CORPORATE OFFICES AND SUBORDINATE EMPLOYMENT RELATIONSHIP: COMPATIBILITY CRITERIA
With its notice n. 3359 of 17.9.2019, the Italian National Social Security Institute (INPS) summarised the compatibility criteria concerning corporate office holders and the creation of a subordinate employment relationship between the company and the individual that manages it.
The material points of notice n. 3359 issued by INPS on 17.9.2019 are summarised below.
APPLICABLE EVALUATION CRITERIA
Starting with the following stand taken by the Court of Cassation (see judg. 18476/2014 and 24972/2013): “being an official of a legal person does not in itself preclude the possibility of establishing an employment relationship between that legal person and that official, where the characteristics of the relationship are such that, notwithstanding the position in the company, the official is subject to the management, control and disciplinary powers of the body’s management”, INPS, in the mentioned notice, provided a detailed analysis by corporate office, determining its compatibility or lack thereof with a subordinate employment relationship.
Such analysis is summarised below in table form.
| Corporate office | Compatibility | Reason |
| Chairman of the Board of Directors | Yes | The chairman of a company, like any other member of the board of directors, may be subject to the management, decisions and control powers of the corporate administrative body.
A chairman can still be an employee even when vested with the power of representation, provided that such power does not include decision-making powers. |
| Corporate office | Compatibility | Reason |
| Sole manager | NO | The sole manager holds the power to express on his own the will of the corporate body, as well as the powers of control, command and discipline.
There is no distinction between the position of managing body of the company and the role of employee as a person performing the actual work. |
| CEO | On a case by case basis | The scope of the power of attorney granted by the board of directors to the CEO is essential to determine whether the office holder can also be considered to be in a subordinate employment relationship.
If the CEO has been given general powers to act, with no need for the consent of the board of directors, the possibility of their being in a subordinate employment relationship with the company is definitely excluded. On the contrary, should the CEO have been granted powers of representation only, or only specific and limited powers, there is generally no obstacle to the creation of a true subordinate employment relationship. In any case, in order to determine the admissibility of such relationships, the following considerations are also relevant: · the relationship existing between the relevant official and the board of directors, · the existence and number of managing directors and · the existence of the elements that characterise a subordinate employment relationship. |
| Sole shareholder | NO | The fact that the ownership of all the company shares is in the hands of a single person excludes any subordination of that person, the sole shareholder, to the directives of a corporate body, even though the company exists as a legal person in its own right. |
| Exclusive managing shareholder | NO | A shareholder who has full control of all management powers, so much so that he is has the “de facto control” of the company, cannot at the same time be an employee of the company, as there is no possibility of characterising the creation and management of the employment relationship as connected to a separate “corporate” will. |
| Shareholder of a |
on a case by case basis | The position of a corporation shareholder who is also a director should be assessed on a case by case basis, checking:
· the actual performance of activities unconnected to his director function, and that such activities are characterised as being of a subordinated nature; · their being subject to the control and disciplinary powers of the company administrative board as a whole, notwithstanding their corporate offices; · general elements such as the frequency and predetermination of wages paid, observance of contractual working hours, classification within a specific company organisation, the absence of even a minimum entrepreneurial organisation, the absence of risk for the worker, the distinction between amounts paid as wages and those deriving from company income, etc.; · that the establishment and management of the employment relationship can be linked to the will of the company as distinct from that of the person holding the office (director, etc.). |
With its notice no. 3359/2019 INPS explained the firm opinion of the courts on the subject, summarizing the basic principles of the subject, with regard to the figure of the director of limited companies in his typical functions as manager and representative of the company.
With its circular letter no. 179/1989, the Institute had already excluded, in principle, that a valid subordinate employment relationship between a company and its “chairman, sole director and managing director” could be established and recognized as such, but these clarifications come in the wake of notice no. 12441/2011, providing clarifications on the possibility of establishing a valid subordinate employment relationship between a cooperative society and the chairman of the same.
Therefore, INPS is of the opinion that the mere circumstance that a shareholder of a limited company also holds the office of director, even though it hints at the absence of the subordination obligation, is not sufficient in itself to conclude that there cannot be a subordinate employment relationship cannot, since in such cases both the condition of ownership of part of the share capital and the management position must be examined separately, on a case by case basis.
Therefore, once the abstract possibility of establishing an autonomous and parallel subordinate employment relationship between the company and the individual who represents and manages it, has been accepted, it shall be necessary to confirm that said individual is actually performing typically subordinated activities other than those attributed to his office, by evaluating each case individually to determine whether the following conditions apply:
- the decision-making power exercised to express the will of the company is entrusted to the board of directors of the company as a whole and/or to another corporate body appointed by the company which exercises an external power, so that the establishment and management of the employment relationship can be linked to a company direction as distinct from that of the person holding the office (director, etc.) ;
- there is strict evidence of the existence of the bond of subordination, i.e. that the worker concerned, despite his corporate office, is hierarchically subject (managerial, organisational, disciplinary, supervisory and control power) to another individual or to the other components of the corporate body to which he belongs, a power which inevitably limits their freedom of action and choice in the exercise of their function and work activity, in addition to the existence of elements that are symptomatic of subordination, such as the the frequency and predetermination of wages paid, observance of contractual working hours, classification within a specific company organisation, the absence of even a minimum entrepreneurial organisation, the absence of risk for the worker, the distinction between amounts paid as wages and those deriving from company income, etc.;
- the individual is actually performing activities other than those attributed to his office; in particular, they must be activities that go beyond the scope of and therefore are not included in the management powers that derive from the office held or from the proxies granted
CONSEQUENCES UNDER COMPANY LAW
Conflict of interest
There is a category of actions that a director who is also employed by the company might perform and that seem to be in clear conflict of interest: for instance, those concerning the employment relationship of the director or the category of employees to which the director belongs. These actions may be in blatant conflict of interest (a director who decides to grant himself a salary increase in his capacity as an employee, or even a director who hires himself as an employee of the company), or slightly less so (a director who is a manager of the commercial department of the company and gives the department a significant bonus to be distributed among those employees). For the joint-stock companies, such acts in conflict of interest are regulated by Article 2391 of the Italian Civil Code, which provides that the director must inform the members of the administrative body and the board of statutory auditors “of any interest (note: even if not conflicting) of his, on his own behalf or on behalf of third parties, in a given transaction of the company”, abstaining from the resolution if he is a managing director. Decisions on matters in which the the Chief Executive Officer has a personal interest made with said CEO having the casting vote may be challenged if the company is prejudiced as a result thereof. For the s.r.l., art. 2475-ter regulates such situations, also providing for the cancellation of contracts executed in situations of conflict of interest.
Consequences for the employee’s social security position and effects on tax deductibility for the company
In cases such as those described here, INPS goes so far as to reject the existence of a subordinate employment relationship and, therefore, the right of the employee who is also a director in a position that is incompatible with the bond of subordination to receive a pension. The worker will be entitled to a refund of the contributions paid, plus interest, but not to the a pension. This is a very severe sanction that can lead to a difficult dispute between the company and its employee who has been called to be part of the administrative body. Particular care must therefore be taken in the case of employees who are called upon to be members of the administrative bodies. With regard to these employees, it should be noted that, in most cases, they are ranked as managers of the company, since a lower ranking would be imprudent and incompatible with the performance of senior functions such as those of the director of a company. A not insignificant aspect, then, concerns the deductibility of the costs incurred for the employment contract that is considered controversial because of the lack of the bond of subordination, which is the factor determining the compatibility of the director position with a position held under a subordinate employment contract.
The office remains at your disposal for any further clarification.
Best Regards
Arianna De Carlo – Senior Payroll Specialist & Labour Consultant
Contact: adecarlo@ldp-payroll.com