Social Insurence Institution (ZUS) groundlessly questioning the employment agreement of a member of the management board of limited liability company. Dispute with ZUS resolved in a favor of our law firm Clients

Despite many court rulings confirming the permissibility of entering into employment agreements with members of the management board who are also shareholders in a company, it is commonplace that the Social Insurance Institution (Zakład Ubezpieczeń Społecznych – ZUS) questions the employment of such individuals.

ZUS most commonly finds that the particular employment contract is invalid because the employed shareholder or member of the management board is not subject to any formal supervision, does not act under any subordination, nor is he/she dependent on the employer – the company.

Employment agreements concluded with the officers of the company or with the shareholders are most often challenged where the insured person becomes unable to work or starts receiving maternity benefits. In such cases, ZUS initiates an inspection in order to verify the correctness of the social security registration. 

First of all, ZUS verifies whether the employment contract was actually performed by the insured person and whether there was an actual need to establish the particular position.

Additionally, they verify whether the contract is valid under the provisions of the Code of Commercial Companies and Partnerships, i.e. whether the formal requirements for such a contract set forth in Article 210 of the Code of Commercial Companies and Partnerships have been satisfied. They also examine whether the contract fulfils the criteria of an employment relationship set forth in Article 22(1) of the Labor Code, and above all, whether it exhibits the characteristics of subordination.

Our law firm has extensive experience in disputes against the Social Insurance Institution (ZUS) related to the questioning of employment contracts of the members of the management board or the shareholders in companies, which allows us to effectively assist clients involved in such disputes.

This was the case in many disputes I handled, including a case that was ultimately put before the Supreme Court which ruled in favour of our law firm’s clients on 28 June 2023, judgment number I USKP 84/22.

The legal issue

The clients in this case were the insured person and company X, in which she was employed at a position of a director.

The insured person was a member of the multi-member management board of company X and, at the same time, one of the shareholders therein. On 30 January 2017 an employment contract was concluded between company X and the insured person, based on which the insured person was to work at a full-time position of the chief administrative officer,
as of 1 February 2017. Her duties included, amongst other things, managing the company’s assets, monitoring the company’s financial standing, managing the company’s financial and accounting system, supervising inventory management, and conducting profitability analyses of commercial transactions. During the summer holidays in 2017 the insured person experienced back pain, and she started medical treatment, beginning in October, the same year. As of November 2017, the insured person was unable to work.

ZUS contested the employment contract of the insured person stating that she was not, as an employee of company X, subject to mandatory social insurance contributions: pension, disability, sickness, and accident insurance, as of 1 February 2017.

At the same time, ZUS suspended further benefit payments to the insured person. 

Based on our clients’ accounts and on thorough analysis of the documents, I determined the following: 

1. There was a genuine need for the employment of a person to carry out the insured person’s duties in company X. 
2. The insured person actually performed the duties of an employee. 
3. The contract was concluded with the insured person in compliance with the formal requirements set forth in Article 210(1) of the Code of Commercial Companies 
   and Partnerships (k.s.h.). 
4. The insured person was not the sole shareholder in company X, but a shareholder
   in a multi-member limited liability company, and the interests of the other shareholders were not illusory. 
5. The employment relationship of the insured person fulfilled the criteria of “autonomous” employee subordination of a member of the management board
   of a multi-member limited liability company. 

Based on the above, I estimated that ZUS’s position was unfounded and I advised the clients to file an appeal against ZUS’s decision. I prepared the appeal and filed it with the competent court on behalf of our clients.

The outcome

Regional Court and Court of Appeal

As a result of the appeal filed, the Regional Court in Katowice ruled in favour of our clients. The Regional Court supported the position presented by our law firm. However, this favourable judgment was subsequently reversed by the Court of Appeal in Katowice. 

The Court of Appeal found that there was no evidence to prove that the insured person was performing work under an employment relationship, and under the supervision of the president of the management board. The fact that she handled the sales programme, communicated with the accounting office, issued invoices to clients, paid invoices, and had access to bank accounts did not indicate that she was carrying out these tasks within the scope of an employment relationship. The Court of Appeal noted that she was a member of the company’s management board and pointed out that, in accordance with Article 201(1) of the Code of Commercial Companies and Partnerships (k.s.h.), the management board manages the company’s affairs and represents the company. The right of a member of the management board to manage the company’s affairs and represent it pertains to all legal and extra-judicial actions of the company (Article 204(1) of k.s.h.).

The Appellate Court also concluded that the insured person did not perform work under autonomous subordination. According to the Appellate Court, the concept of autonomous subordination does not apply to a situation in which the “autonomously subordinated” individual would essentially be subject to their own decisions, considering their capital involvement and their role as a member of the management board of the Company. 

I found the decision of the Appellate Court in Katowice incorrect. As a result, I filed a cassation appeal with the Supreme Court on behalf of the clients.

Cassation Appeal filed with the Supreme Court

On 28 June 2023 the Supreme Court, in its judgment (file number I USKP 84/22), ruled in favour of our clients in the dispute against ZUS. It pointed out errors in the reasoning
of the Appellate Court and overturned the contested judgment.

In its reasoning, the Supreme Court referred to the established position of the Supreme Court, stating that no provision of the Labor Code or the Code of Commercial Companies and Partnerships explicitly excludes the possibility of effectively concluding employment contract with a member of the management board who is a shareholder in a multi-member limited liability company and who holds a position of a member of the management board.

It also pointed out that court findings allow for the employment of shareholders of multiple-member limited liability companies under employment contracts at executive positions, since in such cases, a shareholder cannot be considered an entity whose work involves the use of their own capital. The Supreme Court also noted that there was no possibility of employing
either employee-shareholders in a single-member company, or a dominant shareholder, where the participation of other shareholders was illusory. Therefore, owners of single-member limited liability companies, as well as dominant shareholders, are subject to social insurance contributions, just like individuals engaged in non-agricultural business activities, i.e. under Article 8(6)(4) of the Act on Social Insurance System.

The Supreme Court’s ruling indicates that, in order to qualify as a shareholder for social insurance purposes under an employment relationship, it is necessary only for the employment relationship established by contract to be actually performed and to display
the characteristics set forth in Article 22(1) of the Labor Code, including the aspect of subordination.

The court also emphasised the need to adapt the realities of employment to the way
modern economy operates, requiring greater autonomy and independence (and thus creativity) from employees in many industries. The court noted that it was not necessary for all elements of employee “subordination” to be present in each actual state of affairs. 

Therefore, according to the Supreme Court, a person managing the workplace on behalf of the employer may be employed under an employment relationship in which the performance of subordinated work has specific characteristics, different from a “typical” employment relationship. The traditional concept of subordination as an obligation for the employee to follow the employer’s instructions evolves as social relations progress. Instead of the old system of strict hierarchical subordination and the obligation to comply with the employer’s instructions, even in technical matters, a new form of autonomous subordination emerges, where the employer assigns tasks to the employee without interfering in the manner they are carried out. In this system of subordination, the employer specifies working hours and assigns tasks, while it is at the employee’s discretion how such tasks are to be performed.

Grounds supporting the judgment of the Supreme Court

The Supreme Court also noted that there are numerous provisions of labour law that support the idea of a member of the management board of a multi-member limited liability company performing work under an employment relationship. See Article 128(2)(2) of the Labor Code, Article 131(2) of the Labor Code, Article 132(2)(1) of the Labor Code, Article 149(2) of the Labor Code, Article 1514(1) of the Labor Code, Article 1515(4) of the Labor Code, Article 1517(5)(1) of the Labor Code, and Article 24126(2) of the Labor Code.

The Court emphasised that Article 24126(2) of the Labor Code explicitly states that a person managing the workplace on behalf of the employer can be employed under an employment relationship or on a basis other than an employment relationship. The employment status of individuals holding management positions in workplaces (including the role of a member of the management board of a company) does not result from these individuals fulfilling all the characteristics of an employment relationship set forth in Article 22(1) of the Labor Code, but rather from the legislator’s decision to include these individuals in the category of employees, despite the absence of traditional subordination to the employer’s management. 

In light of the above, the Supreme Court concluded that the position taken by the Appellate Court, which excluded the possibility of an “autonomous” employment relationship for a member of the management board of a multi-member limited liability company, was erroneous.

The Supreme Court noted that the Appellate Court in Katowice essentially denied the existence of an employment relationship, since the activities performed by the insured party were characteristic for a member of the management board of a company, whereas the law does not prohibit the performance of corporate duties within an employment relationship. 

Since in this case the activities covered by the employment contract were actually performed, the insured party could not be denied employee status, as it was possible for her to perform them as part of her corporate duties.

Conclusions

The dispute with the Social Insurance Institution (ZUS), which concluded with the Supreme Court’s ruling on 28 June 2023, resulted in a victory for the clients. In this particular case, legal assistance was necessary at all levels of the court proceedings, including representation before the Supreme Court. However, in other cases, disputes with ZUS can be resolved in favour of the clients before lower courts. 

The facts of each case are different, thus they must be carefully considered and assessed. However, as indicated by judicial decisions and my own experience in such cases, in the event of actual performance of work at executive positions by insured individuals who are members of the management boards of multi-member companies or shareholders in multi-member companies, the chances of winning a dispute with the Social Insurance Institution are high. 

Please note that legal matters can be complex, and it’s always advisable to seek legal counsel and representation when dealing with disputes of this nature. The outcome of a case may vary based on specific details and legal interpretations.