What Rules Apply when giving Notice to Non-Shareholding Director

There were discussions of whether the normal rules for terminating employment set out in §621 BGB are also applicable for non-shareholding directors – at least insofar as the employment contract refers to statutory termination provisions. The Federal Labor Court issued a new ruling on June 11, 2020 (re 2 AZR 374/19).   

You are out: Firing shareholding company director

Relevance for Minor Shareholding Directors

In practice, this decision is relevant to minority shareholding directors of companies. It is true that in the case of majority shareholding directors, the question of kicking out a director holding a majority of shares is only theoretical nature, as they cannot be terminated against their will.

Contractor vs. Employee

Ruling case law and professional literature have disputed whether the notice periods for employment relationships are based on §621 BGB or §622 BGB, which apply in the case of ordinary termination employment relationships of shareholding directors. The difference between the two lies in whether the rules of employees or those of contractors apply. While employees enjoy a lot of legal protection, contractors are generally “hired and fired” at will.

The parties in dispute were arguing over the validity of an ordinary notice of employment. The plaintiff had been appointed by the defendant as director and was hired on the basis of an employment contract at a basic annual salary of 100,000€ gross. The employment contract referred to "the statutory period of notice" to determine the cancellation period.

Decision

The plaintiff's appeal to the BAG was unsuccessful, as - in the opinion court - there were no grounds for invalidity in the termination. The BAG clarified that the plaintiff's employment relationship had been terminated with the six-week notice period stipulated in §621 no. 4 BGB and that §622 II BGB did not apply. The Federal Labor Court held that a third-party or minority director are to be considered as “normal” employees and not contractors. A director who is not the majority shareholder GmbH and does not have an employment relationship with the GmbH and therefore cannot invoke the extended notice periods of §622 II BGB. In older decisions, BGH considered a minority director as an employee and with the latest modification of labor law, the legislature instead linked the notice period provision to the employment relationship with the new version of §622 BGB. Furthermore, there was no indication that the regulation notice periods for (third-party) directors was located in §622.

Hint

With its decision, the BAG has now clearly taken a position on the question of notice periods for external as well as minority directors.  

This opens up new structuring options for companies in practice: Insofar as the statutory notice periods are referred to in the director's employment contract, there is no longer anything to prevent the application of §621 BGB. As a result, companies now have the option of introducing extremely short notice periods if structured accordingly. Therefore it makes a difference when drafting contracts whether a monthly or annual salary is agreed upon, as the provision of §621 BGB is linked to the assessment remuneration and not to the duration employment relationship.

When concluding new contracts, (external) directors should therefore be aware that the BAG's decision inevitably results in reduced protection against dismissal, insofar as no other agreements deviating from the statutory provisions are made in the employment contract.

Related Articles:

Immediate Termination of a Director’s Employment Contract for Compliance Violations

Enforcement of the Dismissal of Director per Interim Legal Protection

Giving Notice as Director of a Corporation

Director Giving Notice in Times of Need

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