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Written by Josep Conesa
Employment and insolvency lawyer
Employment status of a corporate director:
The question of whether a person appointed as a company director holds an employment relationship with that company is often a highly significant one, not only when assessing potential dismissal compensation, but also when determining how a director should have made Social Security contributions, and what consequences any failure to contribute may have in terms of the Labour Infringements and Sanctions Act (LISOS), contribution arrears, and surcharges for non-payment.
Case law has traditionally held that a director or any member of the board of directors occupies an executive position within the company and, as such, forms part of its management structure, giving rise to a commercial rather than an employment relationship.
- The ruling of the Supreme Court of 26 December 2007, for example, establishes the doctrine of the nature of the legal relationship, affirming that the relationship is commercial and not employment-based where a person simultaneously holds the position of board member or member of the company's governing body and also carries out management functions, since it is the nature of the legal relationship, not the functions performed, that is determinative. A commercial relationship is established where there is integration into the corporate management structure, whether directly or by internal delegation.
- Likewise, the ruling of the Supreme Court, Fourth Chamber (Social Division), ruling 739/2017 of 28 September 2017, Appeal no. 3341/2015, declares the employment courts to lack jurisdiction where a person simultaneously performs duties inherent to the board of directors and carries out senior management or general management functions. In that case, the employee held a 33% shareholding, as did the other two partners, was President of the Board of Directors, and acted with full autonomy, independent initiative and complete responsibility. An employment contract had been signed with the company classifying the individual as a section head, but there was no evidence that duties characteristic of that ordinary employment relationship were actually performed.
- The ruling of the Supreme Court, Fourth Chamber (Social Division), 206/2022 of 9 March 2022, Appeal 742/2019, examines the case of a self-employed worker and shareholder of a company who performed the role of financial adviser. One day, the board of directors resolved to revoke his powers and barred him from accessing the company's premises. In that case, the individual simultaneously held the position of board member and general manager. The Supreme Court determined that his relationship was commercial in nature, since he not only held 18% of the company's shares, but was also integrated into the management of the company and did not perform ordinary or routine work.
- The ruling of the High Court of Justice of Madrid, Social Chamber, Section 2, ruling 146/2007 of 8 February 2007, Appeal 5068/2006 also draws a distinction between those holding management powers or a power of attorney and those who are senior executives subject to the special employment relationship governed by Royal Decree 1382/1984. Under that regime, the provision of services must be carried out with autonomy and full responsibility, with powers inherent in the legal ownership of the company and relating to its general objectives; the employee, in performing their functions and exercising their powers, must also enjoy autonomy and assume the corresponding responsibility. That autonomy of the senior executive may only be limited by instructions issued by whoever holds legal ownership of the company.
By contrast, workers who receive such instructions from management bodies delegated by whoever holds ownership of the company must be considered to fall outside the scope of the Senior Executives Decree and therefore to be governed by a standard employment relationship. Middle managers, even where they exercise ordinary managerial functions, remain subject to ordinary employment law, since classification as a senior executive requires accountability solely to the governing body, this being a defining characteristic of that status, in accordance with the repeatedly cited Article 2.1 of the Workers' Statute (Supreme Court judgment of 12/09/1990).
Can a director of a company be an employee of the company?
- The ruling of the High Court of Justice of Andalusia (Granada), Social Division, ruling 197/2012 of 26 January 2012, Appeal 2901/2011, nevertheless found that the employment courts had jurisdiction over a case in which an individual simultaneously held the roles of shareholder, joint director, and service provider, giving and receiving instructions reciprocally.
In that ruling, the Court held that there is no legal bar to excluding from the scope of the employment contract, the exclusion, under Article 1.3(c) of the Workers' Statute (which must be interpreted restrictively), applies only to "activity that is limited, purely and simply, to the mere performance of the role of board member or member of the governing body… provided that their activity within the company involves only the discharge of duties inherent to that role", those members of the company's governing body who, not holding a majority of the share capital, carry out ordinary employment activities, as was the case here. Accordingly, it is in principle possible for a corporate role and an ordinary employment relationship to coexist or be exercised simultaneously, consistent with the established case law of this Court, including judgments of 3 June 1991, 27 January 1992 and 22 December 1994, which make clear that whether an employee-shareholder who manages a legally incorporated company falls within or outside the scope of employment law depends on the true nature of the relationship and on the specific position and activities of the individual within the company". In other words, what matters is an examination of the hallmarks of dependence and working for another's account, and whether or not the person has sufficient decision-making power to determine the will of the legal entity. - Finally, the Court of Justice of the European Union, in Case C-101/21, in a case concerning the protection of employee rights upon a company's insolvency (specifically, the Wage Guarantee Fund, known in Spain as the Fogasa), and interpreting Article 2(2), first subparagraph, of Directive 2008/94, held that this provision must be interpreted as precluding national case law under which a person who, by virtue of an employment contract, simultaneously performs the functions of both director and member of the statutory governing body of a commercial company cannot be classified as a salaried employee within the meaning of that Directive. In other words, where a person holds an employment contract and performs the functions of director and member of the governing body, they are entitled to the protection afforded by the Directive to employed workers.
Conesa Legal: Employment Law Specialists
As you can see, these matters are highly fact-specific, and each case must be assessed on its own circumstances and evidence, with a thorough review of how the employment relationship actually developed.
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