AN (EXTERNALLY HIRED) MANAGING DIRECTOR OF A GMBH ACTING AS AN EMPLOYEE?
Two current decisions are addressing the question, whether an (externally hired) managing director of a limited liability company [Gesellschaft mit beschränkter Haftung – GmbH] can be regarded as employee. While being denied by the Federal Labor Court [Bundesarbeitsgericht – BAG] in its decision of 21 January 2019 (file no. 9 AZB 23/18), the Federal Court of Justice [Bundesgerichtshof – BGH] grants an externally hired managing director the status of an employee (decision of 26 March 2019, file no. II ZR 244/17). Nonetheless, the two decisions are not contradictory.
I. Previous legal situation and background
Under German law, an employee is defined as a person who is obliged by an employment contract to perform work in the service of a third party on the order of others in personal dependence. The employer’s right to give instructions may include content, execution, time and place of the work. In contrast, an employee who works for a company on the basis of a freelance employment contract can essentially design and organize his or her activities and working hours freely. If a managing director is to be regarded as an employee in an individual case, this may lead to the application of employee protection regulations as well as consumer protection regulations and the jurisdiction of the labor courts.
According to the case-law of the BGH, the managing director of a GmbH so far had to act on the basis of a freelance employment contract – and not on the basis of an employment contract. On the other hand, the BAG has repeatedly pointed out in the past that the contract underlying the activity of a managing director can also be concluded as an employment contract.
In the decisions reviewed herein, the BAG now denies the employee position of the managing director of a GmbH, while the BGH affirms it. In both cases, the suing externally hired managing directors objected against a termination given by the GmbH.
II. The managing director as an employer-like person – the decision of the BAG
In the case decided by the BAG, the managing director of a GmbH sought to bring the legal dispute about her dismissal before the labor courts. However, they only have jurisdiction in disputes in which there are employers on one side and employees or at least employee-like persons on the other.
The BAG denies the jurisdiction of the labor courts in the case decided by it. The court points out in its reasoning that the activity of the suing managing director on behalf of the GmbH did not show any degree of personal dependency which would constitute an employment relationship when all circumstances were considered as a whole. This resulted from the fact that, according to the contract between the GmbH and the managing director, the determination of the place and time of her activities was reserved for the managing director herself. In addition, the restrictions on the content of the managing director’s activities given in the specific case, such as a duty of disclosure and a reporting obligation towards the shareholders’ meeting as well as her obligation to be bound by resolutions, orders and instructions issued by the shareholders’ meeting were merely a consequence of her position as managing director.
Nor is the managing director an employee-like person because the managing director of a GmbH is not comparable to an employee in terms of his or her social position. Instead, he or she was a social antagonist of the workforce because, as an unrestricted representative of the GmbH, he or she also performs employer functions.
III. The managing director as an employee – the decision of the BGH
The BGH, on the other hand, had to deal with a case in which an externally hired managing director objected to a termination of the GmbH based on a termination option provided for in the parties’ employment contract in the event that the managing director entered the 61st year of life. It had to be clarified whether this provision infringes the prohibition of discrimination on grounds of age as laid down in the German General Equal Treatment Act [Allgemeines Gleichbehandlungsgesetz – AGG].
The question arose as to the applicability of the prohibition of age discrimination to the managing director. Pursuant to section 6 para. 3 AGG, the AGG is to be applied mutatis mutandis to managing directors when it comes to provisions on access to employment or career advancement. The case before the BGH, on the other hand, concerns regulations on the dismissal of a managing director, so that the applicability of the AGG cannot be based on section 6 para. 3 AGG. The BGH nevertheless affirms the applicability of the AGG because it regarded the managing director as an employee to whom the prohibition of discriminatory dismissal conditions pursuant to section 6 para. 1 sentence 1 no. 1 AGG was also applicable.
The BGH states that the term “employee” in the AGG is not to be equated with the term “employee” in German law because the AGG derives from EU law. For the purposes of European Union law, the manager of a company is an employee if, for remuneration, he provides services to the company, carries out his duties in accordance with the instructions or under the supervision of that company and may be dismissed from his post at any time without restriction.
In the present case, the externally hired managing director was subject to comprehensive auditing and monitoring rights of the shareholders’ meeting and its instructions. In addition, the GmbH could generally revoke the appointment of the managing director at any time in accordance with section 38 para. 1 German Law on Limited Liability Companies [Gesetz betreffend die Gesellschaften mit beschränkter Haftung – GmbHG]. In the opinion of the BGH, the activity of the managing director thus fulfilled the requirements of the EU employee concept. The managing director should therefore be regarded as an employee within the meaning of the AGG As a result, the managing director benefits from the comprehensive protection against discrimination provided by the AGG.
IV. Two courts, two conflicting decisions?
Even if it may appear differently at first glance, the decisions of the BGH and the BAG can still be aligned with each other. For the BGH, the reason for classifying the GmbH managing director as an employee is only the applicability of the term “employee” under EU law, which is broader than the German term “employee”. The BAG, on the other hand, bases its decision on the German concept of an “employee”. As a result, the BAG does not contradict its earlier case law according to which a managing director may have an employee status as it still does not fundamentally exclude the possibility that a managing director may work for the GmbH on the basis of an employment contract. In fact, it was only in the specific case to be decided that there was no sufficient personal dependence on instructions and thus no employee status of the managing director.
Therefore, the decisions do not represent a change in jurisdiction, but rather a consistent continuation of the differentiation between national and EU law concepts of employees. In its decision, the BGH expressly refers in this respect to its previous case law, according to which the managing director of a GmbH does not generally have any employee status when applying the German concept of employee. It can therefore be assumed that discrepancies between the case law of the BGH and that of the BAG on the question of the status of an employee as a GmbH managing director will continue to exist.
V. Consequences and practical advice
As in the past, the BAG’s decision described above will continue to entail the risk that the labor courts will also regard externally hired managing directors of a GmbH as employees under German law. In order to avoid this – and in particular the resulting applicability of the employee protection provisions to the managing director – special caution is required when determining the rights and obligations of the managing director of a GmbH within the framework of drawing up a contract.
Due to the BGH decision described herein, contractual termination options in connection with the age of a managing director are to be considered problematic. In its ruling, however, the BGH points out that such regulations may exceptionally be justified by company interests and company-related interests. Such provisions should therefore also be formulated with due care.
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