BAG on External Managing Directors as Employees

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Entitlement of External Managing Director According to the Federal Vacation Act

An external managing director of a GmbH (limited liability company) can be considered an employee within the meaning of the Federal Vacation Act (Bundesurlaubsgesetz – BurlG) and therefore may be entitled to corresponding claims. This was clarified by the Federal Labor Court in its judgment of July 25, 2023 (Case No.: 9 AZR 43/22).

Whether an external managing director can be considered an employee is a frequent point of contention in employment law. If the managing director is not a shareholder of the GmbH and works under strict directives, this can indicate the employee status of the managing director, as advised by MTR Legal Attorneys at Law, which provides guidance among other areas in employment law.

The Federal Court of Justice also confirmed with its judgment on March 26, 2019, that an external managing director of a GmbH can be considered an employee under certain conditions (Case No.: II ZR 244/17). The Federal Labor Court has now followed this view and decided that the Federal Vacation Act applies to an external managing director as well.

External Managing Director Worked Under Directives

In the underlying case before the Federal Labor Court, the plaintiff was initially employed as an employee and since 2012 as an external managing director at a GmbH. She was deployed in one of the company’s offices and worked there predominantly under directives. She had to adhere to regular working hours, had prescribed tasks to complete, and in some cases, had to provide proof of this.

The plaintiff’s service contract provided for a holiday entitlement of 33 days per year after six years of service. She had to apply for vacation through the company. In 2019, she took only 11 days of vacation and none in 2020.

Claim for Vacation Compensation

In September 2019, the plaintiff resigned from her position as managing director. The contractual relationship between her and the company was terminated by dismissal on June 30, 2020. The plaintiff legally claimed vacation compensation for the years 2019 and 2020, demanding payment of approximately 11,300 euros. She argued that despite her formal position as managing director, the labor courts were competent since she was employed under an employment-like relationship with directives, and as an employee, she could demand vacation compensation.

The lawsuit was largely successful at the Labor Court and the Higher Labor Court. The Federal Labor Court also confirmed the plaintiff’s claim for vacation compensation amounting to approximately 11,300 euros in the appeal process.

BAG Confirms First Instance Judgments

According to the Federal Vacation Act, every employee is entitled to paid recreational leave each calendar year. If this cannot be granted due to the termination of the employment relationship, the employee is entitled to a corresponding compensation claim. Persons similar to employees are also considered employees, the BAG initially explained. For the Federal Vacation Act, the concept of an employee under Union law is decisive.

A key characteristic of an employee is that someone performs services for another according to their directives over a certain period and receives compensation in return. According to the jurisprudence of the CJEU, it is not excluded that a management body of a company can be an employee in the sense of European Union law. This also applies if the degree of dependency or subordination of a managing director is less than that of a “usual” employee, the court further explained.

Employee in the Sense of Union Law

For the assessment of employee status under Union law, what is crucial are the conditions under which a managing director was appointed, the nature of the tasks assigned, and the level of directives. Accordingly, the plaintiff was to be classified as an employee. She had to comply with working hours, worked under directives, and the nature of the tasks assigned, which corresponded to the typical tasks of an employee, indicated the employee status, according to the BAG.

If an external managing director is to be classified as an employee, this has implications not only for vacation entitlements. Employers should therefore review the status of their management bodies.

MTR Legal Attorneys at Law advises employers, employees, and executives in employment law.

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