Compulsory pension insurance of a German GmbH’s working shareholders – from “power to prevent” to “power to influence”

Previous case law

According to the BSG’s previous case law, a managing partner (Gesellschafter-Geschäftsführer) does not perform an “activity according to instructions” within the meaning of Art. 7 (1) Sentence 2 SGB IV (German Social Code, Book IV) and is not subject to compulsory pension insurance if he has the legal possibility to influence the company’s fate. This is the case if he holds more than 50% of the shares in the share capital.

If his share in the company is lower, it depends on whether he can prevent instructions from the shareholders’ meeting that are not convenient to him. In the BSG’s opinion, this is the case if the managing partner either holds exactly 50% of the share capital or has been granted a comprehensive, “real” blocking minority under the articles of association, which covers the company’s entire business activity and not just individual areas (= “non-real” blocking minority). An agreement made outside the articles of association (e.g., in voting agreements or trust agreements) is not sufficient.

With this opinion, the BSG has so far always distinguished between two groups of cases when deciding on a managing partner’s compulsory pension insurance:

• the possibility of influencing the company’s fate, which is given in the case of a majority shareholder (= more than 50% shares in the share capital)
• the right to prevent any instructions of the shareholders’ meeting that are not convenient to him on the basis of a shareholding of at least half of the share capital or on the basis of a comprehensive blocking minority (so-called power to prevent).

The BSG also applied these criteria when assessing whether a partner working in the company who is not a managing director performs an activity according to instructions and is thus subject to compulsory pension insurance.

New BSG decision

In a more recent decision dated December 13, 2022 (BSG, Ref.: B 12 KR 16/20 R), the BSG clarified that a power to prevent alone – i.e., the right to prevent any instruction of the shareholders’ meeting that is not convenient – is not sufficient to exclude dependent employment and thus compulsory pension and unemployment insurance.

The specific case involved a shareholder who, together with his brother, is invested in a GmbH, each of them holding a 50% share. While his brother is the sole managing director, the plaintiff works in a subdivision of the company (purchasing and logistics) as operations manager with extensive authority to act, but without full power of attorney (Prokura). For his work, he receives a fixed monthly salary and an annual profit share from the company. In order to secure the company’s liquidity, he had granted it a loan of around EUR 175,000.00 and assumed directly enforceable guarantees to secure further loans. The Articles of Association stipulate that the conclusion of contracts with shareholders to work in the Company, their amendment or termination and the regulation of all consequences resulting from these contracts are exclusively subject to the shareholders’ meeting’s resolutions, whereby the shareholder concerned remains entitled to vote in any case.

In status determination proceedings, the defendant DRV Bund (German federal pension insurance institute) determined that the plaintiff was subject to pension and unemployment insurance as working shareholder. The Social Court annulled the corresponding decision and determined that the plaintiff was not a dependent employee and therefore not subject to compulsory insurance. On appeal by the DRV, the Regional Social Court overturned the Social Court’s decision and confirmed the plaintiff being subject to compulsory pension and unemployment insurance.

The plaintiff appealed against this decision to the BSG and argued that he was already independent due to his blocking parity in the shareholders’ meeting because, according to the Articles of Association, supervision and the right to issue instructions to working shareholders are assigned to the shareholders' meeting, in which he had unlimited voting rights. Accordingly, he could prevent any instructions being issued to him. This power to prevent was sufficient for an independent activity that is not subject to social security contributions; a power to issue directives was not required for this purpose. 

The BSG did not follow this line of reasoning. Instead, the court concluded that the power to prevent alone does not exclude dependent employment. Even if, due to his participation in the company and due to his voting right in the shareholders’ meeting, the company cannot pass a resolution on his contractual cooperation against his will, this did not automatically lead to the assumption of self-employment. The status of a managing partner depended not only on his freedom to issue instructions in his own area of activity, but also on whether the managing partner is in a position to exert a comprehensive influence on the direction of the company's business activities and thus to direct the GmbH’s entrepreneurial fortunes as a whole like a company owner. This requires the power to influence the entire business activity.

In the BSG’s opinion, the plaintiff as working shareholder did not have such power to influence the entire business activity. In such case, however, he does not work in his “own company” but is integrated into the GmbH as his employer in a manner appropriate for his functions. This also applies to working shareholders not appointed as managing directors. Despite his 50% share in the share capital and his voting right in the shareholders’ meeting, by means of which he can prevent any resolutions that are not convenient to him, he cannot exert significant influence on the managing director’s activities performed by his brother. In case of a contrasting vote, his voting right merely results in a tie and thus to a blocking but not the majority generally required in the shareholders’ meeting for the adoption of a resolution. As a result, the plaintiff can ultimately neither issue instructions to the managing director nor enforce the managing director’s dismissal at any time. The fact that the plaintiff and his brother are de facto managing the company on an equal footing due to family ties is irrelevant for the assessment under social security law.

The fact that the plaintiff has assumed extensive guarantees in favor of the company and has granted it a loan does not bring about a different result. In the BSG’s opinion, the entrepreneurial risk associated with the guarantee is only an indication of self-employment if this risk is accompanied by greater freedom in structuring and determining the scope of his own work. This is not the case, and even the granting of the loan does not grant to the plaintiff any comprehensive possibility to influence the company. 

Recommendation

With the decision of December 13, 2022, the BSG has further specified and tightened its previous case law on the pension insurance obligation of shareholders working in a company. Although the decision relates to an individual case, it is to be expected that the BSG will in future apply the principles established there – according to which a mere power to prevent is not sufficient, but rather a power to influence the company is required for the assumption of self-employment which is not subject to compulsory insurance – to comparable cases of working shareholders and managing partners.

Therefore, all managing directors are well advised to monitor the BSG’s case law and to clarify, by means of status determination proceedings at an early stage, whether or not working shareholders and managing partners not holding more than 50% of the shares in a Company’s share capital are subject to compulsory insurance in order to avoid liability risks. This also applies if a tax audit has not resulted in any objections and has been concluded without a notice. In this case, there is no protection of the audited company’s legitimate expectation that everything is in order. This rather requires, also if there are no objections, an administrative act terminating the audit which specifies the scope, audited persons and the audit’s results including the insurance obligations. It is crucial to ensure that such administrative act be issued.