A fundamental change in case-law on the performance of the duties of a statutory body under an employment contract

1. Introduction

The case law of the Supreme Court has long held the view that a contract concluded between a member of the statutory body of a commercial company and that company under the Labour Code, in which the member of the statutory body (hereinafter “statutory body”) was to carry out activities falling within the competence of the statutory body (usually business management), was invalid due to inconsistency with the law.

These conclusions presented considerable problems in practice, for if the employment contract was invalid, so were arrangements regarding remuneration. In the event of a company’s bankruptcy, insolvency administrators often sought the payment of remuneration on the basis of invalid employment contracts. In such a case, the statutory body had to seek usual remuneration, which could be considerably higher (less favourable for the company) or lower (less favourable for the statutory body) in many cases.

However, in its judgment of 11 April 2018 in case no. 31 Cdo 4831/2017, the Supreme Court rejected this established practice and reached a different conclusion. The decision by the Grand Panel aims to unify the decision-making practice of the lower courts and the conclusions set out in this judgment should govern all courts of lower instance in the future, despite previous opposite decision-making practice.


2. Change of the Supreme Court’s opinion

The change of the Supreme Court’s opinion is based on the finding of the Constitutional Court of 13 September 2016 in case no. I. ÚS 190/15, in which the Constitutional Court concluded that existing arguments invalidating employment contracts concluded for the performance of activities falling within the competence of the statutory body were contrary to the principle of autonomous will and contractual freedom. According to the Constitutional Court, the courts should be more inclined to interpretations leading to the validity of a legal act, rather than vice versa.

The main argument for which an employment contract for the performance of the duties of a statutory body was considered invalid was that the duties of the statutory body were not performed in a superior-subordinate relationship. The statutory body is not subordinate to the company that acts as the employer, but on the contrary, the company is governed by the statutory body. Yet the superior-subordinate relationship is one of the fundamental features of dependent work, the performance of which is the subject of an employment contract.

However, the Supreme Court’s new argumentation infers that this does not prevent the statutory body and the company from agreeing on a relationship within the bounds of cogent (mandatory) legal norms.

The statutory body may therefore agree with the company that their relationship will be governed by the Labour Code. However, this does not mean that an employment relationship exists between the company and the statutory body. Their relationship continues to be governed by the Act on Business Corporations (formerly the Commercial Code) and those provisions of the Labour Code whose application is not precluded by the mandatory provisions of the Act on Business Corporations (hereinafter “ABC“),

These conclusions apply mutatis mutandis if, in addition to a contract for the performance of the duties of a statutory body under the ABC, the statutory body and the company also conclude a concurrent “management” contract for the performance of certain activities falling within the competence of the statutory body (usually business management) under the regime of the Labour Code. In such a case, the management contract must be regarded as an addendum (of its kind) to the contract for the performance of the duties of a statutory body governing the relationship between the statutory body and the company.

Therefore, the management contract is not invalid simply because its parties have subjected it to the Labour Code, but the same requirements apply (in terms of form, content and so on) as to the contract for the performance of the duties of a statutory body.


3. Mandatory provisions of the ABC

Thus, an employment contract for the performance of the duties of a statutory body may be subject to the Labour Code, but the Labour Code only applies in those areas where the Labour Code does not contravene the mandatory provisions of the ABC.

The provisions governing the following areas can be regarded as mandatory:

  • Establishment of the position (the position cannot be established by concluding an employment contract, but only arises in the manner stipulated in the ABC, i.e., as a rule, by appointment by the General Meeting or other body)
  • Termination of the position (the position cannot be terminated by notice, the grounds for termination do not apply, the position will be terminated in the manner stipulated in the ABC – usually by dismissal, resignation or expiry of the term of office)
  • Requirements for the performance of the position and consequences of non-fulfilment (if the statutory body ceases to meet the requirements under the ABC, it ceases to be a statutory body regardless of the existence of a contract)
  • Care of a good manager and confidentiality (the statutory body has these obligations regardless of whether the contract is subject to the Labour Code)
  • Liability for damage (liability for damage is not limited to four and a half times average monthly earnings, but is consistent with the ABC, i.e. without limitation)

4. Conclusion

The previous decision-making practice of the Supreme Court that an employment contract for the performance of the duties of a statutory body (or activities falling within the competence thereof) was absolutely invalid has been overturned.

The Supreme Court has conceded the company and the statutory body can validly agree to subject their relationship to the Labour Code, but only in those areas not excluded by the ABC. However, subordination to the Labour Code can never lead to an employment relationship between the company and its statutory body and therefore the statutory body can never be a company employee.

Some of the mandatory provisions are described above, but only future decision-making practice will show which other provisions of the ABC and to what extent the courts regard as mandatory and from which it will not be possible to deviate by reference to the Labour Code.

The Supreme Court has even conceded the concurrence of an existing management contract under the ABC and an employment contract, in which case the employment contract must be regarded as an addendum of its kind to the management contract.

This resolves all the complications resulting from the invalidity of such employment contracts. It is also still possible to conclude employment contracts for the performance of work corresponding to the duties of the statutory body. However, it is also important to take the mandatory provisions of the ABC into account.

For more information, please contact our office’s partner, Mgr. Jiří Kučera, e-mail:jkucera@kuceralegal.cz ; tel.: +420604242241.

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