Third-Party Managing Director Does Not Count for Company Size under Dismissal Protection Act

In its decision of April 27, 2021 (File No. 2 AZR 540/20), the Federal Labor Court of Germany decided that third-party managing directors of a limited liability company ("GmbH") do not count as employees with respect to the calculation of the company size pursuant to Section 23 (1) sentence 3 of the Dismissal Protection Act ("small business clause").

Facts

The ruling of the Federal Labor Court (Bundesarbeitsgericht, "BAG") is based on the following facts:

The plaintiff had worked as an employee for the defendant since December 2016. The defendant terminated the employment relationship with due notice in a letter dated June 21, 2019. At the time of the notice of termination, the defendant's business comprised 8.5 employees as well as 2 third-party managers.

The plaintiff filed an action against the termination. He took the position that the termination was socially unjustified and therefore invalid. In particular, he held that the Dismissal Protection Act (Kündigungsschutzgesetz, "KSchG") was applicable to the employment relationship at hand, as the two third-party managing directors of the defendant were to be considered employees.

The lower instance courts had already dismissed the action. The Federal Labor Court now also rejected the appeal of the plaintiff.

Reasons for the decision

According to the BAG, the termination in dispute did not require social justification pursuant to Sec. 1 (2) of the KSchG, as the material scope of the KSchG did not apply. Pursuant to Section 23 (1) sentence 3 KSchG, the KSchG is generally not applicable to small businesses which on a regular basis do not employ more than 10 employees or trainees. The court found that the defendant had not surpassed this threshold because its two third-party managing directors were not to be taken into account in the calculation of the number of employees.

However, contrary to the view of the previous instance court, the BAG did not draw this conclusion from Sec. 14 (1) No. 1 KSchG, as this section only related to the question of whether managing directors fall under the personal scope of the KSchG and may thus claim dismissal protection for themselves. According to the court, there would be no contradiction in denying dismissal protection to third-party managing directors, yet including them in the calculation of the company size pursuant to Sec. 23 (1) Sentence 3 KSchG.

The court also found that, contrary to the plaintiff's view, it is irrelevant whether third-party managing directors are regarded as employees in terms of social security law under Section 7 (1) of the Social Security Code IV ("SGB IV"), since the term “Beschäftigungsverhältnis” under social security law and the term “Arbeitsverhältnis” under employment law were not to be treated identically.

Finally, the court did not apply the interpretation of the term “employee” developed by the European Court of Justice, as it was only applicable where EU law was implemented. This was not the case with Sections 1 and 23 KSchG because general dismissal protection law was based on national legislation. Thus, the national concept of the term employee pursuant to Sec. 611a (1) of the German Civil Code remained valid.

This said, the court pointed out that the managing director of a GmbH worked for the company on the basis of a service contract, not an employment contract. This did not mean the company had no right to issue instructions to a managing director. However, the court concluded that the GmbH managing director was only bound by instructions to such an extent that the status of an employee was limited to "extremely exceptional cases", e.g., when the company had the authority to issue instructions going beyond its right to issue instructions under company law also with regard to the circumstances under which the managing director had to perform his duties, and could determine the concrete modalities of the performance of his duties by issuing work-related and procedural instructions. However, the plaintiff had not claimed such an exceptional case.

Notes for practice

As a result of the decisions of the European Court of Justice in the cases "Danosa" (decision of November 11, 2010 – C-232/09) and "Balkaya" (decision of July 9, 2015 - C-229/14), a dichotomy has emerged between a "narrow" national understanding of the term “employee” and a broader concept under EU law. This distinction has so far primarily expressed itself with respect to the issue of whether third-party managing directors of a GmbH are to be qualified as employees.

The BAG makes a distinction: The concept of employee under EU law shall apply wherever Union law has been implemented. In all other respects, however, the national understanding of the term shall continue to apply. In this respect, it is consistent not to take into account third-party managing directors within the scope of Sec. 23 (1) Sentence 3 KSchG, since general dismissal protection law is not based on EU law.

For owners of small businesses with up to 10 employees, this decision is gratifying. An existing legal uncertainty as to whether third-party managing directors are to be considered has thus been eliminated. In view of the economic implications of general dismissal protection, especially for small companies, this issue is of a considerable importance that should not be underestimated.