March 2023 – This article refers to situations where a director of a Slovak company (i.e., a person appointed to be the statutory representative) is in parallel engaged as an employee, occupying a senior management position such as CEO, CFO, COO, etc., in the same company. These situations are relatively common in Slovakia, but they bring more practical and legal challenges than the company might expect.
Employment relationships are regulated by the Slovak Labour Code. In an employment relationship, the employee performs for the employer (the company) so-called dependent work characterised by the employer´s authority and the employee´s subordination.
Employment has the following main features:
The common term “director” refers to an individual statutory representative or a member of a statutory body of a Slovak company (typically the so-called (in Slovak) konateľ or člen predstavenstva), i.e., an individual who is by law entitled to represent the company. The director´s position and duties are regulated by the Slovak Commercial Code. Different to employment, the relationship between the company and a director is in principle a commercial relationship of equal parties. A director is typically appointed and removed by shareholders. Under Slovak law, the director acts on behalf of the company externally, i.e., represents the company vis-a-vis third parties and is also fully responsible for the management of the company “internally”, i.e., for the operational and strategic decisions in managing the company’s business.
A director’s relationship with the company is based on a written “contract for performance of the office” (in Slovak zmluva o výkone funkcie), which requires the approval of the general meeting. If no such specific contract is signed (which often happens in practice), the relationship is governed by the provisions of the Commercial Code in respect of mandate contracts, i.e., there is a “deemed mandate contract” between the director and the company. The application of other laws, in particular the Labour Code, on such relationship is excluded.
Based on the above, the director´s function cannot be performed under an employment contract. Such employment contract, if indeed concluded, would be deemed invalid in Slovakia.
However, a person appointed as director may simultaneously be an employee of the company, in situations where the job description under the employment contract is different from the duties of the director. For example, the director could at the same time perform the work of a Chief Financial Officer, which often meets the characteristics of an employment relationship. This conclusion on the existence of two parallel relationships is consistently confirmed by the Slovak courts. However, the real activities performed and the true relationship between the person and the company are scrutinised in each case individually. If the employment job description shows the characteristics of a director´s duties, the courts tend to rule on the invalidity of the employment relationship. On the other hand, if there is a clear difference between the activities performed under the employment relationship and the director´s duties, such duality is admissible.
Selected practical implications
Companies should plan carefully and ensure that their senior management signs proper contracts addressing the above duality. Below we outline frequent issues that tend to materialise in practice:
Companies often rely on existing employment contracts signed long in the past with their managers, even after the managers have been appointed as directors. Very often, parties merely amend the existing employment contract to include a new position and new salary. However, they do not sign a separate contract on the performance of the director’s function. This may become a real issue when the director and the company part, often in a hostile manner.
If there is no written agreement with the director, the Commercial Code assumes that the director should receive “adequate market remuneration” for the performance of the function. Recalled directors tend to sue their former companies for not being paid such adequate remuneration, claiming that the salary they received was paid purely for work under the parallel employment contract. These claims can grow into very significant amounts for years of a director’s service. The resulting court proceedings are lengthy and consume significant effort and money.
Companies also forget to formally tie the position of the director and employee. Consequently, if the director is recalled from the position by the shareholders, they find it very difficult to terminate the parallel employment contract. This is because the Labour Code grants significant protection to employees and allows termination only in specific circumstances, regardless if the employee is also a director at the same time. This complication can be overcome by adopting an internal policy setting out a rule that the appointment of a person to the director´s office shall be a prerequisite for the conclusion of an employment contract with such person, as this will allow the company to terminate the employment if such person is recalled from the director´s office.