Practical solutions for employers and managers

Employment law encompasses the legal norms that structure the relationship between employers and employees — such as hiring, duties, remuneration, working hours, dismissal and termination, as well as protective rights.

Important sources include the German Civil Code (BGB), the Protection Against Unfair Dismissal Act (KSchG), the Part-Time and Fixed-Term Employment Act (TzBfG), the Working Time Act (ArbZG), collective agreements, company agreements and EU law.

The distinction between an employee and a freelancer depends on a comprehensive assessment of all circumstances of the individual case. The decisive factor is not the contractual designation, but the actual implementation of the contract. According to established case law of the Federal Labor Court (BAG), the following criteria are particularly relevant: personal dependence of the individual performing the work, being subject to instructions regarding the time, place, and nature of the work, integration into the client's operational organization, use of the client's infrastructure and equipment, lack of entrepreneurial risk, no independent market presence or employees, and remuneration based on time rather than success or deliverables. The more pronounced these characteristics are, the more likely an employment relationship exists, even if the contract is formally structured as a freelance service or work contract. This distinction is of considerable practical importance, as it affects protection against dismissal, co-determination, vacation entitlements, continued payment of wages, and, in particular, social security obligations. If an employee is incorrectly treated as a freelancer, this can lead to substantial back payments of social security contributions. Furthermore, the intentional or negligent failure to pay social security contributions can constitute a criminal offense under Section 266a of the German Criminal Code and may result in criminal and administrative penalties for the responsible persons.

In a contract for work and services, the contractor owes a specific result, not a personal work performance within the framework of the company's organization.

An employment contract should contain basic points such as working hours, remuneration, job description, start date, and place of work; many mandatory details also arise from the German Employment Contract Law.

Fixed-term contracts generally require an objective justification or must be covered by the Part-Time and Fixed-Term Employment Act (TzBfG); otherwise, they risk becoming permanent.

Collective agreements regulate working conditions for specific industries or sectors and apply directly to parties bound by the agreement or through declarations of general applicability.

In the event of a transfer of business, employment relationships automatically transfer to the acquiring company, and existing rights and obligations remain in effect.

The Working Time Act limits daily working hours, provides for breaks and rest periods, and regulates permissible working time models, night work and shift work.

Employers are obliged to design workplaces safely and to implement risk assessments, training and appropriate protective measures.

The Works Constitution Act (BetrVG) regulates the rights of co-determination and participation of the employee representation (works council) in company matters.

The works council has rights to information, consultation and co-determination in social, personnel and economic matters.

An action for protection against unfair dismissal must be filed with the competent labor court within three weeks of receiving the notice of termination. If this deadline is missed, the dismissal is considered valid, regardless of its substantive legality. Only in very limited exceptional cases is it possible to file the action retroactively.

Terminations must be in proper form, within the prescribed time limit and be socially justified; special requirements apply under the German Protection Against Unfair Dismissal Act (KSchG).

A dismissal is socially justified if there are operational, personal or behavioral reasons and the interests of both parties have been weighed.

The Protection Against Unfair Dismissal Act applies if both conditions are met: the employment relationship has existed for more than six months without interruption (waiting period), and the company employs more than ten employees (part-time employees are counted proportionally). Only when both conditions are met must a regular dismissal be socially justified, i.e., based on personal, behavioral, or operational reasons.

An extraordinary termination is only permissible if there is a compelling reason that makes it unreasonable for the terminating party to continue the employment relationship until the end of the regular notice period. This generally requires a serious breach of duty. The termination must be declared within two weeks of the party entitled to terminate having actual knowledge of the facts relevant to the termination. If this deadline is missed, an extraordinary termination for the same reason is generally precluded.

A written warning is a formal reprimand for a specific breach of duty, demanding that this behavior be refrained from in the future. It serves three functions: documenting the misconduct, warning of potential consequences under labor law, and providing an opportunity for behavioral change. With a written warning, the matter in question is generally considered "used up." This means that the same breach of duty cannot usually be used again as grounds for dismissal unless a similar incident occurs.

A termination with modified terms combines the termination of the old contract with the offer of a new contract under modified conditions, if there are operational interests involved.

Part-time employees have the right to reduce their working hours, provided that there are no operational reasons to the contrary.

Parental and care leave serve to protect family obligations; they establish an entitlement to leave and, under certain conditions, rights of return.

Employers above a certain company size have special obligations, e.g. protective rights, employment quotas or structural adjustments.

A termination agreement ends the employment relationship by mutual consent; however, it can trigger waiting periods for unemployment benefits or loss of entitlements if it is concluded without due consideration.

The German Remuneration Regulation for Institutions (IVV) contains specific provisions for the remuneration systems of institutions, particularly banks and financial services companies. It serves to implement European supervisory requirements and aims to prevent perverse incentives arising from variable remuneration. From an employment law perspective, the IVV is particularly relevant with regard to the design of bonus schemes, variable remuneration, deferral and clawback mechanisms, as well as the distinction between risk takers and other employees.

A company practice exists when an employer regularly and unconditionally grants certain benefits or perks (e.g., bonuses, Christmas bonuses, additional vacation days), such that employees may conclude that the benefit will continue in the future. In this case, a contractual entitlement can arise for the employees, even if the benefit was originally voluntary. A company practice can only be terminated under strict conditions – for example, by a clear reservation of the right to revoke the benefit or a change in practice.

Appointment as managing director fundamentally changes one's legal status. The managing director becomes an officer of the company and is generally no longer an employee. The existing employment relationship cannot automatically continue but must be explicitly addressed. In practice, there are two options for structuring this change. Suspension of the employment contract: The employment relationship is not terminated, but suspended for the duration of the managing director's appointment. This can be particularly relevant to safeguard a possible return to employment, for example, in the event of a later dismissal. Deliberate termination of the employment contract: The employment relationship is terminated by mutual agreement or by notice of termination and completely replaced by a managing director's service contract. This permanently eliminates the employment status. Regardless of the chosen option, it is crucial that the separation between the position as an officer and the employment contract is legally sound. The employment contract governs remuneration, notice periods, non-compete clauses, liability, and insurance (e.g., D&O), while the position as an officer is determined by appointment and removal. Defective or unclear provisions can lead to significant risks regarding liability, status, and jurisdiction.

The court's jurisdiction depends on the managing director's actual legal status at the time of termination. The decisive factor is not solely their position as an officer of the company, but rather the specific structure of the contractual relationship and its legal classification. As a rule, disputes arising from a simple managing director's service contract fall under the jurisdiction of the ordinary courts (regional court), since managing directors are generally not considered employees. In exceptional cases—for example, if an employment relationship continues alongside the officer position or if the employee status has not been effectively terminated—the labor courts may also have jurisdiction. The distinction is made based on the actual legal circumstances of each individual case. Differences between labor courts and regional courts: Labor courts are comparatively cost-effective in the first instance, as each party bears its own legal costs, regardless of the outcome of the proceedings; moreover, hearings are usually scheduled very quickly, often with an early conciliation hearing, and the proceedings are strongly geared towards settlement-oriented solutions. Regional courts, on the other hand, follow general civil procedure: The losing party usually bears all costs, proceedings are more formalized and usually take longer, settlements are possible but less of a focus, and the substantive review concentrates more on contractual and corporate law issues rather than employee protection aspects.

The classification of a managing director who is also a shareholder under social security law is not solely determined by their position as an officer of the company, but rather by their actual legal influence over the company. The decisive factor is whether the managing director is subject to instructions or exercises entrepreneurial control by virtue of their shareholding. As a general rule, managing directors who are also majority shareholders (more than 50% of the shares) are usually exempt from social security contributions, as they can block instructions. Managing directors who are also minority shareholders are subject to social security contributions if they do not possess a blocking minority or comparable veto rights. In a 50/50 ownership structure, the two shareholders can block each other. In such a situation, there is generally no obligation to follow instructions, as neither shareholder can issue binding instructions to the other. In effect, each has a veto right. Nevertheless, the 50/50 ownership structure requires particularly close scrutiny under social security law, as the classification is always based on a comprehensive assessment. Relevant factors include: provisions in the articles of association regarding voting rights and vetoes, actual management practices, and any external control or directive rights (e.g., advisory board, shareholder resolutions). If there is any doubt about the classification, a status determination procedure with the German Pension Insurance is recommended. This provides binding clarity and helps to avoid retroactive contribution demands, late payment surcharges and personal liability risks – especially in the case of 50/50 structures, which frequently give rise to audits in practice.