Can the sole shareholder and managing director of a limited liability entrepreneurial company (UG) be in an employment relationship subject to social insurance on the basis of contractual relationships between third parties and the UG?

According to the Federal Social Court (ruling of July 20, 2023 - B 12 BA 1/23 R), the sole shareholder and managing director of an entrepreneurial company can also be a dependent employee and thus subject to social insurance contributions if he or she is actually integrated into the company's organization on the basis of an agreement between the entrepreneurial company and third parties.

Facts

The plaintiff is a trained nurse and the sole shareholder and managing director of the defendant, a limited liability entrepreneurial company (UG). The object of the company is, among other things, the independent provision of nursing services in the outpatient and inpatient sector. The UG does not have a permit to hire out employees. The employment contract concluded by the plaintiff and the UG provides for a gross monthly salary of EUR 500 and a bonus of 15% of the annual profit for the activity as managing director. For specific periods of deployment in 2017, the UG concluded service agreements as "contractor" with the responsible body of a hospital, which is to be charged as "client", for the independent planning, implementation, documentation and review of home/inpatient nursing/elderly care. It was agreed that professionally suitable and qualified persons would be employed at an hourly fee of 36 euros, that the UG had an extraordinary right of termination if its own personnel were prevented from performing their duties, and that the UG was free to issue instructions on the performance of the assigned activities. During the contractually agreed deployment periods, the plaintiff was the UG's only trained nursing specialist; he worked for the hospital operator on one of its hospital wards. In this respect, the German Pension Insurance Association (Deutsche Rentenversicherung Bund), as the defendant, established the plaintiff's obligation to be insured under health, long-term care and pension insurance as well as under employment promotion law on the basis of employment.

The Social Court overturned the administrative decision and found that the plaintiff had not been employed subject to compulsory insurance. On appeal by the defendant, the Regional Social Court reversed the Social Court's decision and dismissed the action. The service contracts were not sham transactions. The plaintiff was subject to the right of instruction of the defendant hospital operator and was integrated into its operations. A service contract concluded between two legal entities under private law did not preclude the assignment of the plaintiff's status under social security law. The plaintiff's position as managing director of the UG ended when he was transferred to the UG as a nursing specialist.

The appeals filed by the plaintiff and the associated entrepreneurial company (UG) were successful only because the facts of the case had not yet been clarified, with the result that the appeal judgment was set aside and the case was referred back to the Regional Social Court.

Reasons for decision

The plaintiff was subject to compulsory insurance under the statutory pension insurance scheme and under the law on employment promotion in his work for the defendant hospital operator during the periods at issue. The business content of the agreements between the UG and the hospital owner was the assignment of suitable persons for nursing care, bound by instructions, solely in the interest of the hospital owner and under integration into the organization of the hospital. The UG did not have the entrepreneurial leeway required for an independent work or service. If a one-person UG contractually obligates itself towards another company to perform activities which, by their nature, require integration into the work organization of the other company and the issuance of instructions to the instructors there, express contractual agreements between the shareholder-manager of the UG performing the activity himself and the other company are not required for the establishment of a dependent employment relationship. Comparable to the legal institution of the fictitious employment relationship pursuant to Sec. 10 (1) Sentence 1 of the Temporary Employment Act (AÜG) in the case of an ineffective employee leasing, the legal assessment as employment is rather determined on the basis of the agreements between the UG and the other company as well as the practical implementation of this contract.

A permitted employee leasing is ruled out because the UG had neither the required permit nor further qualified workers to fulfill the assumed activity. The occurrence of the fiction of an employment relationship pursuant to Sec. 10 (1) Sentence 1 AÜG as a result of an unauthorized employee leasing is not relevant because employment pursuant to Sec. 7 SGB IV does not require the conclusion of an employment contract. According to the theory of integration prevailing in social security law, actual integration into an external work organization is sufficient.

However, due to the lack of sufficient findings by the Regional Social Court on the regular annual salary earned by the plaintiff, the Senate was precluded from making a final decision on the obligation to be insured under the statutory health and social long-term care insurance.

Note for the practice

On the same day, the Federal Social Court ruled on the same content in another case involving a nurse in a hospital and in a case involving "services" in sales and marketing. Regardless of the content of the activity and the contractual basis, what matters is the actual arrangement. If, according to this, there is an integration into the business of the legal entity's client, in which the person actually working is in a contractual relationship, then, according to this case law of the Federal Social Court, a dependent employment relationship, and thus one that is subject to social insurance contributions, is established between the client and the person actually working.

The court mentioned the comparability with the legal consequence of Sec. 10 (1) Sentence 1 AÜG, but explicitly did not refer to this argument because the determination of the existence of an employment relationship is reserved for the labor courts. Due to the wording in § 7 SGB IV "... non-self-employed work, in particular in an employment relationship", the court was able to determine the existence of employment under social law in non-self-employed work without having to make a decision on the existence of an employment relationship, because according to the wording of the law non-self-employed work is not only possible in employment relationships.

For consultation and decision-making in personnel practice, it therefore continues to apply that contractual arrangements alone cannot avoid dependent employment under social security law if and as long as the practical implementation of the employment takes place with integration into the operational organization of a client. It is not decisive whether the contractual agreements are made with the client itself or with a third party.