Service or Employment Contract
A service contract can be agreed upon in the same way as an employment contract. But the legal consequences of the two types are different. This can be seen, for example, in the employment protection. If the parties have concluded an employment contract as the basis for the activity, this choice is binding – including the tighter protection rules. This was declared by the Regional Labor Court (Landesarbeitsgericht, LAG) Düsseldorf in its decision of December 10, 2019 (Ref.: 3 Ta 402/19). In this case, a judicial review of the actual performance of the contract would no longer take place. This also means that in the event of a disagreement, there will be free access to labor courts, which would not be the case with a service contract.
In the case at hand, the external managing director was dismissed by the shareholders’ meeting. At the same time, the company terminated the managing director’s service contract with the managing director extraordinarily without notice and, alternatively, ordinarily in compliance with the periods of notice.
The claimant came out against this and turned to the Düsseldorf Labor Court with his dismissal protection suit. In the managing director’s service contract, it was expressly agreed that an employment contract would be concluded between the parties. He demanded a declaration that the employment relationship had not been terminated by the dismissal.
Bound by Instructions or Self-Employed
The main issue is whether the claimant worked for the company as an employee. It is distinctive for an engagement as an employee that the claimant acts bound by instructions. As an employee he cannot, for example, determine the content, execution, place and time of the work himself. However, in a service relationship, the managing director is not bound by instructions, and is free to choose the place and time of his work.
Contract Versus Practice
As a rule, managing directors are employed based on a free service contract. But what is decisive is how the contract is implemented in practice. For if the actual implementation of the contract shows that the managing director performs his work primarily in accordance with instructions and in a dependent manner, there is an employment relationship. In this case, the name of the contract is not important.
In the reverse case, however, such an examination does not take place. If the parties have expressly agreed on an employment contract, their contractual relationship will also be classified as such. The Higher Labor Court Düsseldorf made this clear. Even if, based on the nature of the activity, both a free service contract and an employment relationship would generally be possible, the contractual agreement of an employment relationship and the related specific protective rules would then prevail, the Higher Labor Court of Düsseldorf pointed out.
After the parties in the present case had expressly agreed to conclude an employment contract, they were now bound by this choice of contract, the court ruled.
The consequence of this can be, for instance, that the managing director enjoys more protection against wrongful dismissal and, in case of doubt, can enter into negotiations for severance pay with more strength. In the case of a managing director’s service contract, such negotiations would be more difficult from the managing director’s perspective.