New Regulation of Employment Contracts for Executives (Czech Republic), (January 2012)

For the last years companies have been concluding employment contracts with their executives performing statutory functions despite the fact that there is a high risk of nullity of such contracts. Typical examples are the employment contracts concluded with executive directors of limited liability companies or chairmen of the board of directors of joint stock companies for the position of a Chief Executive Officer.

The Czech Parliament is about to pass an amendment of the Czech Commercial Code that would explicitly allow such employment contracts as of January 1, 2012.

A related amendment of tax and social security laws is being prepared. This amendment will remove the current differences in tax and social security regimes between employment contracts and contracts on the performance of the function.

However, the existing employment agreements of company executives, which were concluded in the past despite the risk of nullity, will not be cured. They will continue to be considered invalid with all related consequences for the parties of such contracts, i.e. in particular the risk of litigations between the executive and the company for the payment of unjustified enrichment or litigations against the state in the area of tax and social security collection or claims for other benefits (e.g. sick-leave, parental benefits or retirement pension).

If the amendment is be adopted in the proposed form, companies will need to consider concluding new employment contracts with executives, entering into effect as of January 1, 2012. The amendment will newly impose corporate approvals as a condition for the validity of these contracts as well as other matters relating to the remuneration of executives.