Employment Law

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

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

The distinction between an employee and a freelancer is based on an overall assessment of all circumstances in each individual case. The decisive factor is not the contractual designation, but the actual execution of the contract. According to the established case law of the Federal Labor Court (BAG), the following criteria are particularly relevant: personal dependence of the individual, subjection to instructions regarding the time, place, and nature of the activity, integration into the client's operational organization, use of company infrastructure and equipment, lack of entrepreneurial risk, no independent market presence or employees, and remuneration based on time rather than success or work product. 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 significant practical importance as it affects protection against dismissal, co-determination, vacation entitlements, continued payment of wages, and particularly social security obligations. If an employee is incorrectly treated as a freelancer, it can lead to substantial back-payments of social security contributions. The intentional or negligent failure to pay social security contributions can also constitute a criminal offense under Section 266a of the German Criminal Code (StGB) and result in criminal and fine-related consequences for the responsible persons.

In a contract for work, the contractor owes a specific result, not personal labor within the framework of the operational organization.

An employment contract should contain fundamental points such as working hours, remuneration, job description, start date, and place of work; many mandatory disclosures also arise from the Transparency Act (Nachweisgesetz).

Fixed-term contracts generally require an objective reason or must be covered by the TzBfG; otherwise, they risk being treated as permanent.

Collective bargaining 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 a transfer of undertaking, employment relationships automatically transfer to the acquirer, and existing rights and obligations are preserved.

The Working Hours Act limits daily working time, 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, instructions, and suitable protective measures.

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

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

An action for protection against 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 deemed effective regardless of its substantive legality. Subsequent admission of the claim is only possible in strictly limited exceptional cases.

Dismissals must be in the correct form, within the notice period, and socially justified; special requirements apply under the KSchG.

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

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

An extraordinary dismissal 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 ordinary notice period. This usually requires a serious breach of duty. The dismissal must be declared within two weeks after the person entitled to terminate gains positive knowledge of the facts decisive for the dismissal. If this deadline is missed, an extraordinary dismissal based on the same facts is generally excluded.

A formal warning is a formal reprimand for a specific breach of duty combined with a request to refrain from this behavior in the future. It serves three functions: documentation of the misconduct, warning of employment law consequences, and a chance for behavioral change. With the warning, the matter is generally "consumed." This means: the same breach of duty cannot usually be used again as a basis for dismissal unless a similar recurrence occurs.

A dismissal for variation of contract combines the termination of the old contract with the offer of a new contract under changed conditions, provided that operational interests exist.

Part-time employees have the right to a reduction in working hours, provided that operational reasons do not conflict with this.

Parental and caregiver leave serve to protect family duties; they establish an entitlement to leave and, under certain conditions, return rights.

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

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

The Remuneration Ordinance for Institutions (IVV) contains specific requirements for the remuneration systems of institutions, particularly banks and financial service providers. It serves to implement European supervisory requirements and aims to avoid false incentives through variable remuneration. In employment law, the IVV is primarily relevant for the design of bonus regulations, variable remuneration, deferral and clawback mechanisms, and 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., bonus payments, Christmas bonuses, additional vacation days) so that employees may conclude that the benefit will also be provided in the future. In this case, a contractual entitlement for the employees can arise, even if the benefit was originally voluntary. The company practice can only be ended under narrow conditions – for example, through a clear reservation of the right to revoke or a change in practice.

With the appointment as managing director, the legal status changes fundamentally. The managing director is an organ of the company and is generally no longer an employee. The previous employment relationship cannot automatically continue but must be consciously regulated. In practice, there are two design options.

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 secure a possible return to an employment relationship, for example, in the event of a later removal from office.

Conscious termination of the employment contract: The employment relationship is terminated by mutual consent or by notice and completely replaced by a managing director service contract. This permanently eliminates the employment law status.

Regardless of the chosen variant, it is crucial that the separation between the corporate office and the service contract is legally clean. The service contract regulates remuneration, notice periods, non-compete clauses, liability, and insurance (e.g., D&O), while the corporate office is determined by appointment and removal. Faulty or unclear regulations can lead to significant liability, status, and jurisdictional risks.

The jurisdiction of the court depends on the legal status the managing director actually holds at the time of termination. The decisive factor is not just the corporate office, but the specific design of the contractual relationship and its legal classification. As a rule, disputes arising from a pure managing director service contract are assigned to the ordinary courts (Regional Court), as managing directors are generally not considered employees. In exceptional cases – for example, if a continuing employment relationship exists alongside the corporate office or if the employee status was not effectively terminated – jurisdiction of the labor courts may also be considered. The distinction is made based on the actual legal structure in each individual case.

Differences between Labor Court and Regional Court: Labor courts are comparatively cost-effective in the first instance, as each party bears its own legal fees regardless of the outcome; furthermore, scheduling is usually very fast, often with an early conciliation hearing, and the procedure is strongly oriented toward settlement-based solutions. Regional courts, on the other hand, follow general civil procedure law: 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 focuses more on contractual and corporate law issues rather than employee-protective aspects.

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 secure a possible return to an employment relationship, for example, in the event of a later removal from office.

Conscious termination of the employment contract: The employment relationship is terminated by mutual consent or by notice and completely replaced by a managing director service contract. This permanently eliminates the employment law status.

Regardless of the chosen variant, it is crucial that the separation between the corporate office and the service contract is legally clean. The service contract regulates remuneration, notice periods, non-compete clauses, liability, and insurance (e.g., D&O), while the corporate office is determined by appointment and removal. Faulty or unclear regulations can lead to significant liability, status, and jurisdictional risks.

The classification of a shareholder-managing director under social security law is not based solely on the corporate office, but on the actual legal possibility of influencing the company. The decisive factor is whether the managing director is subject to instructions or exercises entrepreneurial control due to their shareholding.

As a general rule: Majority shareholder-managing directors (more than 50% of shares) are regularly considered not subject to social security contributions because they can prevent instructions. Minority shareholder-managing directors are subject to social security contributions if they do not possess a blocking minority or comparable veto rights. In a 50/50 shareholding, the two shareholders can block each other. In such a constellation, there is usually no subjection to instructions, as no shareholder can issue binding instructions to the other. De facto, each has a veto right.

Nevertheless, the 50/50 constellation requires particular scrutiny under social security law, as the classification is always based on an overall assessment. Relevant factors include: articles of association regulations on voting rights and vetoes, actual management practice, and any external control or instruction rights (e.g., advisory board, shareholder resolutions).

If there are doubts about the classification, a status determination procedure with the German Pension Insurance (Deutsche Rentenversicherung) is recommended. This creates binding clarity and helps to avoid retroactive contribution demands, late payment surcharges, and personal liability risks – especially in 50/50 structures, which frequently give rise to audits in practice.

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 secure a possible return to an employment relationship, for example, in the event of a later removal from office.

Conscious termination of the employment contract: The employment relationship is terminated by mutual consent or by notice and completely replaced by a managing director service contract. This permanently eliminates the employment law status.

Regardless of the chosen variant, it is crucial that the separation between the corporate office and the service contract is legally clean. The service contract regulates remuneration, notice periods, non-compete clauses, liability, and insurance (e.g., D&O), while the corporate office is determined by appointment and removal. Faulty or unclear regulations can lead to significant liability, status, and jurisdictional risks.