The managing director as an employee: a focus on holiday entitlement

In principle, the terms managing director and employee are mutually exclusive – managing directors are not considered employees under labour law. Nevertheless, in a recent ruling, the Federal Labour Court (Bundesarbeitsgericht, BAG) decided that an external managing director is to be regarded as an employee in certain constellations, for example with regard to holiday entitlement.

The current case

In the judgment of the Federal Labour Court of 25 July 2023, the parties were in dispute regarding the payment in lieu of holiday entitlement for the years 2019 and 2020. The plaintiff had been employed by the defendant since 1 July 1993, initially as an employee and, from 19 April 2012, as a (third-party) managing director.

In accordance with the management’s instructions, the claimant had to work from 7:00 a.m. to 6:00 p.m., conduct cold calling in the mornings and make customer visits and carry out control and monitoring tasks in the afternoons. She had to account for 40 phone calls and 20 visits per week. Her tasks also included job interviews and negotiations. In addition to the monthly salary, she received a bonus based on the company’s performance.

On 5 September 2019, the plaintiff resigned from her position as managing director. On 17 September 2019, she was removed from the commercial register. The contractual relationship between the parties ended as a result of the plaintiff’s termination on 30 June 2020. The plaintiff was incapacitated due to illness from 30 August 2019 until her termination on 30 June 2020.

In the subsequent legal dispute between the parties, the plaintiff asserted a claim for compensation for leave against the defendant in the amount of approximately €11,000 plus interest, as she was no longer able to take the leave to which she was entitled before she left. The Labour Court, the Higher Labour Court and, ultimately, the Federal Labour Court all ruled in favour of the plaintiff.

Decision of the Federal Labour Court

The BAG ruled that the claimant’s claim resulted directly from Sec. 7 (4) of the German Federal Leave Act (Bundesurlaubsgesetz – BUrlG). In doing so, the court relied on the European Court of Justice’s (ECJ) definition of an employee and on Article 7 of Directive 2003/88/EC:

The essential feature of the employment relationship is that someone provides services for and is paid for those services over a certain period of time, in accordance with the instructions of another person.

The plaintiff fulfilled this role as managing director of a third-party company.

Conclusion

The ruling of the Federal Labour Court makes it clear that, under certain conditions, third-party managing directors can be classified as employees. This has a direct impact on their holiday entitlement and, in particular, on any potential holiday pay in lieu.