Dr. Christoph Fingerle, Fachanwalt für Arbeitsrecht

Social Security Obligation of GmbH Shareholder-Directors

The Federal Social Court of Germany has confirmed its recent case law on the mandatory social security obligation of managing directors of limited liability companies in two recent decisions (judgments of March 14, 2018 - B 12 KR 13/17 R and B 12 R 5/16 R).

Facts of the case

The lower courts had in each case affirmed the social security obligation of the two applicant managing directors.

In the first case, the applicant managing director owned 45.6% of the share capital. He had concluded a “voting agreement” with his brother, who as a further shareholder held the remaining shares. In addition, he was presented with an offer to acquire further shares in the future.

In the second case, the applicant managing director owned 12% of the share capital. He had also submitted that he had extensive powers in external relations and that he was often given freedom to act, for example regarding working hours.

Reasons for decision according to the press release

The Federal Social Court upheld the decisions of the lower courts and thus affirmed the social security obligation of the two applicant shareholders.

A managing director who is at the same time a shareholder of the GmbH [German limited liability company] shall fail to qualify as employee within the meaning of social security law only if he has the legal authority to determine the fate of the company by influencing the shareholders’ meeting. This is usually only the case if he holds more than 50% of the share capital (majority shareholder). If the managing director is not a majority shareholder, a legal authority that excludes dependent employment may by way of exception be accepted if he holds exactly 50% of the shares or if he has a comprehensive (“real”/qualified) blocking minority with an even lower share capital participation by virtue of express provisions in the Articles of Association (statutes), so that it is possible for him to prevent the shareholders’ meeting from issuing instructions that he does not approve of.

It does not matter that a managing director has extensive powers in external relations and that he is often given freedom to act, for example regarding working hours. Instead, the decisive factor is the degree of legally enforceable possibilities for influencing the resolutions of the shareholders’ meeting.

Practice notes

In the earlier case law, referred to as so-called “heart-and-soul case law”, the Federal Social Court of Germany had attached great importance to the de facto effectiveness of a GmbH shareholder-director in the assessment of “dependent employment” and thus social security obligations.

This case law has been expressly relinquished and superseded by what is now acknowledged, which could be termed “jurisdiction-jurisprudence” [or “authority/case law”]. As a result, it does not matter who actually directs the fate of the company – for example by virtue of superior expertise, competence or prominence etc.; instead, it depends on who has the legal authority [“jurisdiction”] to direct the fate of the company – regardless of whether this legal authority is actually used or not.

If the social security obligation or absence of social security obligation is an essential point for the GmbH shareholder-director, then this case law – which is now regarded as consolidated – must be taken into consideration when consulting on the structuring of a company.

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