New Information on the Social Security Obligations of Managing Partners

A minority shareholder appointed as managing director in "his or her" German limited liability company (Gesellschaft mit beschränkter Haftung – “GmbH”) is subject to the instructions of the shareholders’ meeting. Therefore, he or she is not self-employed, and is subject to social security obligations. According to two new decisions of the German Federal Social Court (Bundessozialgericht – “BSG”), these obligations cannot be avoided either by a voting agreement with the majority shareholder or through veto rights in the managing director employment contract.

The judgment of the BSG of 11 November 2015, ref. B 12 KR 10/14 R

In the first case, the plaintiff held 30% of a GmbH. The other shareholder held 70% of the GmbH. Both shareholders were authorized to sole representation of the company. In the employment contract of the minority shareholder, it was agreed that he had veto rights over the appointment of other managing directors and in case of certain measures. However, he deferred his wages for the first year of his appointment, thereby granting the company an interest-free loan. Therefore, he invoked his commercial risk with regard to pension insurance.

The BSG did not, however, accept this limited commercial risk as justification of self-employment. It indicated that the managing director was nevertheless subject to the instructions of the general shareholders’ meeting. The general shareholders’ meeting was controlled by the other shareholder. Additionally, veto rights only applied to certain resolution subject matters. Moreover, the employment contract was appropriate, and also eligible for termination for just cause at any time.

The judgment of the BSG of 11 November 2015, ref. B 12 KR 13/14 R

In the second case, the plaintiff held 40% of a GmbH. Her husband held 60%. The two shareholders agreed in a written voting agreement that they would only cast their votes unanimously. The plaintiff had voting precedence (and could therefore make a decision on the vote); her husband also granted her full power of attorney over voting rights held by him. The term of the voting agreement was unlimited. Only legally required termination for just cause was agreed upon. The plaintiff was then appointed as the authorized representative of the GmbH.

The plaintiff argued towards the pension insurance and the court that she was self-employed based on the voting agreement, and not obligated to make social security insurance contributions.

The BSG did not uphold the plaintiff's opinion. The voting agreement could be terminated at any time, at least for just cause. Additionally, in accordance with Sec. 723 of the German Civil Code (Bürgerliches Gesetzbuch – “BGB”), voting agreements could also be terminated ordinarily at practically any time. In case of a conflict – which would represent a just cause justifying termination – the husband would then be granted the decisive role, and he could issue directives to the plaintiff as a managing director. After the termination of the voting agreement, the plaintiff would also have no means to prevent these directives in the general shareholders’ meeting.

Comment

The first decision is not surprising. Hierarchically, the managing director is below the general shareholders’ meeting, so that limited veto rights in an employment contract subject to termination could not justify autonomy in the sense of social security law. The second decision is also understandable, for in case of a crisis the plaintiff would be subject to the directives of her husband. In this regard, the BSG did not consider it sufficient that the agreement was still in existence. The BSG also considers hypothetical changes to make a judgment on autonomy. This view is in line with recent BSG case law. Since the "Schönwetter" decision of the BSG (29 August 2012, ref. 12 KR 25/10 R), a clear tendency in legal decisions towards a stricter evaluation of the characteristic of self-employment can be observed.

Based on these new decisions, auditors are likely to concentrate more closely on minority shareholders who work for the company and are not subject to social security obligations. A social security obligation can only be excluded for an appointed minority shareholder in a legally secure manner if the voting agreement is directly regulated as a component of the shareholder agreement. It is also conceivable that the managing directors could be granted comprehensive veto rights in the shareholder agreement.

A status determination procedure may bring security for those involved, but also carries the danger of high additional claims in case of a rejection of the freedom from social security obligations.