German Court Tightens Rules on Firing Managing Directors: A Hidden Employment Trap for Companies

A recent ruling from Germany’s highest labor court has exposed a dangerous blind spot for companies seeking to part ways with their managing directors. The decision, handed down on June 18, 2026, by the Federal Labor Court (Bundesarbeitsgericht, or BAG) in Erfurt under case number 2 AZR 89/25, clarifies when a managing director can claim the same job protections as an ordinary employee — even after their executive role ends.

The judgment carries significant financial and procedural risks for employers, particularly those that treat managing director contracts as simple service agreements immune to standard labor law.

The Dual-Role Dilemma

Managing directors of German GmbHs (limited liability companies) operate in a legal gray area. They hold two distinct positions: an official appointment as a corporate organ, which grants them external authority to represent the company, and a separate service contract that governs their employment terms. For years, German courts have generally held that members of corporate governing bodies are not “employees” under the Protection Against Unfair Dismissal Act (Kündigungsschutzgesetz, or KSchG) — at least while their organ role remains active.

The BAG’s June ruling now sharpens that distinction. It zeroes in on what happens when the organ appointment ends — through removal or voluntary resignation — but the underlying service contract continues. In such cases, the court found, the managing director may suddenly qualify as a dependent employee, triggering full dismissal protections.

When a Title Doesn’t Protect You

Legal experts analyzing the decision warn that companies cannot rely on formal job titles to shield themselves from labor court claims. The BAG made clear that simply labeling a contract as a “managing director agreement” is not enough to permanently block KSchG protections. If the actual working conditions show signs of dependent employment — such as detailed instructions on how to perform duties, integration into the company hierarchy, or lack of independent decision-making power — and the organ role disappears, the former executive can revert to employee status.

This creates a ticking clock for employers. The sequence of events matters enormously: if a company removes a managing director from their organ position but delays terminating the service contract, or if the contract language is ambiguous, the executive may successfully argue that an employment relationship has revived. The result can be a wrongful termination lawsuit, back-pay claims, or even reinstatement rights.

Practical Consequences for Business Leaders

The ruling forces human resources departments and corporate lawyers to revisit existing managing director contracts with fresh scrutiny. The BAG’s decision underscores that organ status offers no absolute shield against labor law, especially when the executive function ends but the contractual relationship persists.

For companies planning a management separation, the timing and wording of both the removal resolution and the contract termination must be synchronized precisely. A poorly timed or vaguely drafted termination could open the door to costly litigation before labor courts — a forum that typically favors employee protections.

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The June 18 judgment serves as a practical roadmap: companies must verify that their contracts clearly distinguish between the organ appointment and the service relationship, and that termination procedures account for the possibility that a former managing director might suddenly gain employee status. Failure to do so risks not only legal fees but also potential severance payments or reinstatement demands that were never anticipated.

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