Rude awakening for the company if a manager’s annual leave is not properly documented
If the managing director of a company is dismissed and their employment contract ends, this is often accompanied by a rude awakening for the company.
In many cases there will follow considerable claims for compensation for unused annual leave. It is not uncommon for managing directors not to have submitted any holiday time for two or even more years according to payroll accounting.
According to the provisions of the ‘Labour Code’ (LC), the managing director must receive appropriate compensation for unused leave. If the employer delays payment, compensation is due (see also article here). The shareholders often take the view that the managing director was actually on holiday and is responsible for the fact that they did not properly document their holiday. In their opinion, the managing director will therefore not be entitled to any compensation.
Does the LC offer a solution?
The LC serves to regulate specific details in connection with the managing director’s employment contract, but it does not control the procedure for granting leave. Instead this is subject to general provisions which apply to employees. According to the LC’s own provisions, the granting of annual leave is compulsory. In practice this depends upon a few legally relevant facts. Annual leave is granted upon the employee’s initiative, ie. a request from the employee is required and then the employer is required to supply their consent or otherwise justify a refusal in order to formalise the granting of leave. According to case law from the Lithuanian Supreme Court, these provisions also apply in the case of a managing director.
What does case law say?
In a recently decided case, the Supreme Court emphasised the fact that a managing director was not authorised to decide upon the act of granting their own annual leave or to carry out any associated records-keeping. Due to a conflict of interest a managing director cannot represent the company as an employer when concluding an employment contract with themselves or when changing the terms and conditions of their employment, and neither can they do so when determining remuneration or exercising other rights. This also applies to the granting of annual leave.
In order to prove that the managing director has taken paid annual leave as an employee, the employer would have to prove that: 1) the managing director has submitted a request for leave; and 2) the employer has made a favourable decision in regard to this request.
The company’s shareholders meeting was responsible for deciding upon any annual leave requests. As the employer in this case was unable to provide any evidence that the shareholders meeting had actually decided upon the managing director’s annual leave request, the Supreme Court found that the employer had failed to prove that the managing director had in fact taken any annual leave.
In view of the above, we recommend that you review the procedure for granting annual leave to management, and implement a suitable procedure for doing so. This applies in particular if the company does not have a management board. The aforementioned principles are usually especially surprising for those foreign shareholders who are used to laws in another country in which employment contracts are not concluded with managing directors.
Source:
Lithuanian Labour Code