Issues related to Concurrence of Membership

Aleš EppingerPartner, Schaffer & Partner

Issues related to Concurrence of Membership in the Governing Body and Employment.

On the below lines we would like to draw your attention to an issue that has recently been strongly debated – concurrence of membership in the governing body and employment regardless of whether a contract of service has been concluded between the company and the member of the governing body.

The problem lies in the overlapping of activities performed by the same person in the capacity of
a) a member of the governing body, which is a relationship governed in all circumstances by provisions of the Commercial Code, and
b) an employee who has concluded an employment contract with the company and his relationship with the company is governed by the Labour Code.

This situation occurs often with employments of highly positioned managers or sales directors. The Supreme Court and the Supreme Administrative Court of the Czech Republic have adopted a firm attitude in their judgements declaring employments null and void. The implications of the above conclusions of the case law go beyond a purely legal dimension into the tax dimension, specifically also with respect to sickness and social insurance paid under contracts that have not been validly concluded. We would therefore like to emphasise some key issues below that, in relation to this topic, deserve a special attention and, if correctly handled, may significantly contribute to the clarification of the entire situation and related risk reduction.

I. Problem definition

The biggest difficulty in the above mentioned concurrence is considered by courts to be the same material content of both relationships.
The Supreme Administrative Court in its judgments concludes that „the office of the governing body of a company is not a type of job and the formation and cessation of this legal relation is not governed by labour regulations but it is governed by the content of the Memorandum of Association.“ The consequence
is, therefore, that the employment relationship is null and void, i.e. from the beginning and without need to seek the nullity because
the employment contract does not include a mandatory element, i.e. job type specification. However, it is necessary to take into account
that this conclusion is based upon the old Labour Code. The new Labour Code (effective since 1 January 2007) already uses the institute of voidability. It differs from the nullity in that the invalidity does not occur automatically but it needs to be sought in court. Then, Section 5 (a) of the Act on Sickness Insurance establishes
that if the requirements stipulated by this Act are complied with employees with employment relationship have an insurance coverage.

It means that if no employment relationship is formed natural persons are not insured under this provision. On the other hand, even the Supreme Administrative Court adds in this respect that „neither legal regulations nor the nature of a limited liability company impede, however, natural persons from performing other activities (different from the discharge of duties
of an executive head) for a commercial company based on employment relations.” The discharge of duties of a member of the body of a commercial company includes acting in relation to third parties, as well as business management. The business management usually means company management, i.e. organisation and management of its business activities including decision-making with respect to business plans.

II. Criticism

The criticism of the above mentioned established case law may be heard from both professional and government circles. The Ministry of Justice is already preparing an amendment to the Commercial Code, which should explicitly allow the concurrence of both relationships. This amendment to the Commercial Code may, however, come into effect in spring this year the earliest and, moreover, it is not certain whether its provisions could be unconditionally retroactively applied also to existing employment contracts.

According to the statement of the minister of justice the current invalid employment contracts should be convalidated. Such retroactivity of law is, however, in our opinion more than problematic especially with respect to the fact that nullity means invalidity from the very beginning and as such it is not eligible to cause any legal implications and therefore it cannot be remedied in any way. For this reason it is right to review the existing employment contracts and to assess potential implications of the above mentioned conclusions. To make the picture complete we would like to add that also the Ministry of Labour and Social Affairs is preparing an amendment to the Act on Sickness Insurance relying on the fact that members of governing
bodies will participate in the sickness and pension insurance.

III. Outline of a Solution

Since these are not issues that could be easily handled and a clear view adopted that could be applied to all cases in the same way, it is not possible to offer a uniform solution that could be
generally applied to each individual case. Anyway, it is clear that concurrences of both relationships are nothing exceptional and it
occurs very often in practice. An obvious difference arises already from the above mentioned difference in assessing a possible invalidity of a contract either as null and void or voidable. However, it is always necessary to assess all circumstances of a particular case.
For employment relationships formed before 1 January 2007 it applies that they are null and void if the job content of the employment is identical with the job content of a member of the governing body. Such conclusion may, however, be drawn only seemingly generally as the assessment of the “identical job content” is fundamental for the conclusion on nullity.
For employment relationships formed after 1 January 2007 (under the same terms and conditions as above) it applies that they are
“only” voidable and only the one who is affected by such legal act may suggest invalidity. In general, we therefore recommend to judge employment contracts individually and/or to consult doubts and uncertainties with expert consultants and professionals in the field of labour and corporate law. If defects and potential invalidity are found out in employment contracts it would be desirable to conclude new
employment contracts that would clearly separate the job content and the discharge of duties of a member of the governing body.

The material difference between the job content and discharge of duties of a member of the governing body will substantially prevent the risk of challenging the respective employment contract. Such possibility was indirectly mentioned also by the Supreme Administrative Court when pointing out insufficient specification of differences in the nature of activities under an employment contract and activities performed by a member of the governing body. It is therefore always necessary to emphasise a careful specification of the job content included in the employment contract (actually, this conclusion may be generally applied to all employment contracts and not only to those with high risk of invalidity due to concurrence).

We would also like to take the liberty of summarising the above mentioned and include several points that may prevent similar situations
from occurring during employment contract execution in the future (in the envisaged amendment to the Commercial Code).

Several rules may be recommended in general:
a) It is necessary to clearly define the job content in employment. Contracts concluded with members of governing bodies. Such job content must be different from the duties of a member of the governing body. A member of the governing body is entrusted with business management of the company.

Such activity may not in any case “fall” within the job content of the person with whom the employment contract is being concluded. If such differentiation is adhered to, no problem will arise because as the Supreme Court adds:
Neither legal regulations nor the nature of a limited liability company impede natural persons from performing other activities (different from the discharge of duties of an executive head) for a commercial company based on employment

b) It is also necessary to take into account the fact that it is not important whether the duties of a member of the governing body are discharged for consideration or gratuitously.