The correct setting of the legal and contractual relation between a company and its statutory body (or a member of such body) is often a tough nut to crack. Problems occur mainly in a situation when the respective person is also to become (or remain) the company’s employee as a manager. In terms of law, is such concurrence of functions possible? What contract should the respective relationship be based on? The Czech courts have been dealing with this issue for several years now. At the beginning of this year, the Constitutional Court also expressed its opinion and, finally, the issue seems clear now.
The inadmissibility of the “true concurrence of functions”, i.e. a situation when a member of the company’s statutory body is simultaneously its employee in an executive function, and its consequences for the employment (i.e. implied termination/non-existence) has long been confirmed by court judgments. In its judgment, the Constitutional Court now focused on the setting of contractual relationships between the company and a member of its statutory body.
The Constitutional Court was deciding on a constitutional complaint of a chairman of the board of directors of a company, who was simultaneously employed as a managing director at this company. The reason for the dispute was the fact that the company removed him from both positions and terminated his employment for redundancy. These events led to long-standing court disputes, in which the complainant demanded wage compensation from the company for the notice period, whereas the company required the complainant to pay back the remuneration of a managing director on the grounds of unjustified enrichment. Thus, the Constitutional Court (again) dealt with the consequences of the concurrence of functions of a member of a statutory body and a managerial employee from the view of mutual financial settlements.
First of all, it has to be considered that the position of a member of a statutory body represents a specific institute provided for mainly by the Civil Code and the Business Corporations Act. These acts clearly define the limits of the position of members of a statutory body including their duties and responsibilities, which cannot be waived or restricted by any agreements concluded with the company. The contractual relationship between the company and a member of a statutory body is also regulated: the legal condition for the (executive service) contract coming into effect is its approval by the company’s supreme body. If the contract is not approved, it is ineffective, and any payments provided based on such contract constitute unjustified enrichment on the side of the statutory body (or its members).
In practice, employment (management) contracts, based on which members of statutory bodies are remunerated, are often concluded in accordance with the Labour Code. The sticking point is the fact that such contracts and payments provided based on these contracts are not approved by the supreme body of the company as required by the Business Corporations Act.
In this context, the Constitutional Court confirmed its previous conclusion that a member of a statutory body is not an employee. Regardless of which legal regulation governs the contractual relationship between the member of a statutory body and the company, no employment exists. However, the parties are free to subordinate the management contract they conclude to the Labour Code. It is necessary, though, to take into account the limits set by corporate law. According to the Constitutional Court, if a management contract is concluded, it is fully in conformity with the Constitution to consider it as an amendment to the executive services contract and to place the same formal demands on it, including the obligation of the contract being approved by the respective body (which is the condition for the contract to come into effect).
If the parties wish to apply the Labour Code regulations to their legal relationship, the most recommendable approach is for them to always conclude an executive services contract , which will be subsequently approved by the company’s supreme body. The parties should specify which Labour Code provisions are incorporated in the contract (while taking into account corporate limits) and negotiate all remuneration and other payments the member of the statutory body will be provided with. In case they do not comply with this procedure, the parties put themselves at risk that the remuneration will not be paid out based on a valid and effective legal title and the member of the statutory body may be asked to return the payments provided.
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