What kind of contract should the CEO have?

What kind of contract should the CEO have? How many times have we been faced with this question? What is the answer?

It is an almost metaphysical question: How to convey the contractual relationship between a CEO who performs executive functions on behalf of a company? A priori we usually start from a premise. To consider that a commercial relationship based on the exercise of management functions would absorb and annul an employment relationship.

In fact, the corporate courts have considered that if there is a relationship of integration in the administrative body and if the powers are exercised directly or through internal delegation, the relationship is not an employment one. Therefore, the Courts, under these two premises, consider the relationship to be a commercial one. As a result, under these two premises, the Social Security regulations have no effect whatsoever.

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The nature of the Board of Directors and the Chief Executive Officer

And this is so because the Courts have been denying that the essence of the administrative body has a merely consultative, orientative or control or intervention content.

On the contrary, the administrative body and the Chief Executive Officer are responsible for direct and executive action, the exercise of management, direction, decision making of any nature and relevance and the representation of the company. All these actions involve the performance of tasks inherent to the condition of the company’s directors, and fully fit into the performance of the position of director or member of the administrative bodies in companies that have the legal form of a company.

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The Workers’ Statute and the position of the Chief Executive Officer

In this sense, Article 1.3 of the Royal Legislative Decree 2/2015, of October 23, which approves the revised text of the Law of the Statute of Workers is clear. This article excludes from the scope regulated by this Law: c) The activity that is limited, purely and simply, to the mere performance of the position of director or member of the administrative bodies in companies that have the legal form of a company and provided that their activity in the company only involves the performance of tasks inherent to such position.

The Capital Companies Act and a new regulation of the Chief Executive Officer

On the other hand, Law 31/2014 of December 3 carried out an important reform of the general regime applicable to the administrators in the capital companies, introducing as a requirement that when a member of the board of directors is appointed as a managing director or is assigned executive functions by virtue of another title, it will be necessary to conclude a contract between the latter and the company, which must be previously approved by the Board of Directors with the favourable vote of two thirds of its members, and the affected director must abstain from attending the deliberation and from participating in the vote, and which will detail all the concepts for which he may obtain remuneration for the performance of executive functions, including, if applicable, any compensation for early termination of such functions.

The Chief Executive Officer and the STS 98/2018

The Supreme Court, Civil Chamber, in its Ruling No. 98/2018 of February 26, ruled that in the case of simple administration, there may be functions that are alien to the position of director, namely those of management and direction of the company. In these cases, a labor contract is not possible because in this case the labor functions overlap or coincide with those inherent to the position of administrator in these forms of organizing the administration.

That is to say, and it seems a recent peaceful criterion, the contractual relationship of a Managing Director, with executive functions, which include those of direction, management and administration, and the Company, would be of a mercantile nature, and it would be obligatory to enter into a contract under the terms of the Law on Corporations, given that its purpose is not only to control and specify the different concepts of the Director’s remuneration, but also to convey the Director’s consent to accept the position and the terms of remuneration, as well as his relationship with the Company, so that both parties are bound by the terms of this contract, and regardless of their social security status, which could be:

• Either in the Self-Employed Regime (RETA) when they have the effective control, direct or indirect, of the Company, that is, when (i) the Director’s shares or holdings represent half of the share capital, (ii) when at least half of the share capital is distributed among partners with whom the Director lives and is united by a marital or family relationship, (iii) he owns shares equal to or greater than one third or (iv) he owns shares equal to or greater than one quarter of the share capital with management and administration functions.
• Either in the General Regime as assimilated, without unemployment protection or FOGASA, when they do not have effective control of the Company.

(FOGASA – Fondo de Garantia Salarial – Salary Guarantee Fund)

If this article has been of interest, we also suggest you to read the following article published on our website: When does the prescription period of Directors´ liability elapse?