Employees in Germany are entitled to an allowance where their working hours are reduced as a result of the COVID-19 pandemic. But does this entitlement extend to managing directors? This article examines when and under what conditions managing directors can claim the short-time working allowance.
The much-vaunted COVID-19 ‘second wave' is well underway and it will most likely accompany us through the winter months and far into 2021. This will exacerbate the tense economic situation in many sectors and short-time working (known as ‘Kug') will remain in focus. The number of employees on short-time working, especially in small and medium-sized enterprises, has been at a high level since May, but nevertheless declined over summer. The latest developments suggest that applications for short-time working allowances will increase again; even more so relevant in view of the extension of the short-time working allowance adopted by the Federal Cabinet in September.
But as Corona becomes a more permanent state of affairs, new orders dwindle or disappear entirely, no events in the art and culture sector are possible without risk of infection, and tables remain vacant and rooms unoccupied in the hotel and restaurant industry due to numerous restrictions and anxiety, the question arises: can a managing director apply for Kug as well as the workforce?
Requirements for a short-time working allowance claim
The requirements of s95 of the Third Book of the Social Code (‘SGB III') for entitlement to Kug are now well known:
- There must be a temporary, substantial loss of work with loss of income for economic reasons or as a result of an unavoidable event (i.e. at present at least 10% of employees must suffer a loss of income of more than 10%).
- At least one employee must be employed in the company.
- The employee in question must meet the personal requirements (i.e. in particular, he or she must be in an employment relationship that is not subject to termination)
- The loss of working hours must be reported to the employment agency at the company headquarters.
If these prerequisites are met, s95 sentence 1 of SGB III makes it clear that the entitlement to this benefit is granted to ‘employees'.
How are managing directors classified under social security law?
However, as already examined several times (including here), the concept of the ‘employee' in the sense of social security law differs from the classification as an employee under German labour law: According to s7(1) sentence 1 of the Fourth Book of the Social Code (‘SGB IV'), employment is to be understood as ‘non-independent work' which is performed in particular, but not exclusively, in an employment relationship. It depends to a large extent on the obligation to follow instructions. In the case of members of executive bodies, this obligation to follow instructions is assessed exclusively on the basis of the circumstances under company law. For this reason, the Federal Social Court has consistently affirmed the obligation of managing directors to pay social security contributions because according to the legal concept of s37 paragraph 1 of the Limited Liability Companies Act (GmbHG), managing directors are in principle bound by instructions of the shareholders' meeting. This is, however, not the case if the managing director holds at least 50% of the company's share capital or a blocking minority. In these cases, the board members have the legal power to block instructions at any time.
Pitfalls when applying for Kug for managing directors
This means a managing director who is subject to social insurance contributions can be entitled to Kug. This was recently confirmed by the Social Court of Speyer (decision of 22 July 2020 – S 1 AL 134/20 ER) in the context of a preliminary injunction procedure.
In the proceedings, the applicant, an entrepreneurial company (UG) with limited liability, claimed from the responsible employment agency, among other things, that the Kug approved for company should also be granted to the managing director of the UG. The UG's managing director hold a share in the company's capital stock and is therefore subject to social security contributions under German law. He was also affected by the reduction in working hours suffered by the company as a result of the COVID-19 pandemic. The company specialised in coach travel and school transport.
However, there is an aspect that has to be taken into account, particularly in the case of the members of executive bodies, when applying for the short-time allowance. This also led the way to legal action in the proceedings in question: in a crisis, managing directors are usually particularly busy developing strategies to end short-time work: acquiring customers, developing new sales concepts, adapting the product range, etc. This is often announced prominently in the Kug application by the employer in order to demonstrate that it is only suffering a temporary loss of working hours which it is trying to address.
Ultimately, however, short-time work compensation can only be paid to the extent that the individual employee actually suffers a loss of pay. Therefore, the information on the loss of working hours on the one hand and the intended measures to end the recession, especially with regard to the managing board members, must not contradict each other in principle. Otherwise the employment agency concerned could have objections.
Given the above, employers the following practical advice applies where companies wish to apply for Kug (for short-time work allowance) for managing directors:
- Managing directors who are subject to social security contributions under German Law may in principle be entitled to apply for Kug if the requirements of SGB III are met and a legal basis has been created in an individual contract. It should be noted here that the remuneration used to determine the Kug is only taken into account up to the income threshold.
With regard to managing directors, the shareholders' meeting is usually responsible for agreeing on short-time work and for any subsidies to be paid by the company. It is legally a supplement to the service agreement and, if an extra payment is paid in addition to the Kug, it is also a question of remuneration
- Although the threshold value of the ‘substantial loss of working hours with loss of remuneration' in the sense of s95 of SGB III is determined by reference to the business and does not have to be given for each employee individually, the granting of the Kug to a managing director or the business guide presupposes nevertheless, the managing director actually suffered a loss of working hours.
Against this background, the employment agency dealing with the application for short-time allowance is likely to have doubts if the captain abandons the sinking ship too soon. The information in the application concerning the temporary lack of work on the one hand and the information concerning the actual reduced workload of the managing director on the other hand must not therefore be fundamentally contradictory.
However, it is possible to demonstrate this in a convincing manner, especially in smaller companies that have to close down completely for the duration of official orders due to the corona pandemic.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.