Employment contracts for managing directors - International Law Office

International Law Office

Employment & Labour - Luxembourg

Employment contracts for managing directors

November 09 2011

Introduction
Key contractual clauses
Other aspects of valid employment relationships
Aspects incompatible with employment relationships
Affiliation as an independent worker


Introduction

In a series of decisions on eligibility for the re-employment grant,(1) the Administrative Court has clarified the conditions on which an employment contract can be concluded between a limited liability company and its managing director.

At first sight, it seems paradoxical for the same individual to be both an employee and a managing director. Under an employment contract, an employee is bound by a relationship of subordination to the employer, whereas a managing director is mandated by the company to act on its behalf as its legal representative. Moreover, in limited liability companies the managing director is, in principle, the sole managerial body.

Nonetheless, an individual can fulfil the two functions simultaneously, provided that:

  • the employment contract refers to the tasks and duties that are to be performed by the employee; and
  • the latter is bound by a relationship of subordination to the company.(2)

Thus, the contract must stipulate a technical function(3) that is separate from the corporate mandate.

If the sole aim of the employment contract is to ensure eligibility for re-employment support, it will not be regarded as an authentic and valid agreement,(4) which must reflect the position in both fact and law.

On this basis, a managing director will not necessarily be entitled to re-employment support merely because an employment contract and a certificate of registration as an employee have been supplied to the social security administration.(5)

Key contractual clauses

The term 'employment contract' is defined as an agreement whereby a person consents to perform certain duties as directed and controlled by an employer in return for an agreed wage. The employee is subordinate to the employer, which gives instructions on the performance of the work, monitors its execution and assesses the results.

The clauses of the employment contract may indicate whether an authentic employment relationship can be said to exist. The contract must set out:

  • a mandatory working schedule;(6)
  • a fixed wage;(7)
  • the amount of leave available to the employee and the terms on which it may be taken;(8)
  • an obligation to comply with the employer's internal regulations;(9) and
  • a precise description of the employee's technical functions in the context of the employment relationship, as distinct from the individual's mandate as a director.

For example, in specifying an individual's employment functions, the contract might indicate that the employee is hired as a 'corporate adviser' and is in charge of 'incorporation, tax advisory, financial advisory and all related administrative tasks' - in principle, this constitutes a separate technical function. An employment contract that does not precisely describe the tasks that the employee performs in practice will be insufficient to demonstrate that the technical functions are separate from the individual's mandate as a director.(10)

Other aspects of valid employment relationships

These clauses of an employment contract are not necessarily sufficient to prove that an employment relationship is valid, since subordination is not the sole criterion of the employment contract. Moreover, an employment contract is not confirmed as such merely by the expression of the parties' will, whether through the designation of their agreement or the terms in which they describe it. For example, the employer's right to issue instructions or impose penalties fulfils the subordination criterion, regardless of whether the employer exercises such power. The reality of the employment relationship depends on the factual circumstances in which the work is performed.

The subordinate relationship of employee to employer is an essential criterion of an employment relationship and distinguishes an employment contract from other forms of contract, such as a service contract. It requires that the employee perform the work under the employer's authority. Although monitoring of the employee's performance of the work is one of the criteria, constant and permanent monitoring is not required, provided that the employer has a right to issue instructions to the subordinate on the performance and organisation of his or her work.(11)

The existence of an employment relationship, as governed by an employment contract, may be demonstrated by presenting a body of specific and consistent evidence for the court's appraisal.(12) Salary slips and copies of requests for leave have been deemed to contribute to a finding that an employment relationship exists.(13) In another case, a detailed description was submitted of the functions exercised by the employee for the company, noting that the employee was to be given precise orders by the employer on the tasks to be performed, in the person of the majority shareholder whose office was located at the same place as the employee's. The court inferred the existence of close control exerted by the majority shareholder over the employee, who followed the employer's instructions and did not act on personal initiative.(14)

Aspects incompatible with employment relationships

Certain features of a role are incompatible with a relationship of subordination.

Business licence in managing director's name
An issue may arise if the company's business licence is issued on condition that one designated employee be appointed as managing director. In such cases, it would be difficult to decide to dismiss the employee, as his or her dismissal would invalidate the licence and would have an economic impact - albeit only temporarily - on the company. Therefore, a managing director in this situation cannot be considered an ordinary employee, since he or she holds a power over the employer that an ordinary employee would not hold.(15)

Shareholdings
Where the employee holds a significant proportion of a limited liability company's shares, it may be more difficult to adduce decisive evidence of an employment relationship. An employee who holds 22.4% of the company's shares would not be deemed an employee, especially if he or she were the sole managing director. Selling the shares and assuming an appointment as a category B manager a few days before signing an employment contract would not be an acceptable solution and would not prove that the claimed employment relationship was authentic.(16)

Sole manager with power of attorney
If an individual is the sole manager of a company, this may constitute grounds on which to challenge the authenticity of an employment relationship, as the managing director could not issue instructions to himself or herself. In the absence of another manager (eg, an administrative director) or managerial entity with the power to make commitments on the company's behalf and to give the managing director orders in the context of the latter's employment relationship, the managing director is unlikely to be regarded as being in a relationship of subordination to the company, since the former would hold full power of attorney in the exercise of his or her managerial functions.(17)

Moreover, the mere fact that a company has a second managerial body is not irrefutable proof of a relationship of subordination, particularly where the other manager is related to the supposed employee. Where such a family relationship exists, this may constitute grounds to challenge the authenticity of the subordinate relationship in practice.(18)

However, the Administrative Court has previously suggested that it may be possible to mitigate the risks stemming from the accumulation of respective responsibilities as managing director and employee if the individual resigns the position of sole manager well before signing an employment contract and if this is communicated to the Ministry for Small Businesses and the Professions and to the Trade and Companies Register at a time when the employee is still bound by an employment contract with the employer. Resignation as a managing director does not comply with the requirements in terms of publication and results in the employee remaining registered as a managing director with the register, despite his or her intention to resign, but this does not in itself preclude the existence of a relationship of subordination, since fulfilling a corporate mandate does not prevent an individual from concluding an employment contract.(19)

Affiliation as an independent worker

For social security purposes, the distinction between employees and independent workers is based on objective criteria. Thus, provided that the business authorisation regulated by the Law on the Regulation of Craft, Trade and Industrial Professions and Certain Independent Professions (September 2 2011) applies,(20) the following persons qualify as independent workers:

  • associates who hold more than 25% of the shares in a general partnership company, a limited partnership or a limited liability company; and
  • administrators, general partners or proxies who are committed to the daily management of limited companies, partnerships limited by shares or cooperative companies.

The position taken by the administrative and labour courts on the accumulation of responsibilities as a managing director and an employee tends towards the designation of a common concept of an 'independent worker'. This is particularly significant as Luxembourg's instruments of corporate and labour legislation outline different principles that govern the concept.

For further information on this topic please contact Guy Castegnaro or Ariane Claverie at Castegnaro by telephone (+352 26 86 82 1), fax (+352 26 86 82 82) or email (guy.castegnaro@castegnaro.lu or ariane.claverie@castegnaro.lu).

Endnotes

(1) The re-employment grant is available only to workers who agree to a relocation in the context of a professional function that implies a relationship of subordination. Thus, an unemployed person who starts a profesional activity as an independent worker is ineligible for the grant (Administrative Court Decision 26176, November 17 2010).

(2) Court of Appeal Decision 24443, February 8 2001.

(3) Administrative Court Decisions 27159 and 27252 (March 23 2011 and May 18 2011, respectively).

(4) Administrative Court Decisions 27444 and 27457, July 12 2011.

(5) Decision 27252.

(6) Decision 27457.

(7) Decision 27159.

(8) Decision 27252.

(9) Decision 27159.

(10) Decision 27252.

(11) Decision 27159; Decision 32887 of the Court of Appeal (Labour Law Division), November 27 2008.

(12) Among other case law, see Administrative Court Decision 26176, November 2010, and Decisions 27252 and 27159.

(13) Decision 27252.

(14) Decision 27159.

(15) Decisions 27252 and 27457.

(16) Decision 27252.

(17) Decision 27444.

(18) Decision 27457.

(19) Decision 27159.

(20) Article 1(4) of the Social Security Code.


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