Mandatory social security contributions for managing directors is a controversial topic that continues to rear its head and ought not to be underestimated, as businesses can potentially be faced with large back payments.

Our experience at the commercial law firm GRP Rainer Rechtsanwälte shows that businesses often underestimate the obligation to pay social security contributions in relation to managing directors. This is particularly true in the case of shareholder-managing directors, who are also not automatically presumed to be self-employed. We at GRP Rainer Rechtsanwälte note that, in fact, the Bundessozialgericht (BSG), Germany’s federal court for matters pertaining to social security, has set high standards for recognizing a managing director as self-employed.

In two rulings from 14 March 2018, the Bundessozialgericht held that managing directors of a GmbH are generally deemed to be employees of the company and therefore subject to mandatory social security contributions (Az.: B 12 KR 13/17 R and B 12 R 5/16 R). The BSG ruled that shareholder-managing directors are only deemed not to be employees if they have the legal authority to determine the fate of the company by influencing the general meeting the shareholders. This is normally the case if the managing director holds more than 50 per cent of the shares in the authorized capital as the majority shareholder. If the managing director owns exactly 50 per cent of the shares in the authorized capital or less than that, an employee relationship can then only be ruled out if the articles of association include explicit provisions conferring a full blocking minority on him or her, and he or she is able to obstruct the general meeting of the shareholders from issuing instructions.

The Court went on to state that when it comes to the issue of mandatory social security obligations, it is also not a matter of whether a managing director has extensive powers and freedom in their relations with third parties. Instead, the crucial factor is the scope of their ability to influence resolutions of the general meeting of the shareholders by legal means.

Managing directors in an employment relationship are, as a matter of principle, subject to mandatory social security contributions. Clear indications of an employment relationship include, e.g. the managing director being subject to the instructions given by their employer in relation to working hours, the place of work as well as the type of work. This is usually the case with manager directors who are hired from outside of the company, but shareholder-managing directors can also be subject to mandatory social security contributions. For this reason, it is necessary to carry out a detailed assessment of the managing director’s status in order to avoid large back payments. Lawyers who are experienced in the field of company law can offer advice.  

https://www.grprainer.com/en/legal-advice/company-law.html