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Legal Update

German Federal Court: Managing directors of a GmbH must not be discriminated against on the basis of their age in decisions regarding the extension of their term of office

5 June 2012
Mayer Brown Legal Update

Almost six years ago the Equal Treatment Act (AGG) came into force. Recently, the German Federal Court (BGH) ruled unexpectedly when it first had to decide if the AGG applies to managing directors of Limited Liability Companies (GmbH). In its decision dated 23 April 2012 (II ZR 163/10), the BGH applied the AGG to the decision about a prolongation of the term of office of a GmbH’s managing director who had been employed for a fixed period of time: The 62-year old plaintiff had been a managing director of the municipal hospital of Cologne. His service contract had a fixed term of five years after which it had terminated. Thereafter, the position was awarded to a 42-year old competitor. The chairman of the shareholders’ meeting publicly commented on this, declaring that the plaintiff’s service contract could not be prolonged because of his (old) age. The BGH held that this was a forbidden discrimination because of age.

The AGG prohibits any direct or indirect discrimination because of

  • Race
  • Ethnic origin
  • Gender
  • Religion or world view
  • Disability
  • Age
  • or sexual identity

(so-called Prohibition of Discrimination). In a lawsuit the concerned (plaintiff) must only provide indications for his/her discrimination. The defendant will then have to provide evidence for not having offended the Prohibition of Discrimination (i.e. reversal of the burden of proof). For example the defendant may state that no discrimination had occurred or that the discrimination at hand was justified. Invalidating an indicated prohibited discrimination is typically demanding for the defendant. In case the AGG is violated, the affected party is not entitled to claim for an employment contract. Instead it may claim for damages, including non-pecuniary losses.

The AGG is aimed primarily at the protection of employees. However, the scope of the AGG also covers members of corporate bodies. Managing directors (GmbH-Geschäftsführer) and members of the Management Board (Vorstandsmitglieder) are explicitly mentioned. Members of the Board of Directors (Aufsichtsratsmitglieder) are protected if their membership constitutes an occupation. This will be the case if the membership is held in order to provide ongoing means of subsistence.

Materially the AGG protects members of corporate bodies regarding their job access as well as their occupational advancement. Hence it does not apply to the termination of service contracts. For reason of this distinction the prevailing view so far has been that the AGG neither applies to decisions about the termination of temporary employment contracts nor to the non-prolongation for reason of the age of the employee. In its ruling the BGH has now clarified that the non- prolongation of a fixed-term service contract of the managing director of a GmbH is not a decision about the termination but a decision about the (repeated) access to the job rather. Therefore the AGG would apply. This will have to be taken into consideration in connection with temporary service agreements with members of the Management Board (Vorstand). However, this reasoning cannot be applied to the termination of employment contracts without further ado.

The full text of the BGH’s ruling has not yet been published. Apparently the BGH did not comment on whether the Prohibition of Discrimination of the AGG likewise applies to the formal act of appointing members of corporate organs. In principle, the appointment of a corporate body’s members and the corresponding service contracts are legally independent from one another. Since the AGG applies to occupations, many argue that it only applies to the service contract which determines the income. However, this will be practically relevant only in rare circumstances, i.e. if a service contract is entered into unconditionally and before the person concerned is actually appointed member of the corporate organ in question.

It remains to be seen how courts will view age limits in articles of association/incorporation or service agreements. Obviously, such regulations are recommended for members of the Board of Directors (Aufsichtsratsmitglieder) and the Management Board (Vorstandsmitglieder) by the German Corporate Governance Codex (DCGK). If minimum or maximum limits for the occupational age are regulated, the AGG will apply. However, it can be expected that they will be better justified than with employees.

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