Employment Law
Newsletter Issue #1 2015

Current Development in Jurisdiction of German and European Courts concerning Managing Directors of German Limited Liability Companies

Extended Jurisdiction of Labour Courts for Managing Directors’ Lawsuits

(Federal Labor Court, decisions dated 22/10/ 2014 – 10 AZB 46/14 and 3/12/ 2014 – 10 AZB 98/14)

Legal Status of a Managing Director under German Employment Law

In the past the Federal Civil Court (BGH) and the Federal Labour Court (BAG) strictly held that Managing Directors (Geschäftsführer) of a private limited liability company (GmbH) are not employees and no protective labour laws (e.g. Protection Against Unfair Dismissal Act – Kündigungsschutzgesetz) are applicable (subject to few exceptions) to their contractual relationship with the company. Thus, a company could terminate a service agreement with its Managing Director without having any legal ground and the Managing Director had only few possibilities to take action against his/her dismissal before a civil court.

However, now and then some (former) Managing Directors took action against their dismissals before Labour Courts and claimed their contractual relationship actually constituted employment. The advantages of such an action before a labour court are numerous: Legal costs of Labour Courts are lower and must not be paid before the end of the first instance; the parties are not obliged to appoint a lawyer and can represent themselves before a labour court in the first instance; there is no obligation to bear legal costs of the opposing party in the event the case is lost. The most important advantage (and the biggest risk for a company) is the increased probability that in a particular case a court may conclude that material employment law is applicable and thus e.g. compensation payment and/or other (financial) benefits could be achieved by a (former) Managing Director.

New Rulings by the Federal Labor Court

The Federal Labour Court handed down two decisions in 2014, recently published, which allow (former) Managing Directors easier access to labour courts in particular cases. In these decisions the Federal Labour Court ruled that the legal rule of § 5 para. (1) Sent. 3 of the Labour Court Act (Arbeitsgerichtsgesetz), which deems that Managing Directors not to be employees in the meaning of this Act ceases on the date on which a Managing Director is either removed from their position by the company (Abberufung) or their position ends due to their own resignation (Niederlegung). Also, the Federal Labour Court changed its previous position about the relevant point in time for labour courts’ decision on their own jurisdiction: The relevant point in time is not the date on which the claim was filed, but the date of the court decision, which means that all relevant developments until that point of time must be taken into account.

Consequences and recommendation for practice

The rulings by the Federal Labour Court make access to labour courts for Managing Directors easier. Many Managing Directors, especially those who work in a German subsidiary of a foreign group, have very restricted internal powers and receive directives from the company to a large extent. These Managing Directors might now argue that their contractual relationship is an employment after revocation from their position much easier. It is thus important first of all to draft and execute Service Agreements with Managing Directors very carefully and as legally secure as possible. Companies have, furthermore, to be careful when choosing the right time for removing a Managing Director from his duties after the dismissal, although it is almost impossible to avoid access to a labour court: Release from work after giving notice while delaying removal from the office might trigger resignation by a Managing Director himself, while immediate removal from position could lead to problems regarding a continued representation of the company.

Managing Director of a Capital Company as "Worker" under European Law

(European Court of Justice, decisions dated 11/11/2010 – C ‐ 232/09 (Danosa) and 9/7/2015 – C – 229/14 (Balkaya))

The European Court of Justice ruled that in all areas of competence for European Employment Law the definition of an employment relationship must be done autonomously on the basis of European, not national law. The nature of the employment relationship under National Law is of no consequence as regards whether or not a person is "worker" under EU law. Thus, several years ago the Court granted protection against dismissal to a pregnant Managing Director of a Finnish LLC. The Court also ruled recently this year that members of the board of directors of a capital company (Kapitalgesellschaft) who perform their duties under the direction and subject to the supervision of another body of that company who receive remuneration in return for the performance of their duties and do not own any shares in the company must be regarded as "workers" under the Collective Redundancies Directive 98/59/EC. Before that ruling was handed down, the above mentioned provisions were not applicable to Managing Directors in Germany. When implementing the Directive into national law Germany chose to exclude members of the body of a company from the scope when determining the threshold number of employees which trigger the employer’s obligation to give a notification of mass dismissal (Massenentlassung) to the employment agency (Agentur für Arbeit). Mass dismissals without such prior notification are invalid.

Consequences and recommendation for the practice

The decisions of the European Court of Justice have a significant impact on German Labour Law provisions by which the European Law was implemented. Companies thus have to review whether German Labour Law provisions which were not applicable to Managing Directors in the past are now applicable to them.

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