The most important facts in brief:
- Managing director service contracts are usually negotiated individually.
- Managing directors are not employees and are therefore not protected by labor law.
- The managing director service agreement must be distinguished from the appointment as managing director.
What is a managing director service contract?
The managing director's employment contract regulates the rights and obligations of a managing director. The salary, vacation entitlement, any entitlement to a company car, etc. are therefore agreed in the managing director's employment contract.
In order to understand managing director service agreements, it is important to distinguish between the appointment as managing director and the managing director service agreement:
- orderAppointment as managing director refers to the assumption of the position of shareholder under company law. It is not necessary to conclude a managing director's employment contract to assume the position of managing director.
- Managing director service contractThe managing director's service contract is a contract that is fundamentally independent of the managing director's position and which specifically defines the rights and obligations of the managing director.
The employment contract and the appointment are legally independent of each other. This means that, for example, dismissal as managing director does not mean that the managing director's service contract also ends. However, it is legally possible to link the managing director's service contract to the position as managing director by means of agreements. In addition to the principle of separation, the following two aspects are also key to understanding a managing director service agreement:
- No employeeManaging directors are not employees. Accordingly, the protective provisions for employees do not apply to managing directors.
- Service contractThis is a service contract. In concrete terms, this means that the managing director is only obliged to make an effort and take action. The managing director does not have to achieve concrete successes.
What clauses do managing director service agreements typically contain?
In contrast to employment contracts for salaried employees, managing director service contracts are usually negotiated individually. The background to this is that managing directors are significantly more important to the company and at the same time a managing director contract is only concluded very rarely, at best every few years.
The following clauses are common in managing director employment contracts:
- General informationA managing director's employment contract usually begins with a few general provisions, such as the location of the place of employment, who the parties to the managing director's employment contract are, etc.
- TaskSubsequently, the tasks to be performed by the managing director are agreed. The agreement is generally kept very general, so that in most cases it is only agreed that the managing director must use his full working capacity to manage the company's business.
- Contract durationThere is no standardized approach to the duration of employment contracts; there are both fixed-term and open-ended contracts. In the case of open-ended management contracts, a notice period is often agreed that is longer than the statutory notice period Notice period for employment contracts. If the termination is to take place immediately, extraordinary termination is required.
- Non-compete clauseManaging director service agreements usually contain a non-competition clause. The non-competition clause prohibits managing directors from competing with the company during the term of the contract and for a period of time thereafter (e.g. working for a competitor immediately after termination). In order to prevent legal disputes, it is customary to specify the duration and scope of the non-competition clause. It is also customary to stipulate that during the period of activity as managing director, the assumption of any paid activity requires the prior approval of the shareholders' meeting.
- RemunerationRemuneration of managing directors generally consists of a fixed salary and variable remuneration. The variable remuneration can be structured in different ways. For example, managing directors can receive a share of the profit or a bonus if a certain profit is achieved. It is unusual for managing directors to receive overtime pay. In addition to the salary, managing directors often receive a company car and a budget for company meals, business trips, etc.
- Further regulationsIn addition to the above-mentioned provisions, managing director service contracts may contain many other clauses, such as confidentiality obligations, obligations to return the employee at the end of the contract, provisions in the event of illness, etc.
In addition to the aforementioned "classic" provisions, managing director service agreements may also contain special clauses. Which additional clauses a managing director service agreement contains depends on the specific circumstances:
- GroupIf the GmbH is part of a larger group, managing director employment contracts generally contain clauses that include the obligation for managing directors to be elected to a supervisory board. In addition, it is typically agreed that the supervisory board remuneration is (partially) offset against the managing director's salary.
- Management participation: In private equity Management participations widespread. In such cases, managing director service agreements sometimes contain the exact conditions of the shareholding and, in particular, what happens to the shareholding in the event of termination.
What should be considered in the remuneration of managing directors?
The remuneration of managing directors usually consists of three components: a fixed salary, variable remuneration and benefits in kind. In some cases, managing directors also hold a small stake in the company.
Variable remuneration can consist of fixed bonus payments as well as a share in profits, sales or similar. Fixed bonus payments are used particularly frequently when a single event is of particular relevance to a company. For example, a fixed bonus is sometimes agreed if a managing director manages to exceed a defined profit threshold.
Benefits in kind for managing directors generally include the following components:
- Company carCompany cars are widely used by managing directors. It is often agreed that the managing director may choose the company car himself, but a fixed purchase price may not be exceeded.
- Retirement provisionEmployers often grant their managing directors an additional pension to supplement the statutory pension.
- D&O insuranceManaging directors are subject to strict liability. To protect against liability, it is common for the employer to take out D&O insurance for the managing director. D&O insurance protects managing directors against claims and is therefore similar to liability insurance.
When structuring the remuneration, it is particularly important to ensure that there is no hidden profit distribution. A hidden profit distribution occurs when a shareholder is granted a benefit that legally constitutes a profit distribution. For example, if a managing director who is also the majority shareholder receives a salary that is too high, this is ostensibly a salary. In fact, the excessive salary constitutes a profit distribution. A hidden profit distribution leads to considerable tax risks. Therefore, when remunerating managing directors who also hold a significant stake in the company, care must be taken to ensure that the remuneration is in line with arm's length principles.
Can and should the liability of managing directors be limited?
The liability of managing directors can be limited in the employment contract and in the articles of association. Managing directors are exposed to considerable liability risks in the course of their work. Managing directors are responsible for ensuring that a company complies with its legal obligations; in the event of a breach, the managing director may be held liable. The following options exist to limit liability:
- Employment contractLimitation of liability can be agreed in the managing director's employment contract. It is customary to limit liability to gross negligence and intent.
- Articles of AssociationThe liability of the managing directors can also be limited in the articles of association. However, it is rather unusual to limit liability in the articles of association.
- D&O insuranceD&O insurance protects managing directors against claims in the event of a breach of duty. The insurance supports managing directors in defending themselves against claims for damages and at the same time helps to settle the claims.
- Distribution of tasksThe easiest way to prevent a claim is to clearly distribute the tasks within the management. In concrete terms, this means determining which areas are the responsibility of which managing director. Managing directors are then primarily liable for breaches of duty in the areas for which they are responsible. In the other areas, they only have to monitor the managing director responsible.
In addition to the general liability of managing directors, there are special regulations for individual breaches of duty, such as when companies do not pay their taxes or when managing directors delay insolvency.
When is a managing director subject to social security contributions?
Managing directors are not subject to social security contributions if they hold a stake of at least 50 % in the company. However, if managing directors have no shareholding or a shareholding of less than 50 %, they are subject to social security contributions. If you do not want to take any risks, you can carry out a status determination procedure. This determines in a legally binding manner whether or not a managing director is subject to social security contributions.