25.10.2007  Arbeitsrecht • 

Promoting an employee to managing director status – avoiding employment law traps

The promotion of an employee to the position of a managing director (Geschäftsführer) of a German Limited Liability Company raises certain issues as to his legal status. The same applies in the opposite case, i.e., if a managing director is removed from his/her position as managing director and continues to work as an employee for the same company. The German Federal Labour Court has recently addressed these issues.

A managing director is not an employee, but the legal representative of a company and thus is not protected by German labour law. Thus, when promoting an employee to a managing director, the company normally enters into a service contract with the former employee which replaces his employment contract. In this situation the parties often ignore the preceding long-time employment relationship.  Once the position of a managing director comes to an end, for example because the company does not extend the fixed-term service contract, the former managing director will normally try to negotiate financial benefits by arguing that there is no service contract and that the company would have to continue the employment relationship with him even after the service contract has ended, i.e to “fall back” to his former employee status.

In 1993, the Federal Labour Court had held that the conclusion of a service contract between the former employee and the company would imply the cancellation of the employment relationship at the same time, arguing that the parties did not intend to maintain the employment contract in addition to the service contract. An exception would only be considered if the service contract was limited in time and the contractual provisions were not modified compared to the employment contract.

In 2000, section 623 of the German Civil Code was amended to provide that any termination of employment contracts as well as cancellation agreements must be made in writing in order to be effective. This caused divided opinions among courts and legal authors regarding the issue described above. On 19 July 2007, the Federal Labour Court decided that section 623 of the German Civil Code would not affect the court’s former ruling of 1993. The court stated that by signing the service contract, the formal requirements of section 623 of the German Civil Code are met.

Thus, companies do not have to explicitly deal with the question of cancellation of the employment contract to gain legal clarity. However, this assumption only applies if the parties of both the service and the employment contract are identical.

If the former managing director continues to work as an employee of the company on the basis of an employment agreement without any material modifications of his prior working conditions as a managing director, then it should be noted that unless expressly otherwise agreed, it is assumed that the period of service as a managing director would be also considered in connection with the continued employment relationship. The inclusion of the period of the preceding service contract may be relevant with regard to the minimum six months of service required in order to enjoy employment protection under the German Employment Protection Act. In general, the period of working as managing director for the company will not be considered in the employment relationship. However, according to the German Federal Labour Court, the former managing director normally  enjoys employment protection from the beginning of his employment relationship.