The management service agreement (also referred to as CEO service agreement or employment contract) lays down the contractual obligations in the relationship between the managing director and the company, typically a German limited liability company (GmbH) or a German charitable limited liability company (gGmbH).
Usually, the agreement lays down the consideration for the activities as the company's managing director, including
- leave entitlements;
- claims to occupational pensions; and the
- termination of said legal relationship.
In addition, the management agreement sets out the managing director's duties, to the extent these are not contained in the Articles of Association or laid down by law based on his position as a member of the company's executive bodies.
The legal and practical differentiation between the managing director's position on one of the company's executive bodies, starting upon acceptance of the appointment as a managing director, and the employment contract under the German law of obligations are of particular importance in this context. According to the applicable law, numerous rights and obligations, including the statutory power of representation, are associated with a position on one of the company's executive bodies.
The management agreement, which governs the employment relationship between the managing director and the company, on the contrary, exists independently of the position on one of the company's executive bodies. As a consequence, a management agreement does not automatically end when the managing director is removed from his office, but remains valid and effective with the result that the company still owes the agreed remuneration even after the managing director's removal from office.
As a consequence, it is important to use the contractual freedom in drafting the employment contract and to determine the fate of the managing director's employment in case of his removal from office. Depending on the point of view (either the managing director's or the company's), the parties' interests concerning the termination of the employment will usually greatly diverge. Depending on the interests pursued, especially the following contractual items may require special attention when drafting the agreement.
- Remuneration and share in profits, e.g. in the form of variable or target-related performance or profit-related bonus payments or the provision of a company car for private use;
- Continued remuneration and leave entitlements, which are often arranged derogating from normal German employment agreements due to the managing director's responsible position, and
- the agreement of a post-contractual prohibition of competition to protect the company's interests.
Especially the legal requirements relating to the design of variable remunerations systems have recently become very strict. Our attorneys specializing in employment law will be pleased to assist you in drafting a management agreement taking into account your specific interests in Germany.
Even when a CEO service agreement has been drafted to meet a party's interests, in many cases legal obstacles remain to be overcome. For example, very often the question arises, which of the company's bodies is in fact competent for concluding and/or terminating or cancelling the employment contract.
As this question is not always easy to answer, in case of any doubt, it should be examined by our competent attorneys specializing in employment law.
If the company's body was not competent for terminating or cancelling the employment contract, the employment will not be deemed to have been validly terminated and the company will continue to owe the contractually agreed remuneration without getting any service in return. Our competent advice can easily help you avoid this financial risk.
Another peculiarity in relation to a German management agreement consists in the treatment of the managing director under the German employment and social security laws.
- Under German employment law, the managing director of a GmbH or a gGmbH is generally not an employee, especially if a managing director holds a significant portion of the company's shares. As a consequence, he usually does not enjoy any protection against dismissal under the German Protection against Dismissal Act. Exemptions may, however, apply in individual cases when outside managing directors are strongly bound by instructions. The delimitation in the individual case is difficult and should be examined by experienced labor attorneys.
- Under social security law the situation is similar. Outside managing directors holding no or only a minor share in the company's share capital are considered as dependent employees who are subject to compulsory social insurance and hence liable to pay social security contributions. To ensure that payroll accounting and the deduction of social security contributions are carried out correctly, the status of the managing director under social security law should be assisted and clarified by an attorney, for example, by way of a procedure to determine the social security status of an individual, the so-called Statusfeststellungsverfahren.