By Barbara Timková and Jan Gerych of Wolf Theiss and Roger James of Ogletree Deakins
The status of employment contracts concluded between board members and companies has been clarified by a decision by the Supreme Court of the Czech Republic after many years of twists and turns in case law and legal interpretation. The Court has held that board members and companies may, under certain conditions, agree that their relationship should be governed by rules of the Czech Labour Code, thus providing the individual with certain “employment” rights.
The question whether a board member may conclude an employment contract with the company has been keeping Czech courts busy for almost three decades. Generally, the courts have been of the opinion that a board member cannot both perform his office of director and be an employee of the company. Consequently, employment contracts concluded between board members and their companies have been repeatedly held to be invalid. Similarly, former employees promoted to the board often found themselves without a contract: it ceased to exist the moment of their appointment as a board member by operation of law. However, in April 2018, the Czech Supreme Court issued a decision that, to a certain extent, relaxed this uncompromising approach.
Specifically, the Supreme Court derogated from its previous case law and ruled that a board member and a company may opt for their relationship to be governed by the Czech Labour Code. However, such an arrangement does not establish an employment relationship between the parties. Rather, the parties are still considered to be in a business law relationship governed by mandatory provisions of business law. Only such Labour Code rules that are not in conflict with these provisions apply. Hence, mandatory business law provisions regulating, among other things, the appointment and recall from the board, fitness for office, and duty of due care prevail over different provisions of the Labour Code. Importantly, board members are still not employees of their companies, and the companies are not their employers.
The Czech Supreme Court’s decision should temper the approach of the lower courts, which has been to pronounce employment agreements concluded by a board member and the company invalid. Instead, certain provisions of the Labour Code may be found to apply, although the individual will not have the status of employee. However, case law has changed many times, producing different outcomes with respect to this issue. The latest decision will hopefully set a uniform standard of interpretation for the future, but the issue is far from resolved. Future case law is going to be required to clarify some unanswered questions, such as which employment law rules conflict with mandatory business law provisions and which do not. Until then, opting to apply the rules of the Labour Code to directors cannot be recommended.
Compliments of Ogletree Deakins, a member of the EACCNY