External directors are currently subject to extensive rights and obligations and represent the company externally in legal relations. The dispute whether such an external director may regardless be viewed as an employee on a case by case basis has occupied the courts very regularly. Should the existing contractual relationship between the parties be terminated, there arises the question, in particular from a financial point of view, as to how quickly such a termination can be carried out. The decisive factor here is not just whether the director can be viewed as an employee, but rather the contractual basis, as recently decided by the Federal Labour Court (Bundesarbeitsgericht, BAG) (dated 11.6.2020 – 2 AZR 374/19).
The decision of the BAG
Neither extra protection against dismissal for directors nor long statutory notice periods
The BAG held that the notice period for director service contracts (which are not employment contracts) is regulated by the statutory notice period regulation of section 621 German Civil Code (BGB) in the absence of any contractual agreements.
Unlike the notice periods for employment contracts within the meaning of section 622 BGB, this notice period system is not based on length of service, but rather on the contractually agreed remuneration time periods. This could result in significantly shorter notice periods.
The underlying circumstances on which the decision is based
The parties were in dispute over the validity of an ordinary termination and the relevant notice period length required.
The claimant worked for the respondent as a director on the basis of a director service contract concluded with the respondent. The Shareholders’ Meeting passed a resolution in February 2018 to ordinarily terminate the claimant's contract and to remove her as a director. The claimant challenged the validity of the termination as well as the termination date stipulated by the respondent with the view that she was entitled to the extra protection against dismissal of an employee. In addition, the notice periods for employment contracts pursuant to section 622 BGB should apply. The BAG rejected both claims.
Directors are only to be seen as employees in extreme exceptional cases
No extra protection against dismissal for the claimant
The BAG held that the claimant was to be categorised as a director and not as an employee, despite previous restrictions on her authority. That would only apply in extreme exceptional cases. This case did not fall under such an exception. Therefore she could not benefit from extra protection against dismissal. In fact, the respondent referred to the right in section 14 German Protection Against Unfair Dismissal Act (Kündigungsschutzgesetz, KSchG). According to this, the KSchG does not apply to the organs of legal persons and consequently does not apply to the claimant as a director. As a consequence, the claimant could not benefit from extra protection against dismissal.
Shorter notice periods for directors
Contractually agreed remuneration time periods are decisive, not the length of service
The parties had not agreed a contractual notice period for termination. Instead, the contract referred to the statutory provisions. As the director was not classed as an employee, the notice period system pursuant to section 622 BGB was not decisive for this notice period, but rather those pursuant to section 621 BGB.
Length of service played no role here. In fact, it was the contractual agreements the parties had entered into regarding remuneration that were decisive. Annual remuneration was contractually agreed upon, which meant that the notice period was governed by section 621 no. 4 BGB and therefore was six weeks to the end of a calendar quarter. The significantly longer notice period claimed by the claimant under section 622 (2) BGB was not applicable.
Comments and outlook
The decision of the BAG is welcomed and ensures flexible contractual drafting options in practice. Parties have a tool at their disposal which could be used to implement the conditions for terminating contractual relationships with directors in a legally certain manner. Should a contractual relationship need to be terminated as soon and inexpensively as possible, then shorter remuneration intervals should be determined in the contract. The notice period for termination is thus decisively determined. Reference to the statutory notice periods for termination in the service contract is sufficient for this.
The interests of the director are diametrically opposed here. During contractual negotiations they should insist on agreeing a longer notice period for termination so that they have sufficient time upon leaving the company to be able to arrange the same financial security.
One thing is clear: How a director leaves a company, financially and in terms of how long this takes, is up to the parties. Their contractual freedom enables a tailored solution in every situation.