When can the sole shareholder of a limited liability company be its employee? – the court resolves doubts regarding social security

The court sided with the position of the Social Insurance Institution (Zakład Ubezpieczeń Społecznych, ZUS), according to which the sole shareholder of a limited liability company (spółka z o.o.), who is also a member of the management board, is not subject to social insurance based on an employment contract, but is compulsorily insured for pension, disability, and accident insurance as a partner of a single-shareholder limited liability company. The main reason for the court’s assessment was the fact that, in the established factual circumstances, the legal relationship connecting the sole shareholder with the limited liability company lacked the element of employee subordination.

Factual Background

The complainant (K. Z.) was registered from 1 December 2018 for compulsory social and health insurance on the basis of employment with the contribution payer BIURO (…) Sp. z o.o. On 1 December 2018, K. Z. signed an employment contract with the company’s proxy BIURO (…). Under this contract, she was to perform work as an accountant on a 1/8 full-time equivalent basis. Prior to this, K. Z. had already been registered for compulsory social and health insurance based on employment by another contribution payer.

From 31 January 2018 to 3 October 2021, K. Z. was the sole shareholder of BIURO (…) Sp. z o.o., owning all shares. From 12 February 2021, she held 90% of the shares, while E. Z. acquired the remaining 10%.

Following the contribution payer’s registration of K. Z. for social insurance in BIURO (…), the social security authority raised doubts regarding the legitimacy of registering the complainant for social insurance based on the contract and initiated ex officio proceedings concerning the correctness of this registration. The authority indicated that from 1 December 2018, K. Z. did not meet the conditions for compulsory social insurance as an employee of BIURO (…). Based on the gathered material and cited provisions, the authority decided that the complainant is compulsorily insured for pension, disability, and accident insurance as a partner of BIURO (…) Sp. z o.o., with the contribution base not lower than 60% of the projected average monthly salary adopted for calculating the annual contribution base limit.

K. Z. appealed against the decision of the Social Insurance Institution regarding the non-recognition of the employment relationship as an accountant from 1 December 2018 to 3 October 2021. The authority requested dismissal of the appeal, simultaneously indicating that information from the National Court Register showed that K. Z. had served on the management board of BIURO (…) Sp. z o.o. from 31 January 2018 and had owned all shares, remaining the company’s president.

District Court’s Position

The court found the appeal unfounded. It emphasised that, for coverage by employee social insurance, the crucial factor is whether the parties to the contract were in an employment relationship. The existence of such a relationship, and whether it constitutes the basis for social insurance, is not determined solely by the formal conclusion of the employment contract, salary payment, joining insurance, paying contributions, and issuing a work certificate, but by the actual and factual performance of elements characteristic of an employment relationship, as set out in Article 22 § 1 of the Labour Code (Kodeks pracy, k.p.).

In the reasoning of the judgement, the court pointed to the special situation occurring in the case of a single-shareholder limited liability company, which is a particular form of conducting business on one’s “own” account, even if it is, by construction (a legal fiction), separated from the personal assets of the sole shareholder. The court noted that, according to case law, not only the absence of employee subordination within the meaning of Article 22 § 1 k.p. argues against recognising an employment relationship. There is a fundamental contradiction between the owner status and the employee status of a partner in such a case. This results from the concept of employment, which is based on the theory that the employment system rests on the exchange of services between two parties: the owner of the means of production (the employer) and the employee. Therefore, in light of the characteristics of the employment relationship and labour law—which is based on the exchange of services between the owner of the means of production and the employee—the sole (or almost sole) shareholder of a limited liability company generally cannot be in an employment relationship with that company, because the status of the work performer (employee) is “absorbed” by the status of capital owner (employer). The sole or nearly sole shareholder performs activities (even typically employee-like) for themselves (in their own interest) and at their own production, economic, and social risk. The sole shareholder is economically independent from the employer (the limited liability company) because—as the property transfer occurs within the shareholder’s own assets—there is no element of paid work, and they themselves dictate how the company is run as the shareholders’ meeting.

When Can the Sole Shareholder Be Recognised as an Employee?

The court drew attention to the criteria developed by the Supreme Court that may indicate that the sole shareholder of a limited liability company can be recognised as an employee for the purposes of compulsory social insurance:

1. the employment takes place in a specialist position related to the company’s business;
2. the findings confirm the company’s need for the shareholder’s work in that position;
3. the sole shareholder does not engage in the company’s ongoing management activities;
4. the sole shareholder is effectively subject, when performing work for the company, to orders from those managing the company or directing its individual departments.

The court emphasised, however, that to recognise the employment relationship as genuine, the company must conduct business focused on achieving its objectives set out in the articles of association and, in particular, actually conduct economic activity and employ workers for that purpose.

Business law and social insurance law are just some of the specialties of ATL LAW law firm. Our team provides legal assistance regarding social insurance both to companies and individuals. We recommend solutions that minimise the risk of negative outcomes from ZUS inspections and help resolve cases in progress. We advise companies at every stage of control proceedings. If you have doubts about planned business activities in the context of labour law or social insurance regulations, including the current interpretation adopted by ZUS and courts, please feel free to contact us.