Czech Republic: Statutory Body v Employee

It is a common practice in the Czech Republic that the statutory body or member of the statutory body (executive in a limited liability company and board member in a joint stock company)¹ is at the same time employed as a director. However, since 1992 the Supreme Court (SC) has steadily decided that this arrangement is not permissible, as the employment cannot overlap with the performance of the position of the statutory body, which must be performed in a commercial law relationship.

The main difference compared to employment is that the liability of the statutory body is stricter, with no limitations and no employment protection (eg, statutory vacation, notice period, severance payment, etc.). Further, statutory bodies are partly subject to different tax, social security and health insurance (SSHI) treatment.²

Although this point was regularly raised by lawyers, it was ignored in practice. Over 80% of companies, including such giants as ČEZ and Sazka, have used the incorrect scenario.

New court decision

Fresh air was brought in by the decision of the Supreme Administrative Court (SAC) published in spring 2011. Referring to the case law of the SC, the SAC decided that an executive of a limited liability company performing his activities in an (invalid) employment relationship is not entitled to sickness allowances because the sickness insurance payments he made to the system were based on an invalid employment agreement. Although this conclusion logically follows from the decisions of the SC, it has sparked a lively discussion in the Czech Republic. This reasoning about sickness allowances would also apply to pensions and health insurance.

The most usual example is an executive in a limited liability company with no contract and receiving no remuneration for this position who is, at the same time, employed as a general director/manager. This person has paid (high) SSHI contributions, but under an invalid employment agreement. Using the reasoning of the SAC, they are not covered by the SSHI meaning, for example, that no pension accrues for the period in question. Furthermore, they usually cannot recover the funds paid into the system as this is subject to strict time limitations.

Public debate, finally

As a result, a public discussion has finally started. The Ministry of Work and Social Affairs has published a position promising that the social security administration will not look into this when performing audits and will not challenge the right to pensions and other allowances. It is, however, questionable to what extent this position can be relied upon. Further, the Ministry cannot issue a position on health insurance companies where some of them are privately owned.

Amending the Czech Commercial Code

As a result of the media tempest, the performance of overlapping activities as employee should be solved by an amendment to the Czech Commercial Code prepared by the Ministry of Justice. The amendment should expressly allow the performance of certain business management activities by the statutory body in the employment relationship. Activities that may not be delegated to the employment relationship would include participation in meetings of the statutory body, decisions on the delegation of business management, and decisions on basic business orientation or further activities within the framework of the business management falling within the exclusive competence of the statutory body.

The liability of the statutory body stipulated by the Czech Commercial Code will remain unaffected by the delegation. It will thus be possible for the statutory body to have two relationships with the company, one under commercial law and another under employment law.

The amendment was recently approved by the Chamber of Deputies and no obstacles are foreseen in the Senate. It should take effect from 1 January 2012.

From that date, the treatment of statutory bodies from an income tax and SSHI perspective should also be harmonised with the treatment of employees. There is hope that the amendment will also solve the problematic history: it has been repeatedly recommended that the amendment state that SSHI contributions paid from an invalid employment relationship are deemed legal and create participation in the SSHI system.

After years of ignoring this "strange" issue raised by lawyers, it looks like at least a partial solution is on the way. A new start will then hopefully come with the recodification of the Czech civil law, expected to become effective from 1 January 2014.

Footnotes

1 In a limited liability company, each executive (jednatel) is considered a statutory body. In a joint stock company, the board of directors (představenstvo) is considered a statutory body and each board member is a member of the statutory body. For the purposes of this article, we use only the term statutory body. When referring to companies, we refer to limited liability and joint stock companies.

2 Currently, executive remuneration is subject to pension and health insurance but not to sickness insurance. It is fully tax deductible. On the other hand, the board member remuneration is not subject to social security or health insurance but is not tax deductible for the company.

This article was originally published in the schoenherr roadmap`12 - if you would like to receive a complimentary copy of this publication, please visit: pr.schoenherr.eu/roadmap.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.