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Dismissal Protection Act not applicable to managing directors despite employee status

While recent EU law developments on the potential employee status of managing directors (cf. ECJ, June 9, 2015, docket no. C-229/14 – Balkaya) and decisions of the German Federal Labour Court regarding the procedural issue of giving managing directors access to the Labour Courts under certain circumstances have somewhat blurred the dividing lines between managing directors and employees, a recent decision of the Higher Labour Court of Berlin-Brandenburg seems to bring some clarity to the issue.

It has been a fundamental principle of German employment law that all protective laws and regulations relevant for employees do not apply to the contractual relationship between a company and a managing director. However, former managing directors have repeatedly challenged this principle, e.g. in an attempt to gain protection under the Dismissal Protection Act (Kündigungsschutzgesetz, KSchG), while Sec. 14 para. 1 of the Dismissal Protection Act expressly states that employee-specific dismissal protection does not apply to members of a representative body of the company.

In its decision of August 25, 2016 (docket number: 21 Sa 1493/15 21 Sa 575/16) the Higher Labour Court Berlin-Brandenburg clarified that Sec. 14 para. 1 of the Dismissal Protection Act refers to the formal position of managing director, irrespective of the nature of the underlying contractual situation.

The plaintiff argued that he was only formally appointed managing director but actually worked as a normal employee during the entire relationship to the defendant, so that he should benefit from the provisions of the Dismissal Protection Act which provides for strong dismissal protection after six months of employment and in operations of more than 10 employees.

The court decided that Sec. 14 para. 1 of the Dismissal Protection Act was applicable as this provision refers to the formal position of managing directors. The termination therefore did not have to be socially justified according to the strict rules of the Dismissal Protection Act. The law only refers to the function as a representative body and the legal representative power as such at the time of termination. According to the court this was not only confirmed by the wording of the provision but also by the provision’s systematic context. Also, the content and rationale of the provision indicate that only the function as a representative body is relevant as the provision aims at achieving a balance between corporate and contractual law and at making it possible to terminate representative bodies without being bound by dismissal protection.

The decision has been appealed and it remains to be seen whether the Federal Labour Court will confirm or overrule and grant more protection to (former) managing directors by applying the Dismissal Protection Act.