German Higher Regional Court Validates Termination of Managing Director for Favoritism

Quick Hits

• The Higher Regional Court of Frankfurt am Main (Oberlandesgericht – OLG) recently held that termination of a managing director without notice is effective if the director granted inadmissible salary benefits to works council members outside the department.
• The managing director’s claims to bonuses and remuneration are valid until termination takes effect.

The Case

The employee had worked as a managing director of a municipal public transportation company since 2014. Within the multi-member management team, responsibilities were divided by department. The employee was not formally responsible for personnel matters. In the fall of 2021, the city received several reports, some of which were anonymous, of possible irregularities in the personnel department. Specifically, the reports concerned remuneration adjustments, particularly higher pay grades and allowances for works council members, which apparently had no objective basis.

To investigate the allegations, the city hired an outside law firm to conduct a thorough investigation. The interim report, submitted at the end of February 2022, confirmed the allegations in key areas. Based on this report, the supervisory board decided to terminate the managing director’s employment contract without notice at the beginning of March 2022. The employee was accused of approving higher classifications and allowances for works council members without reason, thereby granting favors that were not permitted. However, the employee denied any wrongdoing and filed a lawsuit against the termination, as well as for the remuneration and bonus agreed upon in his contract.

In the company’s opinion, the managing director, based on his knowledge of the internal communication between the human resources department and the responsible co-managing director, had reason to critically question the salary developments and ensure that the management’s decisions complied with the legal system.

The employee denied any breach of duty. He filed a lawsuit against the termination without notice and also demanded payment of the contractually agreed remuneration, in particular outstanding bonuses and his salary until the end of the regular notice period.

Higher Regional Court of Frankfurt am Main’s Decision

Both the Regional Court of Wiesbaden and the Higher Regional Court of Frankfurt am Main dismissed the managing director’s lawsuit, confirming the validity of the extraordinary termination without notice. The supervisory board formally decided on the termination in accordance with the rules, and the statutory period for termination without notice was observed.

The decisive factor for compliance with the two-week notice period is the date on which the employer becomes aware of the circumstances relevant to the termination. According to the court, this did not occur until the investigation report by the external law firm at the end of February 2022. Therefore, the termination announced at the beginning of March 2022 was made in due time. Formal objections were unsuccessful as well: the supervisory board resolution underlying the decision had been passed in accordance with the rules. The invitation and agenda met the requirements of the articles of association, and a plenary meeting was held.

In this case, the Higher Regional Court affirmed the existence of good cause for termination. During the proceedings, the employer presented court decisions showing that several promotions and allowances granted to works council members were inadmissible. The managing director could not refute these arguments, despite his position, which made it expected of him. The court considered it significant that the managing director was involved in communications with the human resources department and subsequently approved the benefits. While the employee was not formally responsible for human resources, a managing director outside the department still has extensive control and monitoring responsibilities, particularly when there are clear signs of negative developments.

However, the promised remuneration, including bonuses, must be paid until the managing director’s employment ends. The employee’s established breaches of duty did not affect his entitlement to bonuses. While such breaches could trigger counterclaims by the company, they do not automatically result in the loss of existing remuneration claims. There was no gross breach of trust in this case. According to the court senate, exclusion on the grounds of breach of trust can only be considered in extremely exceptional cases, which did not apply to this case.

The decision is not final yet.

Key Takeaways

The courts deemed co-signing unfounded salary increases for works council members a serious breach of duty, justifying the extraordinary termination of a managing director outside his own department. Managing directors are responsible for the company as a whole, so they must take responsibility for decisions they are involved in or irregularities that become apparent. Participation in unlawful remuneration decisions without cause can justify termination without notice.

Ogletree Deakins’ Cross-Border Practice Group and Berlin and Munich offices will continue to monitor developments and will post updates on the Cross-Border and Germany  blogs as additional information becomes available.

Dr. Merle Steinhuber is an associate in Ogletree Deakins’ Berlin office.

This article was co-authored by Pauline von Stechow,  who is a law clerk in Ogletree Deakins’ Berlin office.