End of never-ending story on concurrence of offices?
Czech judiciary again dealt with the (un)acceptability of the concurrence of offices, i.e. whether members of a corporation’s statutory body may at the same time perform activities for the same company under an employment relationship. This time, this issue was discussed by the Grand Panel of the Supreme Court, subsequently issuing Decision 31 Cdo 4831/2017 on 11 April 2018. What was their view?
In the case in question the defendant, a chairman of a board of directors, entered into an employment contract with a company for the performance of a managing director’s office. The managing director’s office involved the same activities as those falling within the field of activity of the board of directors.
In its past decisions, the Supreme Court had been of the opinion that a contract concluded between a member of a corporation’s statutory body as an employee and the corporation as the employer under the labour-law regime, under which the member was to perform activities pertaining to the statutory body, was invalid and at variance with the law. The court argued that such activities did not represent dependent activities and that the occurrence, termination and content of a relationship between the statutory body member and the corporation was not governed by the Labour Code. It also argued that under an employment contract, the statutory body member may only perform activities for the corporation not falling within the scope of activity of a statutory body.
In its finding under file no. I. ÚS 190/15, the Constitutional Court found the above arguments at variance with the right to act freely and going against the principle according to which contracts should be adhered to. In addition, the court drew attention to the basic principle of interpreting contracts: the priority is to interpret a contract in a way that does not result in the invalidity of the contract rather than interpret it in a way that results in its invalidity if both interpretations are equally feasible.
In the light of the above finding, the Grand Panel of judges of the Supreme Court deviated from the conclusions made in its previous decisions. It concluded that although the relationship between a corporation’s statutory body member and the corporation should reasonably be governed by a contract of mandate under Section 66(2) of the Commercial Code in effect until 31 December 2013, the parties concerned may agree that their relationship will be governed by the Labour Code. Such an agreement, however, does not make their relationship an employment; it remains a commercial-law relationship, while it is only governed by those Labour Code provisions that are not at variance with the obligatory provisins of the Commercial Code, such as the rules regulating the origination and termination of an office of a statutory body member, the prerequisites of exercising such an office and the consequences of their absence, the remuneration of statutory body members via an executive service agreement that must be approved by appropriate bodies, the duty to exercise an office with due managerial care, and the implications of the breach of such duty.
The same applies where, in addition to an executive service agreement, a statutory body member and a corporation enter into an employment contract to perform some activities falling within the scope of activities of a statutory body. In such cases, the employment contract should be regarded an amendment to the executive service agreement.
Even though it appears that concurrence is admissible, the above situation lacks transparency for both corporations and statutory body members. Moreover, the implications in relation to the Corporations Act are still being discussed. We therefore recommend avoiding the concurrence of offices and concluding a good-quality executive service agreement that may also include traditional employee benefits.