Ida Budayová Kuklišová of PRK Partners explores the key issues relating to the relationship between companies and top managers in Slovakia.
"Because of a dearth of case law, certain aspects of the regulation of relationships between a Slovakian company and its board members or executives remain unclear."
As the position of employee representatives is strengthened and employee protections against dismissal are increased, the regulation of legal relationships between a Slovakian company and its top managers (board members or executives) is being widely discussed again. Local practice developed a dual system, whereby both commercial and employment law apply to these relationships. Since commercial law alone is sufficient to regulate these relationships, the question arises whether following market practice is in the best interest of the company.
This article does not attempt to provide an exhaustive list of issues arising out of the dual system; rather, it merely draws attention to selected ones – namely top managers’ liability for damage and certain aspects of termination of their engagement with a company.
Regulation of the relationships
In Slovakia, relationships between a Slovakian company and its board members or executives (ie, top managers) are not necessarily of a labour law character. Under the Slovak Commercial Code (Act No. 513/2001 Coll) these relationships are regulated by commercial law, either by an agreement on function performance or, if such agreement is not concluded, by a mandate agreement. The Slovak Commercial Code specifies the terms for this kind of mandate agreement. As opposed to an employment contract, in an agreement on function performance the parties have broad flexibility to agree on the terms of the engagement as well as how it can be terminated.
Even though it is possible to regulate the relationship between a top manager and the company exclusively under commercial law, which is more flexible than labour law, it is still not uncommon for a company to conclude an employment contract, typically for positions like CEO or general manager. Opinions vary on the validity of these kinds of employment contracts in Slovakia, and there is still no relevant case law that would give a definite answer to this issue. As a result, where the company and the top manager entered into an employment contract, the company is forced to take into account and follow both commercial and labour law regulations. This dualism results in a number of issues in practice – especially with respect to a top manager’s liability for damage and as it relates to the termination of his or her engagement with the company.
Liability for damage
Under the Slovak Commercial Code members of the board and executives are liable for damage caused to the company due to a breach of their obligations. This liability is of a commercial law character and extends to both actual damage as well as lost profit (subject to certain conditions). Negligence is presumed with respect to a breach of obligations and the damage; the top manager must prove the contrary. The Slovak Commercial Code prohibits exclusion or limitation of this liability.
Liability for damage in the context of an employment relationship differs significantly from commercial law liability. Generally, an employee is liable only for actual damage. The employer can request compensation for lost profit only if the damage is intentional and not recovering the lost profit goes against good morals. The onus is on the employer (the company), which must prove the employee’s intention or the negligence in connection with the breach of obligations as well as proving that damage occurred. Furthermore, if the damage resulted from the employee’s negligence, the employee is liable for the damage only up to four times his or her average monthly salary.
When a top manager is a board member or executive and at the same time is engaged under an employment contract, a clash in liability for damage occurs. In practice it is impossible to distinguish between the actions of a top manager as a board member or executive and as an employee, and the outcome of litigation is hard to predict. Such a dual nature of the top manager’s engagement can make the company unable to recover damages from the top manager or to recover it in the full extent.
This is another area where dualism in a top manager’s engagement can cause complications. In practice the company must terminate the commercial law relationship (under the agreement on function performance or under the implied terms of a mandate agreement) as well as undergo the formal process of employment termination.
Termination of a commercial law relationship does not cause many problems in practice. Generally, the termination is not limited by specific reasons, and unless the agreement on function performance provides otherwise, no notice period and no severance payments apply.
Terminating an employment relationship, on the other hand, is more formalistic and subject to various statutory limitations. Currently, Slovak law does not provide any simplifications or exemptions for terminating the employment of managerial employees; therefore, the full standard employment termination process must be followed. This article does not attempt to list all formal requirements for termination; our aim is to point to certain selected aspects of employee protection that prove problematic with respect to terminating a top manager’s engagement – namely the limitation of reasons for termination, the obligation to offer another suitable position and the involvement of employee representatives.
Unless the top manager agrees to the employment termination, the company is significantly limited in reasons it can use to terminate employment. The Slovak Labour Code (Act No. 311/2001 Coll) sets out an exhaustive list of employment termination reasons, which cannot be extended by agreement. The reasons include underperformance, breach of work discipline, health reasons as well as organisational reasons.
It is worth stating that the employer (the company) must always prove the reason for terminating employment. This may not be easy in practice, especially if the company terminates a top manager’s employment due to underperformance or breach of work discipline. In many cases evidence collected by the company is sufficient for the company to lose its trust in the top manager, but not enough to withstand the burden of proof in litigation on validity of the employment termination.
The most flexible means of terminating employment is to recall the top manager from the position. Surprisingly, this sort of termination is not often used in practice. In order to terminate in this way, the company’s corporate documentation must set out an appointment by a corporate body as a requirement for the relevant employment position. The Supreme Court ruled that the condition of appointment to the position must exist before the employee takes up the position (enters into the employment contract); otherwise, the company cannot terminate in this way. In most cases this option is not considered when a company’s corporate documentation is prepared, or it is implemented correctly. Changing the corporate documentation and renegotiating the employment contract is usually not an option when the termination of the top manager’s engagement is already being considered, which is why such recall is not used often. The company is therefore usually forced to find another recognised means of terminating employment.
Another aspect of employment termination specific to Slovakia is the obligation to offer to the affected employee another suitable position if such a position is vacant at the agreed place of work. This obligation arises if the employment is terminated for organisational reasons (the most common) or for health reasons. Case law has broadened the meaning of a “suitable position” to any position that can be objectively performed by the employee; it does not have to correspond to the top manager’s qualifications. A junior position can even be considered suitable for the top manager. A position requiring retraining of the top manager can also be suitable. If the company (the employer) fails to offer such a vacant position to the top manager, the employment termination can be declared invalid.
Further, if the top manager is engaged under an employment contract, the involvement of employee representatives is a consideration (if active at the company). Regardless of the reason for a unilateral termination by the company, consultation with employee representatives is required for it to be valid. The employee representatives have seven days (or in certain serious matters two days) to express their views on the termination. Even though no agreement need be reached and the termination is valid even if the employee representatives disagree with the termination, this requirement usually represents a complication in the termination process. This requirement can also force the company to release often confidential information on the termination of the manager’s engagement before it has an opportunity to agree with the managers on the terms of the termination or to send the manager on “garden leave” and risk complications during later attempts to deliver a termination notice.
Obviously, employment termination is subject to further formal requirements, such as form, delivery method, etc. In the case of a dispute a court will strictly review all these requirements and most faults will lead to full invalidity of the termination.
Because of a dearth of case law, certain aspects of the regulation of relationships between a Slovakian company and its board members or executives remain unclear. In practice a dual system developed where, in addition to a commercial law relationship, an employment relationship is created by an employment contract between the company and the top manager. This practice developed even though these relationships can be sufficiently regulated solely under commercial law. Such dualism brings complications, especially in the context of a top manager’s liability for damage and when terminating his or her engagement with the company. Given these complications, it is advisable to consider whether following the most common practice (ie, the dual system) is in the best interests of the company.