The social security authorities have launched a campaign to analyze the classification of senior management personnel, directors and board members of commercial companies. Against this backdrop, we review the differences between classifying a relationship under the general social security regime or under the special regime for self-employed workers and their implications
In recent months, many companies have received notices from the social security authorities informing them that it had been detected that the company in question had not identified any person in the system as senior management personnel or as an executive member of the managing body (with or without a corporate relationship).
Taking the view that this situation was, at the very least, unusual, the social security authorities issued a request to the company in question asking it to explain the reason for this situation and, if applicable, to rectify it within a given time period. The social security authorities also warned that, if the company did not answer the request for information, they would inform the labor inspectors.
The above confirmed the existence of a campaign by the social security authorities to analyze the status of the relationships of senior managers, directors and/or board members with commercial companies.
The information request can have different effects or implications depending on whether the classification is under the general social security regime (“RGSS” by its Spanish abbreviation) as an employee or worker treated as such, or under the special regime for self-employed workers (“RETA” by its Spanish abbreviation).
Indeed, the statement, if any, made to the social security authorities may also have an impact on other aspects such as (i) the nature of the contractual relationship with the person in question (employment or independent contractor), (ii) whether the relationship is governed by the Workers’ Statute, by the senior management legislation or by commercial law provisions, (iii) the severance pay to which the person may be entitled if their contractual relationship with the company is terminated in the future and the tax treatment of such severance, or (iv) whether or not the person will be entitled to unemployment benefits.
In light of the requests sent out, this is perhaps a good time to offer some clarification regarding the nature of the relationship between a company and the people by which it is directed and managed, and to consider what all this implies.
Both the special senior management employment relationship and the executive director relationship are positions that, although they are different in nature (the former employment and the latter independent contractor), entail performing administration and management functions at the company. However, the two relationships are incompatible with each other, given that the existence of a dual relationship to perform the same functions would be an artificial arrangement.
Thus, the majority of the case law holds that where a person who has a special senior management employment relationship with the company is appointed as an executive member of its managing body, the relationship ceases to be one of employment and becomes, exclusively, an independent contractor relationship.
The conditions of special senior management employment relationships are governed by the provisions of the person’s contract and by Royal Decree 1382/1985, of August 1, 1985, regulating the special employment relationships of senior management personnel (RD 1382/1985). The employment relationship is fully included under the RGSS like that of any other employee of the company. In other words, from a social security perspective, the fact of identifying a person as a senior manager does not have any special significance, as the person will have to pay social security contributions and will receive all of the benefits generally provided for in the RGSS.
However, recognizing the existence of a special senior management employment relationship can have implications in other areas.
As noted, the special senior management employment relationship is governed by RD 1382/1985, rather than by the Workers’ Statute (save for a contractual clause or legal reference). This means, for example, that, unless higher severance has been agreed on in the contract, the company can withdraw from the relationship with the senior manager by paying severance equal to 7 days’ pay per year worked up to a cap of 6 months’ pay (severance parameters that are significantly lower than those applicable in the termination of an ordinary employment relationship, which moreover must always be based on relevant ground).
As for the social security classification of members of the board of directors, they must be classified under the RGSS as workers treated as employees or under the RETA depending on their degree of ownership of the company.
Paragraph c) of article 136.2 of the General Social Security Law (“LGSS” by its Spanish abbreviation) specifies that the following are included under the RGSS as workers treated as employees: board members and directors of capital companies who perform administration and management functions and are paid for doing so or for their role as employees of the company (the role of director is incompatible with that of senior manager, but not with that of an ordinary employee) and are not in a position of control of the company which would require them to be registered under the RETA.
This inclusion under the RGSS as a worker treated as an employee means that the member of the managing body will not pay social security contributions and, therefore, will be excluded from unemployment protection and from the Wage Guarantee Fund.
However, again, the significance of recognizing the existence of an independent contractor relationship as a director goes beyond merely classifying the worker under one or another other social security regime, and beyond whether or not the worker will receive unemployment benefits.
Accordingly, if a senior management employment relationship becomes an independent contractor relationship as a director, the contractual relationship will no longer be governed by RD 1382/1985, but rather by the independent contractor contract that is signed with the company which will regulate the new relationship with the company (see article 249 of the Capital Companies Law), and the director will not be entitled, among other aspects, to any severance pay in the event of removal from the post unless it has been agreed on in the contract.
Given the above, companies would do well to carefully analyze the status of their executives, board members and directors, particularly in light of the steps being taken and information requests being issued by the social security authorities on a massive scale.
Garrigues Employment & Labor Law Department