Concurrence of executive position and employment relationship under Czech law
CONCURRENCE OF BOARD (EXECUTIVE) POSITION AND EMPLOYMENT IN CZECH REPUBLIC
The parallel existence of membership in the Czech company’s statutory body (i.e. board member, executive, managing director), and a position as an employee (manager) in the same company (“concurrence”) has become the subject of on-going debates in Czech Republic. It should be noted that such concurrence is common in Czech companies; it may almost be called standard practice that the executive of a limited liability company is also its employee (aside from his/her work as executive). While the relationship between the board member (executive) and the company is governed by the Czech Business Corporations Act (until December 31, 2013 by the Czech Commercial Code (act No. 513/1991 Coll., as amended)), the relationship between the Czech employee and the Czech company is governed by the Labor Code (act No. 262/2006 Coll., as amended), with all the pertinent consequences. One of these consequences is a divergent understanding of the liability for damages caused to the company and the related obligation to compensate for damages.
The Czech courts have repeatedly assumed an antagonist position vis-à-vis the phenomenon of concurrence, especially in cases where the employment agreement (or the letter of appointment) explicitly defines the scope of work as the exercise of membership in the statutory body, but also if the duties and responsibilities assumed in the context of employment de facto include the exercise of membership in the statutory body (i.e., if the scope of work implicitly equals membership). Further, the courts have repeatedly found employment relationships null and void, where the position held under the employment relationship overlapped with that of a member of the statutory body. The Czech courts’ prevailing jurisprudence reflects the view that concurrence is inadmissible, also in order to prevent abuse of the differences of performances under commercial law and under labor law in the form of “cherry-picking” (in cases where one and the same person claims both types of performance) – with the following exemption. A Czech company may of course enter into an employment relationship with any individual as long as the content of such a relationship does not equal (nor imply) the exercise of the membership in a statutory body. If follows that concurrence is legitimate, provided that the employment agreement is concluded for a different type of work than the position of a member in the statutory body. For this reason, it is crucial that the scope of tasks and responsibilities be precisely defined in the employment agreement, such that they do not overlap with the same individual’s work as a board member. At present, Czech law does not provide for any explicit regulation regarding the above-described situation.
FUNDAMENTAL DIFFERENCES BETWEEN THE EMPLOYMENT RELATIONSHIP AND THE PERFORMANCE OF THE EXECUTIVE (BOARD MEMBER) POSITION
There are fundamental differences between the employment relationship and the performance of the executive (board member) position and that is information summarizes the comparison of the employment contract and the executive agreement/agreement on performance of the position of managing director/board member of Czech company. Further details are also included in the following table, which also includes suggestions for possible solutions to the differences.
In particular, we would like to highlight certain aspects of the position and protection of the employee, which is contained in the Czech Labor Code in its entirety and related labor legislation. On the other hand, it is not possible to secure the full protection for the executive agreement, which is provided by the Czech Labor Code (and other provisions of Czech law). It should therefore be pointed out that it is not possible to fully transfer all the elements of the protection of an employee governed by labor law to the executive agreement. The executive agreement is a completely different legal relationship, which is not protected by the Labour Code.
It should also be necessary to point out that in the case of a change in labor law legislation, these changes also affect existing labor relations. In the case of an executive agreement, both parties have to consent with the changes.
The executive agreement is always the subject of a business relationship between the parties and it is not possible to ensure the same protection for the executive as follows for employees under Czech labor law. However, the concurrence of the functions of the executive, i.e. the employment relationship with the executive, is long-term problematic and cannot be recommended. The most problematic was the judgment of the Czech Supreme Administrative Court of 9 December 2010, file no. 3 Ads 119 / 2010-58, which did not recognize the participation of a executive in sickness insurance on the basis of an employment contract with the director, which was referring to settled private case law considered absolutely invalid. Following judgments, these absolute conclusions relativized, but also after the last judgment of the Czech Supreme Court of 11 April 2018, file no. 31 Cdo 4831/2017, it is necessary to view the performance of the office of executive and potential employment with caution and the activity of the executive cannot be assessed according to labor-law rules. Especially in the case where the employment relationship should be in the position of the general director, the employment contract with the executive cannot be recommended.
RESPONSIBILITY FOR DAMAGES
Employment contract under Czech law
The employment contract is always strictly governed by the Labor Code, which lays down special rules governing liability for damages, both by the employee and the employer.
In the case of employee liability for damages caused to the employer, it is most important for the employee to set a statutory limit for damages if the damage is not intentionally caused.
The employer is liable for damages caused to the employee during performance work, work-related injuries or an occupational illness on strict liability, which means that there is no culpable or unlawful conduct. It is sufficient if the employee has suffered damage during performance the work or in direct connection with it. The employer is obliged to compensate the employee for actual damage.
Executive agreement under Czech law
In the case of an executive agreement, liability for damages is governed by the Civil Code, which stipulates the obligation of the executive to proceed with “due managerial care”. The executive must always act with due managerial care, i.e. act with loyalty, necessary knowledge and care. When considering whether the executive has acted with due managerial care, account is taken of the care that would be exercised in a similar situation by another reasonably thorough person in the executive’s position. Due managerial care also includes the ability to decide which issues should always be addressed by a specialist in a particular area. Violation of this obligation may result in a claim for damages and it is important to note that the executive is liable for all damages incurred by the company in connection with the breach of this obligation on its part.
In deciding whether there has been a breach of the principle of due managerial care, the burden of proof is on the part of the executive to prove that he has acted in accordance with this principle. Only in cases where the court finds such a situation unfair, the burden of proof would be on company.
Any contractual arrangement that would exclude or limit the liability of the executive would be considered null and void.
In specific cases, the executive may even be directly responsible for fulfilling the company's obligations (e.g. Section 68 of the Business Corporations Act).
In particular, the fact that the company is not liable in principle for damages caused to the executive on his property while performing the tasks or in direct connection with it may be a disadvantage of the executive position.
The solution of the liability of the executive for damages caused to the company would be the conclusion of the relevant commercial insurance.
LIABILITY FOR LOSSES ARISING FROM WORK-RELATED INJURIES AND OCCUPATIONAL ILLNESESS
Employment contract under Czech law
According to the legislation, the system of mandatory statutory insurance of employers' liability in the case of work-related injuries and occupational illnesses applies.
The regulation of employer's liability for damage is not only governed by the Labor Code, but also by the Ministry of Finance Regulation No. 125/1993 Coll., which lays down the conditions and rates of statutory liability insurance for damages caused by an accident at work or occupational illnesses.
Executive agreement under Czech law
The executive agreement does not provide such statutory protection, such as the Labor Code or mandatory statutory employer´s insurance, in the event of damages, work-related injury or occupational disease. A possible solution would be commercial insurance.
PROHIBITION OF TERMINATION OF THE CONTRACTUAL RELATIONSHIP IN SPECIAL CASES
The Czech Labor Code provides protection for employees from termination of employment in specific situations. The Labor Code, which only applies to an employment contract, determines to the employer, in specific cases, the prohibition of termination of employment with the employee, for example - in case of illness, pregnancy, public office, etc. Moreover, the employment contract can only be terminated for reasons stipulated by law.
No similar protection is provided for in the executive agreement. The Executive may be recalled at any time, with immediate effect.
SEVERANCE PAYMENTS IN CASE OF TERMINATION THE EMPLOYMENT
In cases stipulated by law, an employee is entitled to severance payment at the termination of his / her employment in the amount of stipulated by the Labor Code. On the other hand, the legal regulation of the executive agreement does not provide similar protection, but in the case of standard severance payment it can be contractually adjusted similarly such as at the employee.
As an example of severance payment, we mention the case of termination of employment for health reasons of an employee arising from work performance. In the event that an employee is unable, based on a medical certificate issued by the occupational health service provider, to perform his / her previous work due to a work-related injury, occupational illnesses, the Labor Code stipulates a severance payment of twelve times the average earnings.
In order to give the executive the same protection, the executive agreement would have to be amended to include relevant provisions relating to severance payment under the Labor Code.
In conclusion, we would like to point out that the above differences are not a complete list of all possible differences between the employment relationship and the position of the executive, but a description of the points that we believe are the most important.
|Issue||Employment Relationship||Executive Agreement||Possible solution|
|Responsibility for damages||The Labour Code provides for specific rules governing and to a significant extent limiting the responsibility of the employee to the employer for the damages and at same time rules governing the responsibility of the employer to the employee for the damages.|
In terms of the employee’s liability please see for example :
Section 257 (2) of the Czech Labour Code
“(2) The amount of damages (i.e. compensation for damage) to be paid by an individual employee, if such damage is a result of his negligence, may not exceed an amount equal to four-and-half times his average monthly earnings before the breach of his obligation having resulted in the damage. This limit shall not apply if the damage was caused intentionally or when the employee was drunk or after abuse of other addictive substances.”
“The court may proportionally reduce certain damages due to specific causes.”
In terms of the employer’s liability please see for example :
“(1) The employer shall be liable to his employee for damage (harm) sustained by the employee in performance of working tasks or in direct connection therewith by the employer's breach of statutory duties (obligations) or intentional conduct against good morals (contra bonos mores).
(2) The employer shall also be liable to his employee for damage (harm) having been caused to this employee by other employees who breached their statutory obligations in performance of working tasks in the name and on behalf of the employer.
(3) The employer shall not be liable to his employee for damage to the employee's means of transport which the employee used in performance of working tasks or in direct connection therewith without the employer's consent. The employer shall similarly not be liable for damage to his employee's tools, equipment and other things needed for performance of work if the employee used them without the employer's consent.“
|The Czech Civil Code requires that executive always act with due managerial care. Acting with ‘due managerial care’ means acting in a way that is (i) loyal, (ii) based on enough information and (iii) thorough. When assessing whether or not an executive has acted with due managerial care, account is taken of the care that would be exercised in a similar situation by another reasonably thorough person in the executive’s position. Due managerial care includes the ability to decide which issues should be handled by an expert in a certain field. A breach of due managerial care may result in a claim for damages and it is important to stress that executive is liable for all damage which the company incurs in connection with a breach of this duty on his/her part. Should any dispute arise as to whether an executive has been acting with due managerial care, the burden of proof will always rest with the executive to prove his or her proper conduct, unless the court decides this would be unjust, in which case the company must bear the burden of proof. Any agreement excluding this executive liability will be deemed null and void.|
In specific cases, the executive can be also liable for fulfillment of company’s obligations (Section 68 of the Czech Business Corporations Act).
The company is in principle not responsible for the damages caused to the executive and his/her property (car etc.) in performance of working tasks or in direct connection therewith.
|Commercial insurance (Directors’ & Officers’ (“D&O”) Insurance).|
|Liability for losses arising from work-related injuries and occupational illnesses||In the Czech Republic there is currently a system of Insurance required by law, for the liability of the employer for losses arising from work-related injuries and occupational illnesses. |
The employer’s liability for a work-related injury or occupational illness is an objective liability and is governed by the Labour Code and the Decree of the Ministry of Finance no. 125/1993 Sb. It is enough that the employee has suffered an injury while carrying out a task at work or in direct connection with it. This means that there is no requirement to prove the employee’s fault or any illegal act. The employer is liable for losses arising from a work-related injury, even if he has broken no legal obligation or directive.
Strictly speaking, it is not really insurance, but, rather, from the point of view of the operating insurance companies, an operation commissioned by the state to specifically identified insurance companies, Česká pojišťovna and Kooperativa.
|No protection as the mandatory insurance protects only employees.||Commercial insurance (Directors’ & Officers’ (“D&O”) Insurance).|
|Termination of contractual relationship in specific cases||The Labour Code prohibits the termination of employment relationship in specific cases (Section 53 of the Czech Labour Code): illness, pregnancy, exercise of public office etc.||No similar protection. The executive can be recalled anytime with immediate effect.||No solution possible.|
|Severance payments in specific cases||The Labour Code provides for 12 months severance payment in case of termination of the employment relationship if the employee is not allowed according to a medical certificate issued by the occupational medical services provider or under a ruling of the competent administrative agency having reviewed the medical certificate, the employee is not allowed to perform his current work due to an industrial injury, an occupational disease.||No similar protection.||The executive agreement would have to be redrafted to take into account the specific provisions of the Czech labour law.|
For more information, contact us at:
JUDr. Mojmír Ježek, Ph.D.
ECOVIS ježek, advokátní kancelář s.r.o.
Betlémské nám. 6
110 00 Praha 1
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