Contracts for Managing Directors

Court decision may impact structure, deductibility, and benefits of executive compensation

John Mohr

Written by John Mohr Published on 16.05.2011 15:04:14 (updated on 16.05.2011) Reading time: 3 minutes

Companies that currently employ directors on parallel or employment-only contracts should contract their managing directors on statutory management contracts only to avoid costly audit and tax costs.

On 09 December, 2010, the Czech Supreme Administrative Court (NSS) entered yet an additional opinion (nr. 3 Ads 119/2010-58 ) addressing the standing of directors and board members in commercial companies vis a vis disability payments and income tax. This opinion resolved that:

1. A single manager may not be engaged to the firm as an employee if the manager´s duties include responsibilities reserved to the director under §134 and §135 of the Commercial Law. (These speak to the responsibility of the director for the commercial, accounting and statutory management of the company.) The opinion specifically precluded the existence of a parallel employment and the director´s relationship.

2. The preclusion of an employment relationship also precludes the manager´s the right to receive state disability benefits – a benefit reserved to employees since 01.01.2009. (The manager does remain covered under the pension insurance plan in those months where s/he earns in excess of the statutory minimum – 6.300 Kc in 2011.)

3. In the case that a manager-employee exercises activities reserved to the director, the employee contract risks being voided and related expenses (disability withholding, wages) being deemed tax non-deductible(!)

4. Parallel contracts are possible only insofar as the employment contract does not extend into areas of responsibility reserved to statutory management. For practical purposes, this is a non-starter. (Imagine: Director with a janitorial employment agreement ….?)

Small companies: A practical problem demands a practical solution
The problem here is one of both regulatory compliance and profitability. We seek to maximize the value of our company´s assets by shrewdly reducing or eradicating uncompensated risk and avoiding disruptions to our carefully-planned operations. We seek to avoid tax-nondeductible expenses unless they achieve comparatively higher revenues.

Most small companies with whom I have worked have a single manager who carries out the functions of the statutory executive as well as a host of additional employment activities. Often, this person is the sole shareholder. Sometimes the subsidiary of a small multinational corporation with a limited budget appoints a manager to fulfill both statutory and other management activities. In both cases I have encountered parallel contracts (statutory plus employment) and employment-only contracts where the manager has also been appointed director. This is not optimum.

Small companies need simple solutions. The only reasonably simple solution is a statutory management contract, only, approved by the shareholder meeting (or sole shareholder decision in the capacity of same). The director should countersign all manager-employee contracts and contracts negotiated by them, in writing.

If the company is not managed by a single sole shareholder/director, then the company should split the functions of director and manager-employee into the hands of 2 or more persons in written contracts. Manager-employee contracts in particular should specifically exclude the responsibilities of directors listed in §134 and §135 of the Commercial Law, except perhaps insofar as their role is merely to carry out the decisions of the director. In such a case, the company should also establish internal procedures to ensure that this division of responsibility is sufficiently documented.  It might be practical and cost-effective to appoint the local manager-employee´s boss at the foreign parent as the director, to sign or co-sign all key decisions and contracts and use the local management to carry out their decisions. What does HQ think?

Whatever the case, it is important to establish the director of the company as the primary decision-maker in corporate management. To the extent we can do this we avoid disruptions to business and maximize our opportunities to succeed. If these issues affect your situation, consider engaging  advisors that can help you put in place a practical solution that addresses the legal, tax and operational questions in play.


John W. Mohr
is director of CFO2GO entrepreneurial advisory, delivering online and outsourced accounting, domiciliary and financial advisory services to internationally-financed businesses and expats in the Czech Republic.

Would you like us to write about your business? Find out more