The sole shareholder of a limited liability company may, in principle, be an employee of the same company, even in a managerial position, provided that his/her stake in the share capital is less than 100 percent. Nevertheless, as numerous judicial decisions of the Supreme Court make it clear, this is not possible where the sole shareholder (or a shareholder whose stake in the company is about 99 percent) is a member of the management board, since in such a situation the fundamental criterion of an employment relationship, that of the employee’s subordination to his/her employer, is not met.
For example, we may cite the judgments issued by the Supreme Court on 3 August 2011 (case file no. I UK 8/11), on 12 May 2000 (case file no. II UKN 546/99), on 6 October 2004 (case file no. I PK 488/2003), on 9 September 2004 (case file no. I PK 659/2003), on 7 April 2010 (case file no. II UK 357/2009), and also on 20 March 2008 (case file no. II UK 155/2007). In the reasons given for the first of these judgements, it is pointed out that, regardless of the reasoning relating to the absence of employee’s subordination where the sole (or “almost” sole) shareholder is employed in a management position, the paid work principle is not satisfied either, given that wealth transfers take place within the pool of assets of the same shareholder. Formal ownership criteria are really irrelevant in this case.
As a result, Social Insurance Institution’s audit units frequently challenge the effectiveness of employment contracts concluded between limited liability companies and their sole shareholders and refuse to pay out the benefits when employment takes this form. Such negative rulings are also passed quite frequently where the sole shareholder is employed in a non-managerial position in a limited liability company.
While the case-law is clear that it is not permissible for management board positions to be filled on the basis of a contract of employment, it cannot be nonetheless excluded a priori that the sole shareholder may be validly and effectively engaged on that basis in a non-management board position in the limited liability company, provided however that all the criteria of an employment relationship are met, namely: the employee being in a relationship of subordination (in terms of service provided and organisational hierarchy), personal performance of work requirement, and finally performing work for and at the risk of the employer.
To illustrate, in the justification to one of such judicial decisions (judgment of 12 May 2000, case file no. II UKN 546/99), the Supreme Court stated: “The sole shareholder could become an employee of his/her single-shareholder limited liability company, but to do so he/she would need to separate the role of the owner of capital from the managerial function, by completely entrusting the running of the company to a third party or at least to the extent allowing [the sole shareholder] to be employed, without resigning from his/her membership on the management board (…), in a non-managerial position (pracownik wykonawczy), executing substantive tasks within the business of the company and required to follow in this respect the instructions of another member of the management board who is a manager employed by the company (see the judgment of the Supreme Court of 15 July 1998, II UKN 131/98, OSNAPiUS year 1999, no. 14, item 465).”
The tax authorities also presented a view that the engagement of the sole shareholder in the limited liability company under a contract of employment is acceptable. In the private tax ruling issued by the Second Mazowiecki Tax Office in Warsaw dated 31 May 2004 (US 72/ROP1/423/440/04/PS), in answer to the following taxpayer’s query: “Is it possible to conclude a contract of employment with the only shareholder who is the president of the management board in such a way that such contract would be valid under the provisions of the tax law and the related costs would be tax deductible?”, the tax office stated that “the sole shareholder may enter a contract of employment with the company if he/she is not a member of the management board. Article 22 of the Tax Code rules out the admissibility of employment contracts concluded between the company and its sole shareholder who is also a member of the management board.”