LAG on the continuation of the employment relationship of a GmbH managing director in the event of a company merger

With its decision of December 7, 2023 (3 Ta 273/23), the Düsseldorf Regional Labor Court decided that the labor courts also have jurisdiction over a claim for vacation compensation by a plaintiff who has been appointed as another group company’s external managing director during an existing employment relationship even if, due to the merger under German reorganization law, the plaintiff is employed by and holds the executive position with the same legal entity. The employment relationship, which was not terminated on the occasion of the appointment, has not been converted into an independent service relationship due to the business transformation. The plaintiff had been dismissed before the action was filed.

Facts

The plaintiff and the defendant B-GmbH are in dispute about the legal recourse to the labor courts or the ordinary courts in connection with claims for vacation compensation.

The plaintiff was initially employed with A-GmbH as product manager on the basis of an employment contract. Subsequently, he was appointed as external managing director of B-GmbH, which is one of A-GmbH’s affiliates. In connection with such appointment, no contractual agreement was made between the plaintiff and B-GmbH. Rather, the plaintiff and A-GmbH agreed to supplement the employment contract existing between them on the occasion of the appointment by a list of measures requiring approval which had to be complied with by the plaintiff as B-GmbH’s managing director when representing such company.

Subsequently, the plaintiff and B-GmbH agreed – the employment relationship’s other provisions were to remain unchanged –upon a different place of work for the plaintiff’s services as B-GmbH’s managing director as well as a remuneration outside of the standard pay scale. Another agreement between the parties provided for the plaintiff to work, in addition to his function as managing director, also as B-GmbH’s head of product management, with the contract’s other provisions also remaining unchanged.

Later, the plaintiff and A-GmbH agreed to terminate the employment relationship at the end of the year in compliance with the employment contract’s notice period. Before he left the company, the plaintiff received from A-GmbH “Information on the intended transfer of the enterprise within the scope of a merger (in accordance with Art. 613a (5) BGB)”. Such letter stated that A-GmbH was to be merged into B-GmbH and that the employment relationship, by operation of law, was to be transferred to B-GmbH; B-GmbH would become the new employer while the employment relationship with A-GmbH would cease.

A-GmbH was merged into B-GmbH. Soon after, the plaintiff was revocably released from his duties and dismissed as managing director a few days before the termination date provided for in the termination agreement with A-GmbH. The merger and the dismissal were entered in the commercial register. After the dismissal, the plaintiff no longer worked for B-GmbH until he left the company.

Solution

The Düsseldorf Regional Labor Court has declared legal recourse to the labor courts admissible. The plaintiff’s claim to compensation for vacation is a civil dispute between employee and employer arising from the employment relationship pursuant to Art. 2 (1) no. 3 lit. a, Art. 5 (1) sentence 1 ArbGG (German Labor Court Act).

Art. 5 (1) sentence 3 ArbGG assumes that a GmbH’s managing director is not deemed to be an employee pursuant to ArbGG for the term of his appointment as the company’s representative body, which is why recourse to the labor courts is not applicable even if his appointment is based upon an employment relationship and not upon an independent service relationship. However, such assumption ended with the plaintiff’s dismissal as managing director which took place before the action was filed.

The lapse of the legal assumption per se does not automatically result in the labor courts’ jurisdiction if the plaintiff only claims or believes to have been in an employment relationship. This is because the dismissal would not convert the managing director’s previous service relationship into an employment relationship. Rather, the plaintiff has the burden of proof for the circumstances establishing the courts’ jurisdiction, in this case for the existence of an employment relationship. After the dismissal, one must therefore clarify whether the plaintiff’s work was substantively based upon an employment relationship or a free service relationship.

In the present case, the plaintiff worked exclusively on the basis of an employment contract’s provisions – also as B-GmbH’s managing director. The agreements concluded with B-GmbH refer to the plaintiff’s employment contract with A-GmbH – which is recognizable in connection with the following merger. Assuming that B-GmbH has thus already constitutively entered into the plaintiff’s employment contract, this existing employment relationship would have been continued as such. If one assumes that this was merely intended to regulate a substantive contractual amendment in anticipation of the statutory entry into the contractual relationship due to the foreseeable imminent merger, so that the entry of B-GmbH into the employment relationship previously existing with A-GmbH was not constitutively contractually regulated, but was incidentally assumed, but constitutively based on Art. 35a (2) UmwG, Art. 613a BGB, B-GmbH would have equally entered into the plaintiff’s employment relationship as an employer.

There is no legal basis according to which the combination of the executive position and the employment relationship within the same legal entity resulting from a corporate reorganization would lead to the employment relationship’s conversion into a free service relationship. As a result of private autonomy, the parties are free to structure the legal relationship to be separated from the executive position as employment relationship. Even if a GmbH’s managing directors regularly work on the basis of a (free) service agreement, this does not preclude the contracting parties from concluding a different agreement and regulating the services under an employment contract. The employer’s right to give instructions pursuant to Art. 106 GewO (German Industrial Code), which is incompatible with the executive position, is limited to the term of the appointment and is revived upon the appointment’s end.

Practical advice

The Düsseldorf Regional Labor Court’s decision once again underlines the importance of clearly regulating a managing director’s or board member’s engagement under a service agreement and terminating existing employment contracts of the employees “promoted” to the board. Please note that the conclusion of the managing director service agreements requires the approval of the shareholders’ meeting (GmbH) and the supervisory board (stock corporations), while the employment contracts’ termination is the managing directors’ or the board’s responsibility.