, a global trend towards atypical employment relationships across all industries can be discerned. More and more tasks are being offered by entrepreneurs to the crowd of people using their PCs to look for flexible and appealing jobs that do not limit them to acting under a single employer’s regime. However, the flexibility and efficiency they seek comes hand in hand with a loss of labor law rights, and the common wish to minimize (or eliminate) tax and social security payments collides with the public interest.

The Classification

The difficulty in distinguishing between an employee and a contractor is not a new issue; it has posed problems for entrepreneurs for many years. However, the so-called “gig economy” will increase the number of persons engaged in atypical employment relationships at an exponential pace. Whether a person qualifies as an employee or an independent contractor depends on specific circumstances and factors, of which the nature of the contractual obligation, whether there is a relationship of authority and subordination, whether payment is made for a specific piece of work or on the basis of time spent, and whether the contractor is exclusively acting for a single principal or for a number of different companies are only some. 

The Implications

In Austria, the classification as employee or self-employed contractor also affects the assignment to a specific social security system. A (regular) employee is guaranteed insurance under the General Social Insurance Act (ASVG), while a self-employed contractor falls under the National Industrial Insurance Act (GSVG). Both systems are run by different social insurance companies. The competent one for regular employees is in principle one of nine regional health insurance companies (GKK), whereas the counterpart for self-employed contractors in principle is the social insurance company for commerce and industry (SVA). 

The biggest risk in engaging an independent contractor is that the competent authorities could determine that the relationship should have been classified as an employment relationship, requiring the employer to pay income tax and social insurance contributions as well as ancillary wage costs. In Austria, back payments for five years (for social security) and up to ten years (for tax) apply. In addition, (potentially enormous) administrative fines and criminal charges might be imposed. 

The Solution?

At the moment, there is no sure way to avoid this risk in Austria, as the only way to determine the correct form of classification is a non-binding request to the social insurance company. Unsurprisingly, and in light of the potential sanctions for misclassification, the situation has led to heavy criticism. However, the option of having a specific contractual relationship categorized by authorities in advance is currently under discussion, and a draft bill for a Social Security Assignment Act was released in April 2017 and is currently undergoing the parliamentary legislative process. According to the ambitious plan of the Austrian Federal Government, the new law shall be enacted on July 1, 2017 with the aim of providing legal certainty with a binding assessment of the social insurances.

The Disappointment

In reality, the much-anticipated draft bill comes with a number of limitations and is not capable of providing the envisaged legal certainty. Problematically, a binding determination regarding classification either into the ASVG or the GSVG scheme will only be possible upon the mutual agreement of the different social insurance companies (in principle the GKK and SVA), and even then only when the provided information is correct and has not changed since the submission. 

Given the fact that an assignment to a specific insurance system means revenue for the that system’s competent social insurance company (in the form of social insurance contributions), a mutual agreement will be unlikely. In its absence, mandatory insurance under the ASVG will apply, although the overruled social insurance companies (the SVA in principle) will have a right to appeal. Although the final wording of the Act still remains to be seen, there is a risk that the new regulations will not lead to legal certainty for entrepreneurs and their contractors and will even spark a war of the different social insurance companies on “paying members.”

By Wolfgang Kapek, Partner, and Manuel Mullner, Associate, Taylor Wessing Austria

This Article was originally published in Issue 4.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.