Managing Directors: Rights and Obligations in Germany

German Employment Lawyers

Managing Directors: Rights and Obligations in Germany

German Employment Lawyers

Managing directors of companies have a vital job when it comes to the successful running of businesses in Germany. Although it is a role that is coveted by many, it also comes with great responsibility. Without competent leadership, an entire business operation can suffer hugely. Being a managing director can be a stressful role and especially at a big company, therefore, it is vital to know your legal rights and obligations.

Should you need the advice of an employment law specialist, please make sure to contact our firm directly. At Schlun & Elseven Rechtsanwälte, our legal team will provide the representation and counsel you require.

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Drafting and Reviewing Managing Directors Contracts

Managing directors are crucial to providing leadership within a company. Without a reliable and competent leader, an enterprise may face serious difficulties.

The managing director’s contract should clearly define the managing director’s area of responsibility (e.g. finance, sales, production, etc.). Additionally, the rights of representation should be precisely regulated within the contract. In principle, the law provides for joint representation, according to which, in the case of several managing directors, only all of them have joint power of representation.

It is therefore advisable to also deal with the partnership agreement before signing the managing director agreement. This caution is especially true since the provisions in the partnership agreement take precedence over those in the managing director agreement.

The legal status of a managing director is unusual as they are not recognised as “employees” under employment law. Yet, in some cases, they are under social security law. If their shareholding within the company is less than 50 per cent, they must be part of the statutory health insurance scheme.

The lack of employee status under employment law has several important points. In concrete terms, it means the following:

  • No automatic entitlement to unfair dismissal protection: managing directors are not simply provided with the same statutory employment law protection granted to employees in this field.
  • Statutory minimum holiday: similarly, managing directors are not automatically entitled to statutory minimum paid holiday time.
  • No automatic right to maternity leave: The protection granted by the Maternity Protection Act in Germany does not automatically extend to managing directors as they are not viewed as employees.

However, these issues should be resolved in the service agreement negotiated between the company and the managing director.

Since the managing director does not enjoy protection against dismissal under the Unfair Dismissals Act (KSchG), this must be contractually compensated. This is usually done using long contract terms and excluding prior termination possibilities. If, however, termination is not excluded, long periods of notice are regularly granted. In practice, a term of at least two years is usual.

If the contract can be appropriately terminated, managing director contracts usually provide a notice period of at least three or six months to the end of a calendar quarter. It is therefore not advisable to sign an agreement that falls considerably short of these guidelines or even provides for a probationary period.

Neither the protective norms of the Continued Remuneration Act (EFZG) nor those of the Federal Leave Act (BUrlG) applies to the managing director. Thus, the law does not allow the managing director to be entitled to continued remuneration in case of illness. There is also no statutory holiday entitlement. To compensate for this and prevent complicated legal disputes, it is necessary to provide the managing director’s contract with appropriate regulations.

In practice, managing director contracts often provide for continued payment of remuneration for at least three months from the beginning of the illness. The leave is usually granted for 30 working days. Do not get involved with less!

As well as these issues, other factors such as confidentiality agreements, pension rights and exclusion clauses (from working with competition) can be inserted. Negotiating a fair service agreement is more than achievable with the proper legal assistance in your corner. Having reliable legal counsel means that you can rest assured regarding your entitlements as a managing director.

Duties towards the Company as a Managing Director

Managing directors are expected to perform their role in the manner of a prudent businessperson. This is laid out in law by § 43 Limited Liability Companies Act. In terms of making business decisions and entering contracts, the managing director is expected to assess the risk involved and act accordingly.

Managing directors have considerable power in decisions about the company’s running. However, they are expected to take advice and counsel on board, especially regarding essential business decisions. If they conflict, they should put the company’s interests first, ahead of their own interests. Poor decision-making resulting in financial losses for the company can mean answering to the shareholders.

As a managing director, there is an obligation not to disclose essential information concerning the company to rival enterprises. Disclosure of business secrets can result in criminal charges depending on the circumstances. The managing director must also ensure that the company does not breach German competition law. Antitrust practices can lead to heavy financial sanctions for the company.

The complete duties of the managing director should be outlined in the Articles of Association and the service agreement. These documents will act alongside their other legal obligations.

Financial Management Obligations

The managing director is responsible for overseeing the financial running of the company. Although there may be a financial manager overseeing the finances, the managing director is ultimately responsible for ensuring that the bookkeeping records of the company are accurate.

Ensuring that the appropriate taxes are paid and that shareholders receive their entitlements in the correct manner is an important aspect of the role. One element of this responsibility is ensuring that the annual financial statements are submitted on time and in the right manner.

It is in the financial running of the company that the threat of accusations of white-collar crime offences can emerge. Should a managing director be found guilty of crimes such as embezzlement, fraud or incorrect filing they can face losing their role, being barred from future directorships and in some cases even prison sentences.

At Schlun & Elseven Rechtsanwälte, our business criminal lawyers advise managing directors in all matters relating to such cases.

Liability and Insurance for Managing Directors

A susceptible area in the context of management is liability. The managing director must continuously make risky decisions and ultimately be responsible for them. These affect numerous areas of law. For example, consequences can occur concerning competition law, the tax authorities or environmental law. The responsibility for manufactured products, subsidies or other grants carries an immense liability risk.

A specific liability limit can be set during contract negotiations as a preventive measure. In the course of this, there is a great interest of the managing director, but also of the company, to define responsibilities precisely. Taking into account the interests of creditors, liability towards the company can be limited to gross negligence and intent. Furthermore, a reduction of the five-year statutory limitation period for claims for damages can also be agreed. The limitation period can also be shortened (e.g. to six months).

Concerning the agreement on clauses limiting liability, it is advisable to seek legal advice given the expected resistance of the partners and the conditions for effectiveness to be observed. The invalidity of the clauses may result from the fact that they place too significant a burden on the company’s creditors or are not per the principles of capital maintenance.

Due to the high risk of the managing director, there is still increasing use of so-called D&O insurances. The company takes such Directors and Officers Insurance in favour of the managing director. It guarantees sufficient coverage in the event of claims for damages from outside parties (such as health insurance companies or the tax office).

Social Insurance Obligations of Managing Directors

A managing director is generally not considered an employee; however, employee status is a prerequisite for many social security regulations. According to § 2 (2) SGB IV, persons employed for remuneration or their vocational training are covered by social insurance. § 7.1 SGB IV defines employment as non-independent work, especially in an employment relationship. In this context, the obligation to follow instructions and integration into the work organisation are indications of such employment (§ 7.1 SGB IV).

According to Federal Social Court case law, the external managing director of a GmbH is, in principle, considered an employee. An external managing director is a managing director without an equity interest who is, in principle, subject to a certain degree of dependency within the scope of his employment.

However, even if instructions concerning work organisation do not bind them, a dependent employment relationship can be affirmed if they do not bear any entrepreneurial risk (BSG, BB 1973, 1310). This is usually the case if the external managing director receives a remuneration which does not depend on the profit made by the company but is fixed from the outset.

Due to the resulting employee status, the latter is subject to insurance and contribution obligations. In the case of social contributions in arrears, the health insurance company can assert claims for damages against the managing director. In case of doubt, it may be advisable to carry out a so-called status determination procedure to ensure that social security contributions are correctly assessed in the pay