I. Introduction and background

The two rulings which were presented in the last edition of our newsletter (2019|Q3) were primarily concerned with the question of the employee status of the external managing director of a GmbH. A managing director is regularly not classified as an employee under the rules of national law, but his employment relationship is subject to service contract law.
This differentiation, however, was irrelevant for the BGH in that particular case. In the opinion of the BGH, the employment contract in the present case had not been properly concluded between the company and the managing director, so that the legal consequences of such a situation had to be decided.

II. Application of the basic principles of the defective employment relationship

Following its previous jurisdiction on joint-stock companies [Aktiengesellschaft] and on limited partnerships [Kommanditgesellschaft], the BGH has now also assumed for the employment of a managing director at a GmbH that the principles of a defective employment relationship are to be applied mutatis mutandis. These principles deriving from the jurisdiction on the employment contract imply that for the duration of the employment of the employee the employment relationship has to be treated as if the contract was effectively concluded, while it could be dissolved in the future without good cause at any time.

Fiction of effectiveness for the past

Any rights and obligations for the time period of the employment relationship are regarded as “existing”. This means in particular that the employee may retain the remuneration paid to him and does not have to repay the employer. The jurisdiction takes into account the fact that in most cases the employer cannot return the work performed by the employee. The BGH is now transferring these principles analogously to the employment contract of a managing director of a GmbH, so that no services already exchanged can be reversed if (1) the managing director has already taken up work on the basis of the ineffective employment contract and (2) the contract has been concluded with the knowledge of the body of the company responsible for concluding the contract or of at least one member of that body.

Right to dissolution at any time in the future

In addition, the application of the basic principles of the defective employment relationship effects that the employment relationship can be dissolved at any time in the future without good cause. Only in exceptional cases, this right shall not exist if good faith requires the employment contract to be maintained in the future. According to the case-law of the BGH, however, the requirements for such a continuation of the employment contract are very high because the doctrine of a defective employment relationship already leads to a reconciliation of interests between the contracting parties. In the present case, the BGH also transferred this aspect of the principles of the defective employment relationship to the managing director of the GmbH.
The BGH examined such an exceptional continuation of the employment contract and rejected it in its conclusion despite the fact that prior to the conclusion of the ineffective contract an (effective) employment contract had already existed between the parties (which had been terminated in the meantime) and the managing director was also employed as managing director by other companies within the group. The fact that the managing director was prepared to work in the position until retirement was also irrelevant according to the BGH. Contrary to the managing director’s view, the time limit contained in the ineffective contract, which at the same time constituted an agreed minimum term, did not provide any enhanced protection of legitimate expectations either. For the BGH, it was rather decisive that only a short time after the conclusion of the ineffective contract its ineffectiveness was debated between the parties. In the opinion of the BGH, it was therefore not possible to build up any particular confidence in the effectiveness of the contract.

III. Causes for the ineffectiveness of an employment contract

Various causes are conceivable for the ineffectiveness of an employment contract between a GmbH and a managing director, which is why great care must be taken on both sides when drafting and concluding the contract.
In the case decided by the BGH, the cause was to be found in the conclusion of the contract. The chairman of the supervisory board had concluded the employment contract with the managing director without involving any other executive body or board member. According to the articles of association, however, the supervisory board was the body responsible for concluding service contracts with managing directors. The BGH considered the transfer of competence from the shareholders’ meeting to the supervisory board to be unproblematic. However, the action of the chairman of the supervisory board alone was not covered by any power of attorney. The supervisory board had not previously made a decision in the form of a resolution regarding the conclusion of the employment contract, so that the necessary internal decision-making process of the supervisory board body was already missing.
At the same time, however, the chairman of the supervisory board was also authorized to represent the sole shareholder of the company. The BGH, therefore, briefly examined whether the chairman of the supervisory board had passed a shareholders’ resolution by which, on the one hand, he transferred the authority to conclude the employment contract back to the shareholders’ meeting and, on the other hand, decided on the conclusion of the contract with the managing director (so-called punctual piercing of the articles of association). However, the BGH ruled out this possibility already because the chairman of the supervisory board/shareholder representative had not expressed that he would make a binding decision acting as the supreme corporate body.
The representation of the company by a person not authorized to do so (as in the case discussed herein) can lead to the invalidity of the employment contract as can violations of a statutory prohibition or the unethical nature of the agreement. The same applies if the employment contract was terminated as a result of a challenge, e.g. due to fraudulent misrepresentation by the managing director.

IV. Conclusion

The case shows that, in addition to the content of the employment contract with the managing director, greatest care is required in order to avoid the legal consequences of the defective employment relationship, which have now been transferred to the GmbH by the BGH. This is in particular due to the fact that an invalid employment contract can be terminated with immediate effect for the future. In some cases, the ineffectiveness of the employment contract might be a benefit for the company. However, the opposite may also be the case, giving the company a great interest in the continued employment of the managing director for the agreed term of the employment contract. Liability risks may also arise for the persons acting on the conclusion of an ineffective contract. The same considerations apply from the point of view of the managing director.
Hence, legal certainty on the basis of effectively concluded employment contracts for managing directors has to be the top priority and against this background it is advisable to review and, if necessary, “repair” existing employment contracts.