Vacation compensation for external managing directors

In its judgment of 25 July 2023, the Federal Labour Court followed the decision of the Federal Court (Bundesgerichtshof, BGH) on the applicability of the General Act on Equal Treatment (Allgemeines Gleichbehandlungsgesetz, AGG) to external managing directors as employees within the meaning of European Union law.

Federal Labour Court, judgment of 25 July 2023 - 9 AZR 43/22

Facts

The principal issue of this litigation was the question of vacation compensation for an external managing director of a GmbH (the plaintiff).

The plaintiff was initially employed for a long time as an employee at Z GmbH as part of the defendant's group of companies. Since 2012 she was engaged as managing director for the defendant and had been employed in this function at the Z GmbH office since 2018.

According to the instructions of the management, the plaintiff's daily working hours were set at 7:00 am to 6:00 pm. In addition, the plaintiff had to perform certain activities: in the morning, she was required to make so-called "cold calls", and in the afternoon she had to offer services on her own initiative and work in the field. In total, she had to provide evidence of 40 telephone calls and 20 visits per week.

In September 2019, the plaintiff resigned from her position as managing director. The following month, she terminated her employment relationship with effect to 30 June 2020. In the period from 30 August 2019 until the termination date, she called in sick and no longer provided any services.

The plaintiff claimed vacation compensation from the defendant, as she only took 11 days of vacation for 2019 and none for 2020. As justification, she claimed that she was bound by instructions like an employee. From the defendant's perspective there was no entitlement to vacation compensation, due to the lack of an employment relationship.

The lower courts had already ruled in favour of the plaintiff. The Federal Labour Court now agreed and confirmed entitlement to vacation compensation.

Entitlement to vacation compensation as an external managing director

From the interpretation to be made in this respect in line with the relevant European directive, it follows that the plaintiff, as an external managing director, can demand vacation compensation in accordance with sec. 7 par. 4 of the German Federal Vacation Act (BUrlG).

In principle, every employee is entitled to paid vacation in every calendar year in accordance with sec. 1 BUrlG. German law stipulates that vacation must be compensated if it can no longer be granted in full or in part due to termination of the employment relationship, sec. 7 par. 4 BUrlG.

In this context, it should be noted that the BUrlG implements the requirements of Art. 7 of European Directive 2003/88/EC (Directive concerning certain aspects of the organisation of working time). Accordingly, national courts must also interpret the BUrlG on the basis of the wording and purpose of the said directive, insofar as this is possible, in order to achieve the defined objective of the directive. As a result, the interpretation of the scope of sec. 2 BUrlG is based on the definition of employee under European law.

According to the European Court of Justice (Europäischer Gerichtshof, EuGH) the definition of an “employee” encompasses everyone who performs an actual and genuine activity. In this respect, however, activities that are so minor in scope that they are completely subordinate and insignificant, are to be disregarded. The essential factor for classification as an employee within the meaning of European law should be the provision of services within a certain period of time in accordance with instructions, for which remuneration is received in return.

Taking this into account, managing directors may also qualify as employees within the meaning of European law. According to the case law of the European Court of Justice, an overall assessment must be made in this respect, taking into account the conditions under which the appointment was made, the nature of the tasks assigned, the framework in which these tasks are performed, and the scope of the managing directors´ competences. The circumstances under which the managing director can ultimately be dismissed, and the extent to which the managing director is subject to control within the company, must also be taken into account. In addition, the overall assessment should include the extent to which the managing director participates in the decision-making process of the company.

Against this background, the Federal Labour Court came to the conclusion that the plaintiff was to be considered as an “employee” within the meaning of European Union law. The relevant fact was that the plaintiff was bound by instructions resulting in particular from the determination of their daily working hours and the specification of typical employee tasks.

Practical relevance

The classification of external managing directors as “employees” within the meaning of European Union law will also have to be applied to other provisions based on European Union law. The Federal Labour Court and the Federal Court have paved the way for uniform case law based on the understanding of an “employee” under European law, taking into account the particularities of the individual case.

However, this will not only be relevant in ongoing contractual relationship and in the context of termination scenarios. Rather, the criteria of an employee under European law and its consequences for prior legally valid drafting of the contractual documentation for external managing directors must be taken into account in advance.