Corporate officer and employee status

Summary

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The AFEP-MEDEF code (French governance code) indicates that when an executive of a listed company becomes a corporate officer, it is appropriate to terminate his employment contract with the company.

The scope of this rule is restrictive, since it only concerns the top corporate officers of listed companies. The majority of companies and executives – mainly corporate officers of unlisted companies/ subsidiaries of listed companies – can combine a corporate officer function with an employment contract, subject to fulfillment of a number of conditions.

Corporate officers sign a corporate officer contract (and not an employment contract) ; they are subject to the Commercial code (C.com) and not to the Labor code.

This is a fundamental difference, since the employee status offers much more protection, particularly in case of a breach of contract.

The accumulation of a corporate officer contract and an employment contract is cause for many disputes, especially at time of revocation of the contract.

Synthetic reminder of the corporate officer status

Regarding the compensation package, the status of corporate officer differs in certain respects from that of the executive having an employment status.

Corporate officers do not benefit from the Labor code or the Collective Labor agreement.

In particular, they do not benefit from these three key aspects :

  • Article 81A of the Tax code (CGI), which provides tax exemptions for travel abroad.

    The tax advantage is very significant ; for example, it allows for a tax-exempt revenue on circa 30% of gross annual remuneration for 85 days spent abroad (without any additional cost to the company) ;

  • Benefits concerning dismissal or retirement (notice period, severance pay, retiring allowance) ;

  • Unemployment insurance (Pôle Emploi).

    The specific unemployment insurance (GSC) for corporate officers presents two significant pitfalls compared to the employee plan :

    • A 12 month waiting period
    • A shorter coverage period :
      - 24 months versus 36 months for persons aged 50 or older,
      - And specially, for executives of at least 58 years of age, the Pôle Emploi allowances can be paid until the wind-up date of the full pension plan.

Note : corporate officers are subject to various risks in terms of civil and criminal liability, which suppose the implementation of some protective measures.

Conditions for cumulating a corporate officer contract and an employment contract

The possibility for an executive to accumulate the two status exists when various conditions are met :

  • The Board of Directors or Supervisory Board must decide on the future of the employment contract (is the employment contract continuing or is it suspended ?). If no specification is made, then it is generally considered that the employment contract is suspended, and as such the executive is exclusively a corporate officer ;
  • For executives being members of the Board of Directors, the executive must have had an employment contract in place prior to his appointment as a corporate officer ;
  • As an employee, the executive must exercise effective « technical » responsibilities distinct from the one he exercises as a corporate officer ;
  • As such, he must be « subordinated » to the employer : the executive must be under the authority and control of the employer who has the power to give him instructions, to supervise the execution of his contract and to impose sanctions if applicable. This implies that he does not have full powers as corporate officer ;
  • He must have two separate pay checks for these functions. This precaution is not sufficient, but necessary.

In principle, the executive recovers his employment contract the day he is removed from his corporate officer function, and if the company wishes to separate from him then it will have to dismiss him. In this case, many questions remain unsolved : in particular, the question of the level of seniority to be considered for the calculation of rights (should the period spent as a corporate officer be taken into account ?), or the question of financial compensation for unemployment benefits.

In order to avoid confusion and to make a clear distinction between the corporate officer position and the employment contract, it is common practice, when possible, to ascribe the employment contract in a separate legal entity.

In a few words :

  • If the Board of Directors or Supervisory Board decides to accumulate a corporate officer contract and an employment contract for one or several of its executives, we strongly recommend that the Board specifies :
    • The powers attributed to the corporate officer ;
    • The maintaining of the employment contract ;
    • The main components of the compensation package as a corporate officer and as an employee ;
    • The anticipated plan in terms of liability.
  • If the Board decides to suspend or terminate the employment contract, it should specify :
    • The powers attributed to the corporate officer ;
    • The main components of the compensation package, possibly compensating those which he will no longer be able to benefit from : profit-sharing, Article 81A ...;
    • The subscription of a specific guarantee for unemployment insurance ;
    • The measures in the event of breach of contract (notice, revocation indemnity, non-competition clause, outplacement).
    • The anticipated plan in terms of liability.

ESSERE ASSOCIES can help you define and implement your policy regarding the status of your executives.