Dismissal Protection for Managing Directors: Federal Labour Court Clarifies the Order of Removal and Termination

Many assume that managing directors of a German limited liability company (GmbH) are excluded from dismissal protection across the board. That assumption is too simplistic. In its judgment of June 18, 2026 (case no. 2 AZR 89/25), the Federal Labour Court (Bundesarbeitsgericht, BAG) made clear that whether the Dismissal Protection Act (Kündigungsschutzgesetz, KSchG) applies turns on two factors: the contractual basis of the managing director’s engagement and the timing of removal and termination. 

The newly published reasons for the judgment show that terminating a managing director’s engagement without careful preparation can create significant risk. This is particularly true for non-shareholder managing directors engaged under an employment contract. 

No Dismissal Protection for Company Officers, but Only While They Hold Office 

Under Section 14(1) no. 1 KSchG, general dismissal protection does not, as a rule, apply to members of the body that represents a legal entity by law, which includes GmbH managing directors. The rationale is that those who exercise employer functions sit on the employer’s side and should not enjoy the same protection as employees. 

Crucially, this exemption applies only if the individual still holds office when the notice of termination is received. That is exactly where the BAG’s latest decision comes in. 

BAG: A Removed Managing Director Can Become an Employee Again 

The case concerned a managing director engaged under an employment contract containing a reassignment clause. The company first removed him from office and, several months later, terminated his employment with notice. In the interim, he worked as a “Special Project Manager“ reporting to the new managing director. 

He brought an unfair dismissal claim, arguing that he had regained employee status once removed from office. The BAG agreed with him insofar as it rejected the widely held view that former managing directors remain permanently exempt. 

Receipt of Notice Is Decisive: Three Scenarios 

The BAG held that Section 14(1) no. 1 KSchG requires the individual to still hold office when the notice of termination is received. This gives rise to three scenarios: 

1. Termination first, removal second 
   If notice is served while the individual is still appointed as managing director, the exemption in Section 14(1) no. 1 KSchG applies. 
   Result: The Dismissal Protection Act does not apply. 
2. Removal first, termination second 
   If the individual no longer holds office and works under an employment contract, the former managing director can, in principle, claim protection under the KSchG. 
   Result: The dismissal must be socially justified. 
3. Termination and removal at the same time 
   In the BAG’s view, it is sufficient for both notices to be received at the same time. 
   Result: The exemption still applies, and there is no dismissal protection. 

The sequence of removal and termination is therefore critical to any subsequent litigation risk. 

A Service Agreement Does Not Eliminate Every Risk 

Of particular note are the BAG’s comments on managing directors engaged under a traditional managing director service agreement. These are arrangements in which the corporate office defines the relationship and the managing director is not personally dependent on, or bound by instructions from, the company in the way an employee typically is. The label on the contract is irrelevant. What matters is that the managing director is not subject to employee-type instructions as to the time, place and content of the work. 

Here, the court confirmed its established case law: the Dismissal Protection Act generally does not apply to genuine managing director service agreements. Even so, companies should not wait indefinitely after a removal before serving notice. 

Risk arises in particular where the former managing director continues to work for the company after removal. A short handover or the winding-down of current business should normally raise no issues. The position may differ, however, if the individual takes on operational duties on a lasting basis and acts under the company’s direction. 

The further the new role departs from the original managing director function, the more likely a court is to ask whether an employment relationship has arisen in the meantime. If so, general dismissal protection could apply. 

What This Means in Practice: “Managing Directors Have No Dismissal Protection” Is No Longer a Safe Assumption 

The decision shows that the rule of thumb “managing directors have no dismissal protection” no longer holds without qualification. Companies should ask the following questions in particular: 

• Is the role based on an employment contract or a service agreement? 
• Does the individual still hold office when the notice of termination is received? 
• Will the individual continue to work for the company after removal? 
• Are removal and termination properly timed in relation to each other? 

Mistakes can carry significant financial consequences, particularly for non-shareholder managing directors, whose contracts often contain features of an employment relationship despite being labeled “service agreements.” 

How Companies Can Avoid Dismissal Protection Risks 

To avoid unnecessary dismissal protection risks, companies should: 

• adopt the resolutions on removal and termination, and serve both, at the same time wherever possible; 
• keep careful records showing when both notices were received; 
• avoid extended transition periods or continued employment after a removal; 
• review the contractual basis of the managing director’s role at an early stage; and 
• identify any dormant employment relationships in advance. 

Conclusion: Removal and Termination Belong Together 

With its judgment of June 18, 2026, the BAG has clarified the significance of corporate office for dismissal protection and drawn a clear line on where the risk lies. The decisive question is whether the individual still holds office when the notice of termination is received. For managing directors engaged under an employment contract, removal before termination can trigger protection under the KSchG. 

The practical takeaway is clear. As a rule, companies should implement termination and removal together, or at least simultaneously, and document receipt. Doing so will generally prevent avoidable unfair dismissal litigation.