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Appointed as managing director and still an employee – common formal mistakes.

Specialist article in corporate law

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Appointment as Managing Director: Impact on the existing employment relationship and formal requirements

In practice, it often happens that a managing director refers to a "dormant employment relationship" after a termination and claims protection against dismissal under labor law. This article explains how the appointment of an employee as managing director affects the existing employment relationship and what formal requirements must be observed.
The question of terminating an existing employment relationship when an employee is promoted to managing director is a recurring issue in legal literature and labor courts, but without clear answers. The role of the written form requirement under Section 623 of the German Civil Code (BGB) in terminating an employment relationship remains particularly unclear (see also our blog post from November 19, 2018, on possible formal errors and their consequences when "promoting" an employee to managing director).

Legal situation since the introduction of the written form requirement according to Section 623 BGB

Since May 1, 2000, Section 623 of the German Civil Code (BGB) requires the written form for employment contracts, not only for terminations but also for termination agreements. An employment contract can only be terminated by mutual consent if there is a written agreement in the form required by Section 126 of the BGB. A valid termination agreement always requires a written document.
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Federal Labor Court: Implied termination of the previous employment relationship through a managing director’s contract?

If the managing director's service contract is concluded in the form required by Section 126 of the German Civil Code (BGB), the statements made are open to interpretation. It must be clarified whether the parties intended to terminate or merely suspend the previous employment relationship when concluding the managing director's contract. Compliance with the statutory written form and compliance with the hint theory do not require an explicit termination clause in the managing director's contract.
According to the case law of the Federal Labor Court (Federal Labor Court) (judgment of July 19, 2007, 6 AZR 774/06), a written managing director contract constitutes, "in case of doubt," the implied termination of the employment relationship, unless expressly agreed otherwise. The conclusion of a written managing director contract complies with the written form requirement under Section 623 of the German Civil Code (BGB). The employee must generally be aware that, by entering into the managing director contract, they are relinquishing their status as an employee. The contractual relationships are restructured, and the previous contract loses its significance. Without special circumstances, which must be explained by the terminated managing director, it is not clear why the old contract should continue to apply.
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Did the right person sign?

The Federal Labor Court (BAG) has so far generally determined that a written managing director's service contract meets the formal requirements of Section 623 of the German Civil Code (BGB) for the termination of employment contracts. However, it has not yet been clarified who on the company's side must sign the contract. In particular, it is unclear whether the shareholders of a GmbH are responsible for concluding a termination agreement with an employee promoted to managing director. The Federal Labor Court has not yet taken a final position on this.

Fundamentally separate responsibilities for service contracts and employment contracts

According to Section 46 No. 5 of the GmbHG, the shareholders are responsible for the appointment and dismissal of managing directors of a GmbH. This also applies to the conclusion and termination of the managing director's service contract. Case law affirms this "annex competence" due to its proximity to the appointment and relies on an analogous application of Section 46 No. 5 of the GmbHG.
However, the GmbH as employer is responsible for terminating an employment relationship and is represented by its managing directors in accordance with Section 35 (1) and (2) GmbHG.

Annex competence also for the conclusion of the termination agreement?

The question is whether the shareholders, by virtue of their "ancillary authority" and in derogation from Section 35 (1) and (2) of the GmbHG, can also be responsible for concluding a termination agreement with an employee promoted to managing director. Courts of appeal support such ancillary authority for the shareholders' meeting by analogy with Section 46 No. 5 of the GmbHG, based on the proximity to the matter and a potential risk of abuse.
However, this view should be viewed critically and has not been decided by the highest court. There is no unintentional regulatory gap and no comparable interests. The establishment of an employment relationship and the termination of an employment relationship are different contractual relationships, so there is no functional connection.
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Jurisdiction of the labor courts in disputes concerning the termination of the previous employment relationship

In practice, the problem of terminating the previous employment relationship often arises upon appointment as managing director, particularly after termination. Employees and managing directors then frequently invoke the "dormant" employment relationship. Disputes over the continued existence of the employment relationship can be brought before the labor courts. For the additional contract, usually the managing director's service contract, the fiction of Section 5 (1) Sentence 3 of the German Labor Court Act (ArbGG) applies, and thus recourse can be had to the ordinary courts. If the managing director's service contract contains instructions similar to those in an employment relationship, the labor courts have jurisdiction over both contractual relationships.
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Recommendations for employers when terminating an employment relationship

Employers should observe the provisions of Section 623 of the German Civil Code (BGB) when appointing employees as managing directors. If the employment contract is terminated without proper form, the employment relationship remains in effect as a "dormant employment relationship," which may result in protection against dismissal under the German Dismissal Protection Act (Kündigungsschutzgesetz). To avoid this, employers should observe the following:

  • The termination agreement should be regulated either separately or explicitly in the new employment contract.
  • For an effective cancellation, a written document signed by both parties is required.
  • In the case of third-party employment or the assumption of managing director positions in affiliated companies, a tripartite contract should be concluded between the managing director, the previous employer and the new company.
  • It is recommended that the managing directors co-sign the termination agreement as corporate representatives.

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