Applicability of the Czech Labour Code on the Executives’ Contracts in Statutory Bodies and Concurrence of Functions
At the end of this year, there is not that many legislative news, which would be generally relevant for all entrepreneurs, as usual. Not only the Czech legislature, but also the Czech courts can introduce changes for entrepreneurs. One of the interesting and important case law for entrepreneurs in 2019 is the decision of the Supreme Court of the Czech Republic on the validity of an employment contract concluded by a member of the statutory body and its interpretation, if the Labor Code should be applied to it even partially in accordance with the will of the contracting parties.
Applicability of the Czech Labour Code on the Executives’ Contracts in Statutory Bodies and Concurrence of Functions
Concurrence of functions is a long-term topic within the Czech case-law and also in practice. We wrote about this problem already in our article Concurrence of executive position and employment under Czech law.
In decision of the Czech Supreme Court made on April11, 2018, File No. 31 Cdo 4831/2017, the court for the first time expressly allowed, that the member of the statutory body of the company and the company might, in the executive’s contract on performance of function, agree differently and derogate the general rule expressed in Section 66 para. 2 of the Czech Commercial Code (under this Section, the relationship between the company and its executive is governed appropriately by the Czech regulation of the mandate contract). Therefore, the executive and the company can in the executives contract agree, that their relationship shall be governed under the Labour Code regime. “Such arrangement (in relation to the exercise of competences of the statutory body) does not render the relationship between the company and the executive a labour-law relationship; it shall continue to be a business-law relationship governed by the Commercial Code and - as a result of a contractual agreement - by the (applicable) provisions of the Labour Code in the extent, that is not against a mandatory legal provisions governing the regulating (in particular) the position of a member of the statutory body of a business corporation and its relationship with the business corporation. ” Thus, the executive’s contract subordinated to the Czech Labour Code was not considered by the courts to be null or unlawful, given such contract must be interpreted in a way that maintain its validity, while excluding the application of a number of provisions of the Labour Code, which are against the rules applicable to the members of the statutory body of Czech business corporations.
In the Czech Supreme Court's opinion, the function of a member of the statutory body is no longer dependent work within the meaning of Section 2 para. 1 of the Czech Labour Code, even if the mutual relationship is, by agreement of both parties, subordinated to the Czech Labour Code. The above conclusions apply also in cases, where a member of a statutory body and a business corporation conclude, in addition to the executive’s contract, a concurrent “management” contract to act in specific areas falling into the competence of the statutory body (usually for business management), and in such management contract, a regime of the Czech Labour Code is agreed. In such cases, the management contract shall be regarded as an (kind of) amendment to the executive’s contract regulating the relationship between a member of a statutory body and a business corporation within the performance of certain activities within the competence of the statutory body. The management contract is not invalid only because it subordinated to the Czech Labour Code by agreement of the parties, but the same requirements must be met (required form, content and also the requirement for its approval by the competent body of the business corporation), as the executive’s contract itself.
An agreement contained in the executive’s contract (or in a concurrent “management” contract) that the relationship between a member of a statutory body and a business corporation (for the performance of a function in a statutory body) is governed by the Czech Labour Code, it is not possible to divert in particular from the rules governing the establishment and termination of the function of a member of the statutory body, the prerequisites for performing such function and the consequences of their absence, the remuneration of statutory bodies members, the form of the executive’s contract; the obligation of approval of such contract and the obligation to perform the function with the due manager’s care. Those rules must be, in principle, regarded as mandatory rules in view of their purpose and meaning.
Therefore, a function of a member of the statutory body of a business corporation is established at the moment of effectiveness of the decision of the General Meeting (or Supervisory Board) on the election of such member (if such member fulfils all the statutory requirements), regardless of the fact that the executive contract with the company is governed by the Czech Labour Code (under which such relationship shall be established by the date specified in Section 36 of the Czech Labour Code). If the elected member does not fulfil some of the requirements for the performance of the function of a member of the statutory body, the elected member does not become a member of the statutory body of the company, regardless of the fact that the concluded executive contract (or a concurrent “management” contract) should be governed by the Czech Labour Code.
Also, the termination of the function cannot be governed by the Czech Labour Code, and the competent body of the company can recall a member of the statutory body from the function (and this function ceases to exist) even without a specific reason (in this respect, the protection provided to the employees in the form of termination notice and termination period cannot be applied).
Likewise, the obligation of a due manager’s care and the obligation to maintain confidentiality on the information whose disclosure to third parties could cause damage to the company, including the consequences of their breach, binds a member of the statutory body regardless of whether the executive contract (or concurrent “management” contract) is governed by the Czech Labour Code. Even in such a case, the duty of a member of the statutory body to compensate for damage caused to the company by the performance of his/her function is not limited by four and a half times of such member’s average monthly remuneration (cf. Section 257 para. 2 of the Czech Labour Code).
The Czech Supreme Administrative Court also dealt with the validity of the employment contract concluded between the company and the member of its statutory body in decision made on January 17, 2019, File No. 10 Ads 284 / 2017-42, regarding a conflict of interest within the meaning of Section 22 para. 2 of the Czech Civil Code effective until the end of 2013. According to this decision, the employment contracts concluded by the same person on behalf of the employer (the company) and on behalf of the employee (the statutory body member) are not automatically null and void because of a conflict of interest within the meaning of Section 22 para. 2 of the Czech Civil Code effective until the end of 2013. The relevant administrative authority has to evaluate, in each individual case, whether there is a conflict of interest between a company as an employer and its statutory body member as an employee. These conclusions should apply also under the new Czech Civil Code (effective from the beginning of 2014), in particular under the Section 437 thereof.
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