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7 December 20233 minute read

Compensation for annual leave: External managing directors can also be employees within the meaning of the Federal Leave Act

In cases in which outstanding leave cannot be granted in full or in part due to the termination of the employment relationship, Section 7 para. 4 of the German Federal Leave Act (Bundesurlaubsgesetz – BUrlG) provides for a compensation claim by employees against the employer. A decision by the Federal Labour Court (BAG) has now finally clarified that external managing directors of a limited liability company (GmbH) can also base such a claim directly on Section 7 para. 4 BUrlG  despite being part of the management.


Recourse to the definition of “employee” under EU law

The BUrlG implements the provisions of the Working Time Directive1, meaning that the principles developed by the Court of Justice of the European Union on the concept of employee are decisive when interpreting the concept of employee in the BUrlG.

This was determined by the BAG on 25 July 2023 (case no. 9 AZR 43/22). The court thus confirmed the opinion of the Federal Court of Justice (judgement of 26 March 2019, case no. II ZR 244/17) and thereby clearly rejected the view that management personnel cannot rely on the BUrlG under any circumstances.


External managing directors as employees under EU law

By referring to the definition of employee under EU law, managers can also be categorised as employees. In contrast to the national definition of employee, the concept under EU law is much broader and interprets the required obligation to follow instructions more generously. In particular, under EU law, membership of the management of a corporation does not necessarily preclude the assumption of employee status. This is because the status of “employee” within the meaning of EU law depends not only on the essential characteristic of the performance of services subject to instructions, but also on the nature of the tasks assigned, the framework within which these tasks are carried out, the existing control and the circumstances under which dismissal is possible.

The BAG applied these criteria and categorised the plaintiff external managing director as an employee. Even if it still depends on an assessment of the individual case, the court thus opened up the possibility of categorising external managing directors as employees within the meaning of EU law on the basis of the aforementioned definition.


Jurisdiction is determined by national requirements

The BAG’s comments on the determination of court jurisdiction for disputes of an external managing director regarding compensation for holiday entitlements were also noteworthy. In contrast to the applicability of the BUrlG, the national definition of employee continues to be decisive for the jurisdiction of the labour courts. In this respect, the court clarified that such disputes can be settled before the labour courts if the external managing director is by way of exemption to be qualified as an employee under national law.


Takeaways for employers

Following the judgement of the BAG, it is therefore clear for companies that their external managing directors may also be able to successfully assert claims for holiday pay compensation after the end of their employment. Especially in combination with the case law on the forfeiture of holiday entitlements – influenced by EU law – this can have a considerable impact in practice. It is therefore also important to pay attention to the consumption of annual leave by management personnel and to consider possible compensation claims prior to the termination of the cooperation.

1Directive 2003/88/EC of the European Parliament and of the Council of 4 November 2003