Managing Directors of German GmbHs (private limited companies) and members of the executive boards of German AGs (public limited companies) have to be aware that they might be employees with regard to social security schemes.
Some companies, especially startups, prefer engaging freelancers to employees. The reason is quite obvious. Employees have statutory rights and social insurance contributions have to be paid, which means freelancers are cheaper and more flexible to engage. But a lot of freelancers are in fact employees and subject to social insurance scheme.
Managing Directors (GmbH)
GmbHs are represented by managing directors (Geschäftsführer). According to the German Federal Social Court, managing directors of a GmbH are employees with regard to social security scheme. This means that they are subject to compulsory social insurance contributions. They are subject to the instructions of the owners and are integrated in the work organization of the GmbH. However, the Federal Social Court makes two exceptions:
If a managing director holds at least 50 percent of the shares in the GmbH, they can prevent resolutions that affect them negatively. In this case, the managing director would not be subject to instructions. However, even if the managing director only holds a smaller share in the company, they will not be subject to social security contributions if they hold a blocking minority granted in the articles of incorporation. Therefore, they must be in a position to prevent resolutions from being passed with their veto, despite the fact that their share is less than 50 percent.
As a rule, agreements and resolutions outside the articles of incorporation are not relevant with regard to social insurance. Likewise, it is not sufficient for exemption from social security, for example, that
- a managing director works largely independently and without instructions, if the shareholders only exercise a limited right of instruction,
- the articles of incorporation stipulate restrictions on the right of instruction,
- a managing director is authorized as a sole representative of the company by a provision in the articles of incorporation or is entitled to appoint such a managing director or can only be dismissed for due cause,
- instructions are not issued to a managing director of a family business due to family ties.
Executive Board Members (AG)
Due to their position under the German Public Limited Company Act, members of the executive board of an AG are not personally dependent. A member of the executive board can perform their duties independently and manage the company on their own responsibility. Nevertheless, according to the social courts, executive board members of an AG are treated as employees with regard to social insurance schemes.
In practice, however, the issue of compulsory social insurance rarely arises. The legislator has exempted executive board members of AGs from compulsory insurance in the statutory pension scheme. In the area of employment benefits, too, executive board members are exempt from compulsory insurance. Therefore, essentially only statutory health insurance and social long-term care insurance remain. However, board members usually receive high remuneration. For this reason alone, they are not subject to compulsory health and long-term care insurance.
Managing directors of a Societas Europaea (SE) who are also members of an administrative board are treated equally to members of the executive board of an AG with regard to social security regulations.
Freelancers
Freelancers are only genuine freelancers, and are in principle not subject to social security contributions, if they are independent of instructions and are not integrated in the work organization. If freelancers work on the business premises of the principal, this is already a strong indication of operational integration. A freelancer should also offer their services to other clients and, if necessary, do advertising. However, the mere fact that the freelancer has other clients does not mean that they are self-employed. In practice, the applicability of freelance work that is not liable for social-security contributions often fails due to the lack of the risk typical for entrepreneurs. The freelancer has to bear a risk of loss, e.g., remuneration liabilities towards their own staff, rental liabilities for office space and equipment, travel costs, etc.
The following criteria are typical for self-employed activities exempt from social-security contributions:
- the freelancer has their own office, if required for the activity
- the freelancer does not have a workplace in the principal’s company (no e-mail address, no telephone extension, no business cards, etc.)
- the freelancer is allowed to render their duties with their own staff or subcontractors
- no fixed hourly rates or fixed monthly remuneration
- no minimum/maximum/regular working hours
- the freelancer also offers their services to other clients (in particular through advertising)
- the freelancer also actually works for other clients.
Incorrect judgement of the status under social security law
If an insurance obligation for an alleged “freelancer” is determined, the principal must pay the unpaid social security contributions up to the limit of the statute of limitations (at least four years). This includes not only the employer’s contributions, but also the contributions that should have been paid by the employee. It is not easy to reclaim contributions from the employee and it is usually only possible to reclaim part of the contributions as long as the contractual relationship still exists. In the worst case, non-payment of social security contributions may even be punishable in criminal law.
In case of doubt, a status determination procedure should be initiated at the clearing office (Clearingstelle) of the German Pension Insurance (DRV Bund) before starting the employment, but at the latest within one month after its commencement the employment. This has, among other benefits, a very important advantage: If the DRV Bund determines that the employee is obliged to pay social security, the total social security contribution will only become due for payment when this decision becomes legally binding (if necessary, after social court proceedings). Objections and complaints have a suspensive effect. The situation is different in the case of a contribution decision following a subsequent pension review. Here, objections and complaints do not in principle mean that the required contributions would not have to be paid for such a long time. In addition, it is possible to apply for an expert opinion from the DRV Bund on the employment status of contractors in the same employment relationship. This also creates (some) certainty.
The status determination procedure should not be initiated without preparations. It is strongly recommended to first check the status of the freelancer oneself or with the support of a lawyer, and to what extent the freelancer’s activity or contract can be adapted in order to avoid social security liability.
Conclusion
It is not always easy to determine whether an executive or a freelancer is employed with regard to social security schemes or not. Mistakes or negligence in this area may result in extensive subsequent claims made by the DRV Bund and criminal proceedings may be initiated.
