OK, so you’ve done that brilliant piece of work for your customer and now it’s time to get paid as a freelancer in Germany. How confident are you that you will find the agreed amount of money in your bank account at the agreed time?
At the end of the day, every piece of work you do – regardless of how artistic or creative it might be – is a business transaction. You provide a service, the customer pays you. That is how it should be.
But, sometimes, that doesn’t work. The money has NOT arrived and you have to ponder what happens next. In this article, I want to give you some guidance and advice on the way things work in Germany.
Contents: How to get paid as a freelancer in Germany
- Why is it important to understand what goes on?
- Do due diligence
- Apply to every type of business
- Payment in advance or on account
- Keep talking to the customer
- You must make a decision
- Using service-providers
- The legal process to recover your money
- “Zahlungserinnerung” (reminder)
- “Mahnung” (notice of payment reminder)
- “Mahnbescheid” (legal notice of payment)
- “Vollstreckungsbescheid” (legal enforcement notice)
- Taking the debtor to court
- How to get paid as a freelancer in Germany – a summary
Why is it important to understand what goes on?
I’m sure you wish that all your customers are friendly, understanding, ethical, English-speaking partners. The reality is, though, that there are a whole bunch of people out there who are exactly the opposite. Unscrupulous, hard-nosed or desperate characters who are just waiting to fleece you.
If you understand the situation and your right you have a much greater chance of receiving your payment promptly.
And remember, exactly the same procedure will apply to you if you owe money to somebody else. So it is worth being clear about the consequences of your actions.
Do due diligence
“The best way to avoid not getting paid is not to do the work at all.”
Bit of a truism perhaps, but it is actually a wise piece of advice. Clearly, you need to work to pay the bills and get your job-satisfaction. The secret here is making sure you are doing the work for the right people, those being the ones who will pay you.
People often use the term due diligence in the context of business acquisitions, for example. It means doing research up front in order to find out as much as possible about the business. This then reduces the risk of making a bad decision about the acquisition.
For you as a freelancer or small business-person, exactly the same principle applies. You need to assess your potential customer even before you have come to an agreement with him.
Clearly, if you have worked with him before, you can rely on your experience to guide you. Otherwise, you might want to:
- do some internet research about him and see whether there are any negative comments.
- find some other suppliers to the business and ask them about their experiences.
- obtain a credit report on the customer. (This will cost you between EUR 30 and EUR 50 but might be a worthwhile investment).
You must decide what amount of risk you are prepared to take. If you have more than enough work to do, you can turn down work much more easily than if you are struggling to find any customers in the first place.
Apply to every type of business
The general principles of dealing with debtors apply to every type of business and consumer even though there are some differences in the finer details.
You should always have a contract with the customer when you are doing freelance work! In Germany both oral and written contracts are valid. You should, however, always make sure that you have a written contract as this is the only way that you can definitely prove later what you agreed with the customer.
Here are some important points to bear in mind when agreeing a contract with your customer:
- It doesn’t matter what you call it! It can be a contract (“Vertrag”), an agreement (“Vereinbarung”), an arrangement (“Übereinkunft”) or whatever you like.
- You can complete a contract by hand or you can print and sign it. Either is valid.
- Both parties should sign the document. It is important for you to make sure that the person signing is able to sign on behalf of the business! This can avoid validity problems later.
- It should contain at a minimum:
- the names and business addresses of both parties.
- the work or services that are to be provided. The more detail the better as there is less room for misinterpretation later.
- the completion date (or time) for the work.
- the amount of money you will receive for the work.
- the payment terms.
Your invoice to the customer is the basis on which he will make the payment. There are certain requirements of an invoice in Germany and you must adhere to them.
This ensures that there is no wiggle-room later if the customer does not want to pay. There are numerous examples online of what an invoice should look like.(You can google “Rechnungsvorlage” (invoice template).
You must always include the following items on your invoice:
- Full name and address of both the customer and yourself as the supplier.
- Your tax number of VAT identification number.
- The date of the invoice.
- An invoice number (in sequence).
- A description of the service or product with price and quantity.
- The date or period of time in which the the service was provided.
- The net amounts (without VAT).
- The VAT percentage.
- The amount of VAT included in the invoice.
- The gross amount.
- The reason (if applicable) why you are not charging VAT. (For example, if you are a small trader (“Kleinunternehmer”). I have discussed VAT and small traders in my article “A guide to VAT for freelancers in Germany”.
- Your bank account details – Bank, IBAN and BIC so that the customer can pay you.
Payment in advance or on account
You can, of course, reduce your risk by asking for payment in advance.
Many consumers and businesses today pay for services and products in advance. This is the case with nearly every service that you purchase online. And yet, offline, the principle still rules that you must complete the work first before you receive payment. So, your request for payment in advance may or may not be successful.
On the other hand when you are working on a project that will take perhaps a number of weeks or months, then it is normal for you to receive payments on account in regular intervals. What these intervals are – you should agree with the customer in the contract.
Keep talking to the customer
So, you have done the work, written the invoice and now you are waiting to be paid. One of the most important pieces of advice I can give is to keep talking to the customer. Try and find out in advance when he usually pays invoices (if there is a particular day of the week for example). A long-winded approval process can also result in you waiting a long time for your payment. You need to know about this beforehand
As soon as the payment date comes along, check whether you have received the money. If not, then contact the customer and ask politely whether there was a problem with the invoice.
This is the point at which you need to be:
- diplomatic. You want information (and payment) and you don’t want to jeopardize the relationship.
- firm. The customer needs to be quite clear, that you have fulfilled your part of the bargain and now he has to fulfil his.
You also need to listen carefully to your customer and pick up any signals that he might be sending. If he has some complaints about your work, for example, it might be genuine. It might, however, just be an excuse to avoid payment and in this case you must stay firm in your position.
Hopefully, the money will arrive on your bank account and you can enjoy the fact that this particular project has now finished.
However, if it is does NOT you have some serious thinking to do.
You must make a decision
Your customer has not paid you and you now have to decide what are your options. The problem at this stage is that you are probably saying goodbye to your customer. One half of you might say “but I can’t upset my customer…” whilst the other – the rational half – will probably understand that a customer who doesn’t pay should not even be counted as a customer at all.
Walk away and write it off to experience
OK, so it will depend on the amount of money involved. If you do not want any more hassle, then just leave it. Maybe the customer will pay (although he probably won’t). If the amount is small, then maybe it is just not worth any more of your time thinking about the problem.
Incidentally, if you do have to write off the debt, this is a tax-deductible expense for you. Likewise, if you have already paid the VAT on the invoice to the tax office, you can get a refund of this tax as well.
Continue pestering your customer for your money
Send the customer e-mails and call him regularly. This can sometimes work as he will arrange payment just to get rid of you. From his perspective, you are effectively invoking his guilty conscience every time you contact him. The question in this case, however, is whether he even has a guilty conscience. If he doesn’t, you are probably wasting your time.
Start the legal process of recovering your money
The third option is to start the legal process of recovering your money. If you are clear in any case that you will not be working with this customer again, then – depending on the amount involved – this can be a sensible and serious option.
The issue with any legal process is that it costs money (and time and energy). Although the costs of the legal process should be borne ultimately by the debtor (the person owing the money, i.e. your customer), you will have to pay various costs in advance. And the question you must always consider is: will the debtor have enough money to pay you anyway? If the answer is probably not, then you should consider just walking away.
The legal process contains a number of steps, not all of which are complicated and expensive. The important thing is for you to understand what they mean so that you can make an informed decision about your best course of action.
At this point I want to say something about the use of service-providers to help you bring in the money that is owing to you.
Debt collection has not always had a great reputation and Germany is no exception. There are however different types of service-providers who you can use to help you get the money that is owing to you.
Lawyers, traditionally, have always been involved in the process – and still are if the situation involves actually going to court. Often a letter from a lawyer can be more persuasive than an e-mail from you. Lawyers can undertake all activities involved in bringing in debts but probably cost the most.
It can be a good idea to let a lawyer deal with the whole process from beginning to end. He has the facts and the documents and can represent you in court if that is where you ultimately end up.
Large credit information agencies
These companies amass huge amounts of business data on many companies through the active participation of their members. They are therefore able to provide an indication up front as to whether a certain customer is a good business risk. They can also use this fact as leverage to get debts paid – information about outstanding debts also flows into their credit evaluation.
Other debt collection services
There are many other debt collection services. They will relieve you from the burden of having to do the paperwork yourself.
As with any other service-provider, it is wise to use one based on the recommendation of somebody you know. Ultimately, though, if the case has to go to court, only a lawyer can represent you.
The legal process to recover your money
Everything I have talked about until now concerns the things you should do that are not directly part of the legal process. In this next section, I want to talk about what happens if it is necessary to increase the pressure on your debtor.
When you are dealing with debtors, you should document all your steps. I advise you to keep a file with notes and the relevant documents on each of your overdue debtors.
Your first step is to send the customer a reminder. This should be in writing, in a friendly tone. Often the customer has simply forgotten, or has lost some of the relevant paperwork. A reminder can jog his memory. In the reminder you should include details of the amount outstanding, which invoices it refers to and also your payment details again.
The reminder is not strictly speaking part of the legal process. But I suggest you always send one to your customer as soon as the payment is a couple of days overdue
“Mahnung” (notice of payment reminder)
The notice of payment reminder (“Mahnung”) is an important document. It really kicks off the legal process.
When your customer has received the notice of payment reminder, his debt is officially overdue (“in Verzug”). This is the point from which you can charge interest on the debt if your customer is a consumer. And from this point onwards you can charge the costs for the reminder process to the customer (a net amount of EUR 40 regardless of the actual costs).
Certain conditions have to exist for a notice of payment reminder to be issued (and be valid):
- a valid debt must exist.
- you must have contractually agreed a due date with the customer which has now past.
- you must clearly request the debtor to fulfil his contractual dues (i.e. pay).
There are certain instances in which the notice of payment reminder is not required. If your customer is a consumer,for example, you can inform him on the invoice that the legal payment terms of 30 days apply. If this is the case, then you do not – theoretically – have to send him an additional reminder. However, if your terms are less than this, then you must do so.
There is no legal basis for the number of reminders that must be sent to the customer. One is sufficient. Often, however, it makes sense to send a series of letters – usually three – to the customer in which you can increasingly emphasize how serious the situation is.
I would recommend sending the notice of payment reminder using registered mail. This way you have proof of delivery, if it is later required.
“Mahnbescheid” (legal notice of payment)
The legal notice of payment is a document that is issued by a court (“Mahngericht”).
You (or your service provider) can apply for the legal notice by filling in an application form. There is an online portal for the applications here. You cannot download the application form – you have to purchase it from a stationery shop, for example.
Because the court issues the legal notice of payment, you must pay certain costs in advance. The costs vary depending on the amount of the outstanding debt. Ultimately, however, the debtor bears the cost of the proceedings. This assumes that he has enough money to pay.
The legal notice of payment does not mean that the court has reviewed the details of the outstanding debt and found that you have the law on your side. The court will review that the formal details on the application form are correct and then it will issue the notice of payment to the debtor.
The legal notice of payment is delivered by registered mail and comes in a very distinctive yellow envelope. It looks quite intimidating and this in itself can sometimes ensure that payment is made.
Normally, if debts are not paid within 3 years (after the end of the current year), they are time-barred. This means that you then have no legal way of getting back your money. By issuing the legal notice of payment you are also moving back the limitation period for the debt for a further 6 months.
What happens when the debtor receives the legal notice of payment?
One of 3 things will happen:
- The debtor will pay. In this case, the work you have done so far has paid off and you can congratulate yourself. Unfortunately, you have probably lost your customer.
- The debtor will officially file his objection to the legal notice of payment with the court. He must do this within 14 days. (This is very easy for him to do – he only has to tick one box on the form and send it back). There are a couple of reasons he might do this:
- he genuinely believes that the debt is not justified and will not therefore pay.
- he has no intention of paying or does not have the money, but wants to gain time.
If this happens, the court will inform you. You can then either decide to bite the bullet and forget the debt or you can take the debtor to court.
- The debtor simply ignores the legal notice of payment. He does not pay and makes no objection. In practice, this situation will also happen often. If he has no money, then it is often the case that YOUR legal notice of payment is just one of many.
If you hear nothing from the court (that the debtor has officially objected), then you proceed to the next step which is the legal enforcement notice (“Vollstreckungsbescheid”).
“Vollstreckungsbescheid” (legal enforcement notice)
The court does not automatically issue the legal enforcement notice, you have to apply for it. It does not, however, cost any more money.
When the debtor receives the legal enforcement notice, he has the same choices as before with the legal notice of payment:
– ignore the notice
This time there is one fundamental difference though. If he simply ignores the notice and does not pay, then you automatically get “title” to the debt. This is the equivalent of the court issuing a judgement in your favour.
With this so-called title you are now legally able to enforce the debt and you have access to certain ways of getting to the assets of the debtor. The most common methods are:
The bailiff (“Gerichtsvollzieher”)
You do not have to confront the debtor yourself. You can contract with a bailiff, a state employee, to collect the debt on your behalf. He literally knocks on the door of the debtor and asks for payment. If the debtor is unable to pay, the bailiff is entitled to take property to cover the debt.
Deduction from wages or salary (“Lohnpfändung”)
If the debtor is an employee somewhere, you can apply to the court for direct payment of your debt out of a deduction from his wages or salary.
Payment from the bank account of the person or company (“Kontopfändung)
Again, you can apply to the court for your debt to be paid directly out of the funds in the bank account of your customer. The bank must hand over the money owed, apart from a minimal amount which the debtor can keep.
Taking the debtor to court
If the debtor has objected at the stages of the legal payment or enforcement notices, you are faced with the option of taking the debtor to a civil court. To do this, you must consult with a lawyer who is qualified and able to represent you in the court.
Your lawyer will draft a lawsuit in which he includes all the evidence relating to the debt. Again, this is a costly process because you have to pay the court costs up front. (If you win judgement, the debtor must then pay all your costs).
He will send the lawsuit to the court which reviews it then asks the debtor for his side of the argument. If you have not reached a settlement in the meantime, the court will set a date for the court hearing.
At every stage, there is the possibility of negotiating a settlement with the debtor at which point the case can be dropped.
If you get a judgement in your favour, you have a “title” to the debt and are back at the same point as before when you can appoint a bailiff, for example, to help you get the debt.
Going to court is not a decision to be taken lightly. Even if you are confident that you will win, the whole process will take a long time (it can be many months). And ultimately, you do not know whether the debtor will be in a position to pay you at that time anyway. If he is not, then you yourself must pay all the court costs and your lawyers fees.
How to get paid as a freelancer in Germany – a summary
If you find yourself in the unfortunate position of having done work for which you have not been paid, you have a number of options. It is always preferable to go for an out-of-court settlement with your debtor, if possible.
Although it is probably the last thing on your mind, you should always consider the option of not working for a customer if payment appears to be in doubt. Doing work and then not getting paid for it robs you of that time (and the opportunity for a paying customer). Therefore you should be diligent at the beginning of the working relationship.
Do not be afraid to pursue the legal channels open to you. It is your right and your livelihood! On the other hand, you should always consider the option of just writing off the debt and learning from the experience.