GERMAN LABOR AND EMPLOYMENT NEWS the scene is all too commonthe - PDF document

second Quarter 2005 German Federal Labor fail to terminate a Managing director within this two-week period, then the share- holders have waived their right to terminate the Managing director for cause. Contents solicitation of customers: a right of released Managing directors? 1 court Facilitates the holders must terminate the Managing director’s service agreement within two termination of employees Who Perform Poorly 3 the Legal aspects of the “release” of an employee during the employment relationship weeks of learning of the event which served as the basis for the termination. If they director warrant a termination for cause, German law sets forth that the share- GERMAN LABOR AND EMPLOYMENT NEWS the scene is all too common—the shareholders of a German company lose trust SOLiciTATiON Of cuSTOMERS: A RiGhT Of RELEASED MANAGiNG DiREcTORS? By Jörg Rehder Frankfurt attorney at Law; solicitor (england and Wales) jrehder@jonesday.com ++49 69 9726-3122 in the company’s Managing director. as a result, the shareholders—as is their If the actions which caused the shareholders to lose their trust in the Managing right—decide to remove the Managing director from his statutory executive posi- tion. this removal, however, does not directly impact the contractual relationship the Managing director may have with the company. If, as is often the case, the Managing director and company also concluded a service agreement setting forth the rights and duties of the Managing director, the shareholders will also need to terminate this agreement in order to sever their relationship with the Managing director in its entirety. the termination must, of course, be in accordance with the provisions of the agreement. 4

2 i.e., the Managing director will continue to receive his pay six-month termination notice period and that any such termi- nation may be effective only at the end of a calendar year. accordingly, if the shareholders terminate the Managing director on July 14, 2005, the termination will not become effective until december 31, 2006, i.e., the Managing director is entitled to almost an 18-month termination notice period. during this period, the Managing director must continue to provide his services to the company in accordance with the provisions of the service agreement and the company must pay him his full compensation, plus any benefits. such an arrangement will, in all likelihood, not be viewed favorably by the company nor by the terminated Managing director. accordingly, the shareholders may decide to “release” the Managing director from his work obligations, and other benefits from the company, but he is not to may set forth that the Managing director is entitled to a director is still bound to the company and on its payroll, he the release period. However, when this is weighed against the benefits, it may make company is that it must continue to pay the Managing director for the duration of from the company, but he is not to appear for work. the obvious downside for the tions, i.e., the Managing director will continue to receive his pay and other benefits shareholders may decide to “release” the Managing director from his work obliga- may not compete with the company. the company in mind, and (ii) since the released Managing appear for work. the obvious downside for the company for work who may not necessarily have the best interests of pany will not have an otherwise influential person appear the Managing director. the primary benefits are (i) the com- weighed against the benefits, it may make sense to release the duration of the release period. However, when this is is that it must continue to pay the Managing director for a Managing director’s service agreement, for example, However, a recent court decision has caused some con- director owes a duty of loyalty to the company as long as Managing director was entitled to engage in “preliminary” to run before the termination notice period expired, the ticular released Managing director only had a few months recently ruled that since the service agreement of a par- payroll. However, quite surprisingly, a court of appeals he is still bound to the company and on the company’s est labor court—have consistently held that a Managing In the past, German courts—including Germany’s high- to be in violation of the duty not to compete. activities during the release period which many would deem well as released employees) may, in fact, engage in some decision, it appears that released Managing directors (as sternation among employers because, according to this activities in terms of setting up a new business without running afoul of the prohibition on competition. In this case, tionship between the company and the Managing director. appointment of a Managing director and a contractual rela- to reiterate: German law distinguishes between the statutory activities warranted a termination for cause. presented to the court was whether the Managing director’s line in terms of competing with the company. the question as they felt that these “preliminary” activities crossed the the Managing director for cause effective immediately the Managing director planned on becoming self-employed was contacting customers, the shareholders terminated employer learned that the released Managing director not surprisingly, as soon as the Managing director’s customers in the future. employer’s customers to discuss doing business with these and had admittedly contacted a couple of his current sense to release the Managing director.