Issue: August 2018

GERMANY - No Dismissal Protection for Managing Directors in Germany

By: Dr André Zimmermann

In practice, managing directors (Geschäftsführer) frequently try to attack the validity of a dismissal by bringing unfair dismissal claims. In a recent decision, the Federal Labor Court (Bundesarbeitsgericht) has again rejected such claims. The court reiterates that managing directors do not enjoy rights of protection against dismissal if their appointment as managing director was in place at the time notice of termination was given.

The German Dismissal Protection Act Does Not Apply to Managing Directors

Pursuant to section 14(1) no. 1 of the German Dismissal Protection Act (Kündigungsschutzgesetz, KSchG), the provisions on dismissal protection

do not apply, within the operation of a legal entity, to the members of a corporate body which has been appointed to legally represent the legal entity“.

Accordingly, the general rights of dismissal protection under the Act do not apply to legal representatives of legal entities, such as for instance the managing director of a German company with limited liability (GmbH). Notably, unlike other employees, the dismissal of a managing director therefore does not require any social justification.

The Facts of the Case

The claimant had been employed by the defendant since 1996. In 2011, the defendant appointed the claimant as managing director. Alongside the claimant, the defendant company had an additional 98 managing directors. Detailed signature guidelines were in place containing regulations on the managing directors’ powers to represent the defendant.

In February 2014, the defendant gave notice to terminate the contractual relationship with the claimant. The claimant brought an action for unfair dismissal. Before the end of the notice period, he resigned from his office as managing director effective immediately.

The claimant argued the dismissal was invalid due to lack of a ground for dismissal. Furthermore, the claimant argued that he had been an employee of the defendant and that his appointment as managing director had merely been a formality. Therefore, he argued, dismissal needed to be socially justified. Both the Labor Court and the Regional Labor Court dismissed the action for unfair dismissal.

Decision of the Federal Labor Court

The claimant’s appeal on points of law before the Federal Labor Court was unsuccessful. Contrary to the view of the claimant, the dismissal was not required to be socially justified pursuant to section 14(1) no. 1 KSchG.

The Federal Labor Court confirmed its previous case law according to which the provisions of the first chapter of the KSchG do not apply to managing directors if the managing director’s appointment to a corporate office persists at the time the notice of dismissal is received. The Court held that it is irrelevant if an appointment to a corporate office is ended after notice of dismissal has been received.

According to the Court, section 14(1) no. 1 KSchG applies even if the relationship under the law of obligations which underlies the corporate office is substantively an employment relationship. There are no considerations under European law which would run counter to such conclusion.

At the same time, any restrictions placed by the parties on the managing director’s power of representation, as contained in the signature guidelines, are irrelevant. This is because it is not possible for the statutory power of representation to be restricted vis-à-vis third parties.

Furthermore, the Court held that the exclusion from the general rights of protection against dismissal did not contravene article 12(1) of the German Constitution nor did it constitute a breach of article 3(1) of the German Constitution by treating differently senior employees and members of statutory corporate representatives.

The appointment as managing director may, at best, constitute an abuse of legal process in particular cases. In the case at hand, however, there were no indications of that.

Assessment

The judgment of the Federal Labor Court is consistent with previous case law. The Court expressly makes the point that only the formal corporate office as managing director at the time the notice was received is relevant. Managing directors, accordingly, cannot rely on an alleged employee status even if they were bound by instructions, or if their power of representation was restricted inter parties.

However, managing directors are not left entirely unprotected. As explained by the Federal Labor Court, managing directors are protected by general clauses under civil law against the exercise of the right of dismissal in contravention of moral principles or good faith.

Notably, the appointment as managing director may constitute an abuse of legal process if such appointment is merely used as the pretext to a dismissal shortly afterwards. This does, however, require close temporal proximity. The mere fact that the appointment is not already revoked at the time notice of dismissal is given does not, however, indicate that the original appointment constituted an abuse of legal process.

Conclusion

The Federal Labor Court has provided legal clarity by discussing in detail the possible objections against a lack of protection against dismissal for managing directors. By doing so, the Court ends the practice frequently used by managing directors whose employment has been terminated, to turn to the courts alleging employee status and claiming rights of protection against dismissal.

André Zimmermann

Orrick, Herrington & Sutcliffe LLP