Whether the managing director of a GmbH, a type of German private limited liability company, is obligated to make contributions to social security is frequently a point of contention. Various different factors need to be considered when weighing things up.
According to a report by the commercial law firm GRP Rainer Rechtsanwälte, a lack of awareness regarding a managing director’s obligation to contribute to social security is particularly liable to give rise to problems when a GmbH is being established. If the managing director is obliged to make contributions to social security but no contributions are made, we at GRP Rainer Rechtsanwälte note that there is then the possibility of having to make large back payments which have the potential to threaten a young company’s existence.
The obligation to contribute to social security encompasses contributions to unemployment, pension, health and nursing care insurance as well as accident insurance. Whether a managing director is obliged to make contributions depends on whether he is employed or self-employed.
Externally hired managing directors are employees in most cases. The usual criteria for a dependent employment relationship is that the individual in question be integrated into the external company and that the employer have the authority to give instructions in relation to the place of work, working hours and the type of work to be performed.
It is more difficult to make a distinction in cases involving managing directors who are also shareholders. In these instances, it needs to be examined whether the managing director is in fact carrying out his work independently. Key factors in determining whether this is the case is whether a personal business risk has been entered into and the share in the company’s capital. In cases where the share in the business is greater than 50 per cent, the managing director has substantial influence over the fate of the company, meaning that it can be assumed that he or she is self-employed and thus subject to the obligation to make contributions to social security. This can also be true of minority shareholdings if the managing director has a comprehensive blocking minority or has free reign in relation to his or her workforce as well as place of work and working hours.
Having said all of that, when it comes to classifying an occupation as an employed or self-employed role it is not only the contractual framework but also the actual content and drafting that are decisive, as these may in practice deviate from the contractual arrangements.
The first step should therefore always be to establish whether there is an obligation to contribute to social security. Contractual arrangements that are designed only to circumvent this obligation can have expensive repercussions in the form of back payments if the actual circumstances give rise to an obligation to make contributions to social security. If, on the other hand, these circumstances allow for an exemption from said obligation, the contracts can be prepared accordingly.
Lawyers who are experienced in the field of company law can advise shareholders and managing directors.