What’s is a Geschäftsführervertrag (managing director’s contract)? What role does it play? When is a GmbH managing director an employee and has to make social security contributions? Find out everything you need to know about the GmbH managing director’s contract in plain English, including important terms such as Dienstvertrag (service contracts), Arbeitsrecht (labour law) and Fremdgeschäftsführer (external managing directors).
- What exactly is a GmbH managing director contract?
- Who can be a GmbH managing director?
- When and how is a GmbH managing director appointed?
- GmbH managing director who doesn’t have an employment contract
- GmbH managing director as an employee with an employment contract
- Employed external managing directors
- Rules of procedure
- Social insurance contributions
- Termination, dismissal and end of contract
- Appointment of a GmbH managing director without a written contract
Got questions about setting up a GmbH in Germany?
- Startup expert
- 10+ years experience
Hi, I’m Andreas and I’ve been advising businesses in Germany for over a decade. I’d be happy to call you and answer any questions you have in a one-on-one consultation.
The Anstellungsvertrag (employment contract) for a Geschäftsführer (managing director) is a complex matter that touches on numerous areas of law. This is because the managing director of a GmbH is not a regular employee. As a rule, the contract between a GmbH and its managing director is not an Arbeitsvertrag (employment contract) but a Dienstvertrag (service contract). That is, the Arbeitsrecht (German labour law) only applies in certain circumstances.
The contract between a managing director functions as a necessary supplement for the appointment of a managing director. That is, the GmbH Act already regulates some rights and duties of the managing director, but not the remuneration and all related aspects – these must be set in a separate contract. This legal agreement is known as a few different things in Germany:
- Geschäftsführervertrag (managing director contract)
- Geschäftsführeranstellungsvertrag (managing director employment contract)
- Geschäftsführer-Arbeitsvertrag (managing director employment contract’)
An employee and not an employee at the same time
We’ll touch on this more below, but it’s important to know the exact status of a GmbH managing director can be confusing because of contrasting rulings from two key courts: the Bundesgerichtshof (federal supreme court) and the Bundesarbeitsgericht (federal labour court).
The main issue arises from that the fact that the position of managing director – unlike all other employee positions – is an executive or “corporate-body” part of a company which is generally appointed via:
- the Gesellschafterversammlung (shareholders’ meeting), or
- the Gesellschaftsvertrag (articles of association).
Because of this, the Bundesgerichtshof has ruled that the position is incompatible with an employment relationship. In other words, a managing director cannot be an employee.
However, under certain circumstances, the Bundesarbeitsgericht does recognise the managing director as an employee.
According to the GmbH Act (GmbHG), the position of managing director in a GmbH is an “Organ” (“corporate body”) of a limited liability company (§ 6 GmbHG). Shareholders of a GmbH must fill this position with a natural person who has full legal capacity. For example, you can appoint a shareholder or an external person as a managing director. (However, ultimately management is the joint responsibility of the shareholders.)
Let’s unpack who can and can’t be a Geschäftsführer (managing director) of a GmbH.
You, of course, can’t appoint minors or persons with limited legal capacity as managing directors of a GmbH. Moreover, you can’t transfer management duties to a legal entity. That is, a company entity can’t hold a management position.
As touched on above, a GmbH can appoint only a natural person with full legal capacity. This person must also meet the so-called “Einwilligungsvoraussetzungen” (consent requirements) for a GmbH managing directorship. That is, certain factors can bar someone from this important executive role.
Primarily, the law rules out anyone who has gotten into legal trouble. That is, anyone convicted of insolvency offences, breach of trust or fraud with a custodial sentence of more than one year. Also, delaying filing for insolvency, providing false information in breach of the Aktengesetz (Records Act), or failure to comply with previous employment disclosure obligations are likewise grounds that prevent a person’s appointment as a managing director.
Be careful: It can be particularly tricky if you, as a shareholder, intentionally or grossly negligently appoint a person as managing director who isn’t legally suitable for the position of managing director. In this way, shareholders risk being held financially accountable by other shareholders if this person becomes a liability for the GmbH.
A viable managing director is a prerequisite for a GmbH’s entry in the Handelsregister (commercial register). This position must always be filled because without one the GmbH is considered “leaderless”. If the GmbH is without a managing director due to incapacity, dismissal, a termination agreement or death, all shareholders must then manage the business jointly.
You can make a precautionary provision for this case in the shareholders’ agreement. One or even all shareholders can be entrusted with managing a GmbH using the Musterprotokoll (model protocol) when forming the company. They then become “geschäftsführende Gesellschafter” (managing shareholders / managing partners). However, if there are more than two partners, it is not always practical for all shareholders to be managers at the same time. For one, this shifts the shareholders’ meeting to that of management, which can be a hindrance in day-to-day business.
It is therefore always advisable to regulate the appointment of the managing director in the Gesellschaftervertrag (partner agreement or articles of association). Here, you determine with which majority of the voting shares the managing director must be elected. If a managing director resigns, the shareholders only have to appoint a new managing director.
The shareholders of GmbH may also appoint a “Fremdgeschäftsführer” (external managing director) who then becomes a salaried member of it workforce. (You can learn more about a managing director’s salary in Germany here.)
The appointment of a new managing director must always be entered in the Handelsregister (commercial register”) and named on business documents and in the imprint of print and online material.
The GmbHG simultaneously grants the managing director special rights and obligations. There is an important distinction to consider. Does the managing director have an employee status with an Arbeitsvertrag (employment contract) or not? Let’s explore this in more detail.
For one, the law states that the shareholders’ meeting appoints a managing director of a GmbH via a resolution. The appointment is then entered into the commercial register. But, the law doesn’t make the drafting of a written contract mandatory. Nevertheless, it is always wise (and also the norm) that a written managing director’s contract is drawn up. It’s in the interest of shareholders to have a written contract to safeguard themselves against various pitfalls. Not having everything set in stone is a risk that is not worth taking.
When is a managing director not an employee of a GmbH?
In Germany, if shareholders of a GmbH take up a management role, they are called either a Gesellschafter-Geschäftsführer or a geschäftsführende Gesellschafter (this translates to shareholder-director or managing partner).
If this person also holds a majority of the shares in the GmbH, the Bundesarbeitsgericht (federal labour court) doesn’t classify her as an employee, as she has a decisive influence on the decisions of the shareholders’ meeting. Thus, the contract of a managing partner who holds the majority of the shares is not an Anstellungsvertrag (employment contract), but merely a Dienstvertrag (service contract).
If a managing director owns only a small amount of shares or none at all, employee status can kick if this person:
- is not contractually and factually allowed to decide independently the time and place of work performance, or
- is “personally dependent” on the company.
Given this, most managing directors don’t have an employee classification or status.
Limited labour protection for non-employee managing directors – and how to remedy it
For non-employee GmbH managing directors, like most managing partners, some protective employment laws don’t apply. For example, non-employees can not automatically claim paid sick leave in the event of illness, as the EFZG (continued payment of remuneration act) only applies to employees. Likewise, managing directors without an employment contract cannot claim protection against dismissal. Therefore, prospective GmbH managing directors should make sure their contracts have provisions that entitle them to the following:
- Continued payment of remuneration in the event of illness,
- recreational leave,
- payment of health insurance costs,
- life or pension insurance,
- occupational disability insurance coverage, and
- generous notice periods in the event of termination.
Now that we know a little more about managing directors without an employee status, it’s time to look at the other possibility. That is, a managing director who owns only a small stake in the company may have “employee status”. This depends on whether the person in this position is not contractually allowed to decide when and where work performance takes place or is “personally dependent” on the company.
The “employed” managing director needs a Geschäftsführeranstellungsvertrag (managing director employment contract)
Like any employment contract, the managing director employment contract begins by stating the parties entering into the contract and when the work started/will start. Further parts include:
- Scope of management authority
- Authority to manage and represent the company
- Regulations for transactions requiring consent
- If applicable, exemption from restrictions on insider dealings under § 181 BGB
- Determination of rights and duties
- Requirements regarding the place of employment and working hours
- Holiday entitlement
- Non-competition clause
- Remuneration regulations and bonuses
- Remuneration in the event of illness
- Duration of contract
- Notice periods
In Germany, a managing director that is not a shareholder is known as a “Fremdgeschäftsführer” which translates to “external managing director”.
Generally, external managing directors are employed like salaried employees. They have to turn up at a particular place and time and follow instructions. However, there is a key point of difference: They don’t have a regular Arbeitsvertrag (employment contract) but rather a Dienstvertrag (service contract). But, despite this, external managing directors usually have to make Sozialversicherung (social security) contributions as well. This means that just like a regular employee in Germany, the GmbH has to pay the social security contributions on their behalf. In other words, most external managing directors are legally considered to be employees – but not a regular type of employee with a regular employment contract.
Transitioning from employee to managing director
What happens when an employee who is already an employee gets promoted to managing director? The employee – let’s call her Maria – goes through a change in employee status. That is, Maria loses her protective rights as a regular employee, which is a disadvantage, especially as she has been with the company for years. For example, if she’s been an employee of the company for more than ten years she enjoys extensive protection against dismissal.
For this reason, Maria should require contract clauses that protect her entitlements. Specifically, there should be an agreement in the employment contract that she – as the Fremdgeschäftsführer (external managing director) – may return to her former status as an employee when she no longer holds the position. In other words, her employment contract is “suspended” while she is the managing director.
Don’t forget to include Geschäftsordnung (rules of procedure) in the managing director’s contract (regardless of whether or not it’s an employment contract). These rules can be agreed to by resolution of the shareholders’ meeting and then attached to the employment contract as an appendix. These rules should address the following things:
- The GmbH managing director’s powers of representation
Up to what amount may the managing director enter into a contract without the shareholders’ consent?
- Exemption from §181 BGB
This prohibits the managing director from entering into a legal transaction with the GmbH personally (self-dealing or self-contracting).
- Duties of the managing director in the internal relationship
Earlier preparation of the Jahresabschlusses (“annual accounts”) and Lageberichts (“management report”) than prescribed by the GmbHG
- Liability of the GmbH managing director in cases of gross negligence and wilful intent
- Taking out mandatory financial loss liability insurance
Whether managing directors of a GmbH are liable for Sozialversicherung (social insurance) depends greatly on their employee status. Here the labour courts (Arbeitsgerichte) and social courts (Sozialgerichte) have different opinions.
While the labour court generally classifies the GmbH managing director as an Arbeitgeber (employer) (see above), the social court sees him as an Arbeitnehmer (employee).
Under section 7 (1) of the German Social Security Code (SGB IV), there is an obligation to pay social security if a non-self-employed activity is carried out. Moreover, the person carrying out this activity must be in an employment relationship. Employment is defined as “work according to instructions and integration into the work organisation of the person giving the instructions”.
However, this cumbersome formula fails to define precisely whether the GmbH managing director fits into this definition of an employee. That is, as a leader of a company, the managing director operates independently but is also subject to instructions. Because, on the one hand, the position has the power to hire and fire personnel, give instructions to employees and decide on investments. On the other hand, the GmbH managing director must follow the instructions of the shareholders and implement them. Below we take a closer look at this seeming conundrum.
Gesellschafter-Geschäftsführer (managing partner)
The obligation for a GmbH managing partner to pay Sozialversicherung (social security insurance) depends on whether the position is effectively under the control of the other shareholders or not. As soon as a managing partner owns more than half of the equity shares, she is not subject to instructions and therefore doesn’t have to pay social security contributions. A managing partner with less than 50% equity may be subject to social security contributions, but not necessarily in all cases.
Which managing partners with less than 50% equity are exempt from social security contributions is a legal grey area. But, again, the key factor is whether the managing partner is subject to instructions. If she is an independent managing director – that is, she is not integrated into the work organisation in terms of substance, time or place and is only accountable to the Gesellschafterversammlung (shareholders’ meeting) – the obligation to pay social insurance may not apply.
Managing directors who are not shareholders
Unlike managing partners, Fremdgeschäftsführer (external managing directors) do not usually have a direct shareholding in the company for which they work. For this reason, they are often classified as employees and are liable for social insurance contributions. But, many factors come into play when determining an individual’s employment status as we’ll explore below.
Reasons that the social security obligation doesn’t apply to external managing directors
Much of the criteria that classify someone as “Selbstständige” (“self-employed”) – and therefore exempt from the social insurance obligation – are evident in how a managing director operates. The following points, in particular, point to a self-employed status:
- The legally effective external representation of the company (sole representation)
- Free determination and arrangement of own working hours as well as the type and location of activities
- The managing director is the only one with decision-making powers on-site, e.g. due to a high degree of physical distance.
- The company has emerged from a sole proprietorship or partnership of the external managing director.
Reasons that the social security obligation applies to external managing directors
If an external managing director is employed by a company she has no stake in and partly receives remuneration independent of profits and losses she is classified as a “leitende Angestellte” (an executive). This applies even if a managing director’s work performance is largely free from instructions and controlled by the GmbH shareholders to a limited extent. This is because, within the GmbH structure, supervision exercised by the shareholders is seen in the eyes of the law to be “abhängige Beschäftigung” (dependent employment) in terms of social insurance. Thus, external managing directors regularly hold positions that obligate them to make social insurance contributions, even if they perform employer functions. (This is not offset by any bonuses or profit-sharing agreements.)
This view is regularly taken by the relevant authority – the Clearingstelle (Clearing House) of the Deutschen Rentenversicherung Bund (German pension insurance association).
How to get official clarification
Overall, such a decision is made on a case-by-case basis. The Sozialgericht (social court) has the ultimate power to determine if a managing director is liable for social security contributions.
If there are any doubts about the managing director’s status, going through a Statusfeststellungsverfahren der Clearingstell (status determination procedure of the “clearing house”) can help.
This can be particularly advantageous if you want to check if a contract meets the requirements for exemption from social insurance. By undergoing this so-called Statusfeststellungsverfahren (status determination procedure according to § 7 a SGB IV) at the Deutschen Rentenversicherung (German pension insurance fund), you can get binding clarification on whether or not someone is a dependent employee in the sense of social security law. In this way, you gain legal certainty.
The managing director may be dismissed within the standard contractual time limits. There are several ways to terminate the relationship:
Dismissal by the Gesellschafterversammlung (shareholders’ meeting)
The managing director may be dismissed at any time at the shareholders’ meeting. A simple majority is enough for this. A shareholder-director may also vote personally on the decision unless there is an important reason for the dismissal. The dismissal becomes effective as soon as the managing director has been notified.
The Geschäftsführer (managing director) resigns
The managing director of a GmbH may resign at any time, even without good cause. However, this resignation must not be untimely, otherwise, the managing director may be liable for damages. The resignation must be declared at the shareholders’ meeting, whereby a written statement is not required but recommended.
Other types of termination
The managing director’s position may end after a defined period has elapsed. It also ends in the event of death or conversion.
To appoint or employ a managing director, business owners need a contract, which may also be entered into orally. Surprisingly, this means it’s possible to work as a GmbH managing director without a written contract. In general, however, it is advisable in any case to put the managing director’s contract in writing.
Conclusion: The main thing to consider when creating a GmbH managing director contract
As you can see, there are many things you need to consider when creating a managing director’s contract. In particular, if you plan to appoint a managing partner with less than 50% ownership or an external managing director, you should use the Statusfeststellungsverfahren (status determination procedure) at a Rentenversicherungsträger (pension insurance institute) to determine if the social insurance obligation applies before entering into the contract. By doing so, you avoid legal risks that can lead to high back payments to the Sozialkassen (social security funds) if your GmbH is audited later down the track.
Tip: If you want to use a template for a GmbH managing director contract, you have to adapt it and get a lawyer to look over it. Not getting the legal stuff in order right from the start can have serious consequences later down the track.
Still got questions about setting up a company in Germany?
- Startup expert
- 10+ years experience
Hi, I’m Andreas and I’ve been advising businesses in Germany for over a decade. I’d be happy to call you and answer any questions you have in a one-on-one consultation.