The Grand Senate of the Czech Supreme Court has (again) revisited the issue of whether or not it is permissible for one and the same person to hold the position of a member of the management („statutory body“) and at the same time to work for the company under an employment contract. In its decision, the Supreme Court has set out new rules.
Generally speaking, „concurrence of functions“ describes a situation in which a member of the management body (the „statutory body“) of a company is at the same time employed with the company under an employment contract – e.g. as a director and as the CEO. Such employment relationships are governed by the Labor Code, whereas the legal relationship between the company and the members of its statutory body is governed by the provisions of the Civil Code and of the Corporations Act (which have superseded the previous Commercial Code in this respect).
Older case law found that the office of a „board member“ (member of the statutory board) could not be lawfully exercised within the context of employment (so that any employment agreement to such effect would have to be considered invalid or, as it were, terminated by implication). The courts took the same position towards employment agreements which had formally been made for a different position, but with a job description that essentially matched management functions reserved for the statutory body. This meant that members of the statutory body could only engage in work for the company on the basis of an employment agreement if the tasks were clearly outside the scope of competencies of the statutory body – though it was sometimes hard to determine what kind of work would fall within this scope or lie outside it.
As a consequence, members of the statutory body did not enjoy the kind of protection employees afford under the Labor Code (notice periods in the case of termination, severance pay, bonus arrangements agreed in employment agreements).
A recent ruling by the Czech Supreme Court indicates a major shift in how the judiciary perceives the „concurrence of functions“: according to the justices, a parallel employment agreement may now be seen to represent some sort of addendum to the manager agreement. Such an employment agreement should be valid, and certain provisions of the Labor Code should thus apply to the legal relation between the company and the member of the management. At the same time, the court apparently denies that the agreement gives rise to standard employment, and indeed, the member of the statutory body will still be subject to the fundamental duties and restrictions that apply to corporate officers (i.e., in particular, the duty of due care, unlimited personal liability, the possibility of being recalled from office, even for no stated reason, and the need to have both the agreement and the compensation package approved by the supreme body of the company – i.e., the general meeting or the shareholder).
In spite of these promising signs, then, a number of issues remains unclear, which is why we still advise against arrangements that could qualify as a „concurrence of functions“.
Supreme Court ruling 31 Cdo 4831/2017 of 11 April 2018