Groundbreaking ruling of Supreme Court regarding manager contracts

The Czech Supreme Court has submitted to the legal opinion of the Czech Constitutional Court (“the CCC”), whose ruling we have informed you of and its summary may be found HERE, and by doing so has changed its established decision practice.

On the basis of the groundbreaking ruling, the CSC explicitly allows companies to validly enter into a so-called manager contract with its executive director (or a statutory body member) with the contract being subject to the Czech Labor Code. In all likelihood, the approach is to be applied to contracts signed in compliance with the current Corporation Act.

Nevertheless, even though the manager contract refers to the Labor Code, the substance of the labor-law character of the relationship between the statutory body member and the company is not to change – the director does not become an employee on the basis of the manager contract and Labor Code provision only apply to a limited extent. The director may nor claim the employee protection in accordance with the Labor Code which would be in contradiction with the binding provisions of the corporate law. The Labor Code provisions, then, need to be regarded more like “general terms of a contract” or an appendix to a contract on the exercise of a function.

The CSC ruling is contributory in the fact that is lists which specific corporate rules may not be violated by signing a manager contract under the provisions of the Labor Code. The cited examples are:

  • The executive director may be removed from their office at any time (even without giving any reason for it); hence, a notice period rules as stipulated by the Labor Code do not apply and the director is not protected by the period of notice unless the company statutes/articles of association state otherwise;
  • The manager contract must be drawn in a written form and approved by the General Meeting, which also applies for any remunerations (i.e. “salary”) of the executive director;
  • The executive director is bound to perform their duties with due managerial care and maintain the professional secrecy of confidential information;
  • The executive director is bound to pay damages in whole should any be caused by them since the liability for damage is not limited by the Labor Code.

The CSC concluded that legal proceedings concerning manager contracts are always to be regarded as disputes between the statutory body and the company, and as such are to be heard by regional courts as the courts of first instance (as opposed to labor-legal disputes in which case they would be district courts).