Third-party GmbH managing directors: No vacation extras.

The case before the German Federal Labor Court

The case launched by a woman who had been the external managing director of a GmbH for several years ultimately reached the Federal Labor Court.

Her tasks were regulated in detail in her contract of employment. The provisions included a specific number of calls and visits per week, which she was required to prove. Her vacation entitlement was also detailed in her employment contract. However, in recent years she took little leave: In 2019, she only took 11 days of vacation, and in 2020 she took no vacation at all.

The collaboration with the GmbH ended after approximately eight years when the managing director terminated her management contract at the end of June 2020.

She wanted to be paid for the leave not taken after the end of the collaboration, requesting an amount of around EUR 11,300 gross plus interest as vacation compensation.

The limited liability company not only refused to pay out her leave but had also not informed the managing director that her leave could lapse. The company properly did not do so, believing that the managing director was not an employee and, therefore, did not need to be informed about her vacation entitlements lapsing.

This turned out to be an expensive mistake.

Failure to inform employees can be expensive

In the strict sense, employers are not obliged to inform employees that their leave may expire if they do not take it within a specific period of time.

Nevertheless, if an employer fails to inform its employees accordingly, this can have expensive consequences: According to the case law of the European Court of Justice (ECJ) and the Federal Labor Court (BAG), leave does not expire or become time-barred unless the employee has been notified, even if deadlines elapse.

This can become costly for employers at the end of an employment relationship if they have to compensate the employee for vacation days not taken.

However, this case law only applies to employees.

Managing directors may be regarded as employees

Consequently, the decisive factor in the case of the managing director and her claim to compensation for vacation pay consisted of the question of whether the employer should have informed her, as an “employee”, about the impending expiry of her vacation entitlement so that she would not be entitled to vacation compensation?

The Federal Labor Court ruled that the company should have, given that the question of who is or is not an employee has to be decided in accordance with European law.

Examined from the perspective of European law or ECJ case law, this specific managing director was an employee: She had provided services for another party for a certain period of time as per their instructions in return for remuneration. Accordingly, external managing directors of a corporation are not employees as such. However, the definition always depends on the individual case.

This is where the woman’s employment contract comes into play as it regulated her duties in great detail. Due to the fact that the managing director’s employment contract bound her to very strict requirements regarding her duties, the Federal Labor Court saw no alternative to classifying her as an employee – in compliance with European law.

As a consequence of the company failing to inform her appropriately, the managing director was entitled to full vacation pay in lieu.

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