Social security: Attention board members!

08 Oct 2018

If a company does not pay its social security contributions, it is not just a trivial offence. For legal entities, joint and several liability for compensation to social security is assumed by board members, executive boards or liquidators. A recent decision by the Federal Supreme Court reminds the bodies of this obligation – and of the risks of non-compliance.

On 26 June 2018, the Federal Supreme Court passed verdict 9C_599/2017 in a case that transpired as follows: Person X was a board member of an SME that had 25 employees and a simple administrative structure. Person Y was CEO. Starting in May 2012, the responsible cantonal compensation office began issuing collection requests for the SME and as of October 2013 loss certificates were issued. The compensation office informed board member X promptly regarding a possible liability for damages. Board member X immediately left the executive board. Shortly thereafter, person Y was entered as the sole board member and CEO in the Commercial Register. In April 2015, bankruptcy proceedings were initiated for the company. Shorty thereafter, the former board member X received a legal order from the social security administration office requesting reimbursement of CHF 150,000 for unpaid social security contributions, based on an officer's liability as per article 52 of the Federal Act on Old-Age and Survivors' Insurance (AHVG).

Board members are liable

This type of officer liability occurs if, cumulatively, a damage, a breach of duty by the officer, a causal relationship and adequacy exist. The courts place very high demands here on due diligence for executive boards. In the case of SMEs, they are expected to be thoroughly informed on the course of business and any outstanding invoices.

Verdict with grave consequences

The responsible cantonal court rejected the defence made by the board member. He claimed that the social security administration office had not informed him of the outstanding payments in a timely manner. Board member X knew that the CEO had already been liable for damages due to unpaid social security contributions as part of the bankruptcy proceedings of another company. Based on this prior history, board member X should have paid much closer attention to the orderly payment of the contributions. He could have gathered information regarding the matter (e.g. bank statements and debit notes or an account statement from the social security administration office) and implemented measures for proper and lawful payment. According to the law, his lack of competence to actually make the payments does not exonerate him.

The Federal Supreme Court confirmed the judgement of the prior instance. As such, board member X must take responsibility for the mistakes made by CEO Y.

Identify and minimise risks

The obligations of executive board members differ based on the size of the company. They cannot all be painted with one brush. Executive board members in large companies cannot check and ensure the payment of every social security contribution. Here they primarily monitor the management’s work. In small companies, on the other hand, the executive board (member) has more responsibility. He/she needs to be more involved in the daily operation and keep a watchful eye on existing information. If need be, he/she also needs to do additional research into such matters.

In a nutshell

  • Executive board members assume joint and several liability for the (correct and timely) payment of social security contributions. These circumstances are recalled in a Federal Supreme Court ruling published in June 2018.
  • The judgement was made in a case where the executive board member failed in his obligation to perform due diligence by not gathering confirmations and information from neutral sources. In the case at hand, this led to personal liability of the board member.
  • Executive board members are well advised to precisely know their obligations and carry them out even if there is resistance to them doing so.

 

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