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- Introduction
- Social Security Contributions
- Termination and Compensation
- Taxation
- Senior Executive Contract Template
INTRODUCTION AND CONCEPT OF SENIOR EXECUTIVE EMPLOYMENT
The senior executive contract is governed by Royal Decree 1382/1985. The scope of this Royal Decree covers senior executive personnel, employees who carry out their role with full autonomy and responsibility. They may be defined as employees who exercise powers inherent in the legal ownership of the company and relating to its objectives. In practice, it is general managers holding broad powers of attorney who are treated as senior executives.
The special senior executive employment relationship is founded on the mutual trust that exists between the employer and the senior executive. As a result, the parties are free to agree on the exercise of their respective rights and obligations, provided they observe the minimum standards set out in this Royal Decree.
KEY FEATURES OF THE SENIOR EXECUTIVE CONTRACT:
Formal requirements: A senior executive contract must, in principle, be concluded in writing, although the absence of a written agreement does not affect the validity or enforceability of the contract. There is one exception: where the senior executive accedes to this position through internal promotion, a written contract is always required.
Content: The content of this type of contract is determined primarily by whatever the parties freely agree upon, on the basis of mutual trust. However, certain minimum provisions must always be included: identification of the parties; the subject matter of the contract; the agreed remuneration, with a breakdown of its various components in cash and in kind; and the duration of the contract.
POSSIBLE SPECIAL CLAUSES:
Both parties may exercise freedom of contract and agree on whatever terms they see fit, provided they respect the following limits set out in the Royal Decree governing the relationship:
1.- Probationary period: may not exceed nine months. Once the probationary period has elapsed without withdrawal from contract having occurred, the contract takes full effect, and the time served counts towards the senior executive's seniority within the company.
2.- Contract duration: the senior management contract shall last for whatever period the parties agree.
3.- Working time: the parties are free to determine working hours, schedules, public holidays, leave entitlements and annual leave, provided these do not exceed what is customary in the relevant professional sector.
4.- Non-competition and retention clause: the senior executive may not enter into employment contracts with other companies unless authorised by the employer in writing or otherwise agreed in a written clause. The parties may also agree that the employer is entitled to compensation should the employer have provided the senior executive with specialist professional training and the executive leaves before the agreed period has elapsed.
5.- Post-contractual non-compete: the parties may set a maximum period of two years during which the senior executive, in exchange for financial compensation, may not compete with the employer in the same field. This clause is only valid if the following conditions are met:
a) The employer has a genuine industrial or commercial interest in the restriction.
b) The senior executive receives adequate financial compensation.
6.- Confidentiality: the senior executive's position gives them access to information across the entire organisation; for this reason, it is standard practice to include a clause in the contract by which the senior executive undertakes not to disclose the employer's most sensitive information.
SENIOR EXECUTIVE SOCIAL SECURITY CONTRIBUTIONS:
Senior executives must make Social Security contributions under all headings of the General Scheme, with the exception of the Wage Guarantee Fund (FOGASA) and unemployment. They are therefore treated as employed workers for the purposes of inclusion in the relevant Social Security scheme, but excluding unemployment protection and the protection provided by the Wage Guarantee Fund. Notwithstanding the variety of circumstances that may arise, this is the correct Social Security classification.
TERMINATION OF THE SPECIAL EMPLOYMENT RELATIONSHIP OF SENIOR EXECUTIVES:
It should be noted that even where a dismissal of a senior executive is declared unfair, the employer is under no obligation to reinstate them, nor to pay interim wages during proceedings.
Termination by the senior executive's own will:
The senior executive may terminate the employment relationship voluntarily without entitlement to compensation. They must give a minimum of three months' notice, which may be extended to six months if this is expressly provided for in writing in contracts of more than five years' duration. In the event of failure to give notice, the employer shall be entitled to compensation equivalent to the salary corresponding to the period of notice not observed.
The senior executive may also terminate the contract without prior notice and with entitlement to any agreed compensation where the employment relationship is brought to an end in any of the following circumstances:
a) A substantial change in working conditions that is manifestly detrimental to their professional development, undermines their dignity, or has been decided in serious breach of the employer's duty of good faith.
b) Non-payment or persistent delay in the payment of the agreed salary.
c) Any other serious breach of contractual obligations on the part of the employer.
d) A transfer of the company or a significant change in its ownership that results in the revocation of its governing bodies or a change in the content or direction of its principal activity.
The compensation receivable will be that established in the contractual clauses or, in the absence of any agreed provision, the equivalent of seven days' salary in cash per year of service, up to a maximum of six monthly payments.
Termination of the employment relationship due to loss of trust by the employer:
Since this is a contractual relationship founded on mutual trust between the parties, the employer may bring the special employment relationship to an end without needing to establish a specific justifying cause, the mere loss of confidence in the individual is sufficient grounds for termination.
This withdrawal from contract must be notified in writing with a minimum notice period of three months and must be accompanied by payment of the agreed compensation or, failing that, the statutory compensation equivalent to seven days' salary in cash per year of service, up to a maximum of six monthly payments.
It should be noted that, unlike ordinary employment relationships, any compensation received by a senior executive is treated as salary and is subject to income tax, in contrast to dismissal compensation received by an ordinary employee under a standard employment relationship. Furthermore, if the senior executive is also a member of the company's board of directors, they will be registered under the general Social Security scheme as an assimilated contributor and will therefore have no entitlement to unemployment benefit or to protection under the FOGASA (Wage Guarantee Fund).
Termination of the employment relationship due to serious and culpable misconduct by the senior executive:
The employer may terminate the employment relationship on grounds of serious and culpable misconduct by the senior executive; however, such dismissal may be declared fair or unfair.
Where the dismissal is declared fair, the senior executive will have no entitlement to any compensation. That said, a judge declaring the dismissal fair will need to establish that the disloyalty or breach of trust is supported by evidence demonstrating a violation of the duty of loyalty to the company's governing bodies, or by acts carried out by the senior executive in bad faith. Mere conjecture will not suffice.
Where the dismissal is declared unfair, the senior executive will be entitled to the agreed compensation. A golden parachute clause may have been included in the contract to protect the senior executive in the event of unfair dismissal, stipulating, for example, one year's remuneration as the applicable compensation. In such cases, reinstatement will only be available if expressly provided for in the contract. In the absence of any agreed provision, the statutory compensation will be equivalent to twenty days' salary in cash per year of service, up to a maximum of twelve monthly payments.
Reinstatement of a Prior Standard Employment Relationship for Senior Executives Promoted Within the company:
Where a senior executive has been promoted within the company under a senior management contract, the agreement should specify whether the new special employment relationship replaces the previous standard one, or merely suspends it. In order to preserve the employee's acquired rights, any replacement shall only take effect after two years have elapsed since the contractual novation occurred; before that period, the relationship will be deemed to have been suspended. In the absence of an express agreement set out in the contract, it will be presumed that the standard employment relationship predating the senior management relationship has been suspended.
Upon termination of the special senior management employment relationship, and without prejudice to any severance entitlements arising from such termination, the employee shall have the option to resume their original employment relationship under the same conditions as those in place before it was set aside. This means the company must maintain the same salary the employee was previously receiving, or adjust it to the professional grade applicable under the relevant collective bargaining agreement.
Should the company refuse to allow such reinstatement, it must also pay the compensation applicable in cases of unfair dismissal under ordinary employment relationships (45 days' salary per year of service, capped at 42 monthly payments).
The only exception to reinstatement of the prior ordinary employment relationship is where the disciplinary dismissal of the senior executive is declared fair.
MISCONDUCT AND DISCIPLINARY SANCTIONS:
A senior executive may be subject to disciplinary action for breach of the obligations arising from this special employment relationship.
Any such offences, regardless of their nature, shall become time-barred twelve months after the date of commission, or from the date on which the employer became aware of them.
DISPUTE RESOLUTION:
Disputes arising between senior management personnel and companies fall within the jurisdiction of the judges and magistrates of the employment courts, given that the relationship is contractual in nature and governed by labour law.
Personal Income Tax (IRPF) TREATMENT OF SEVERANCE PAYMENTS under senior management contracts:
Compensation payments arising from withdrawal from contract or dismissal are exempt from Personal Income Tax (IRPF). See ruling of the Supreme Court.
CONCLUSIONS:
There are some particularly sensitive clauses in these contracts. As employment lawyers in Barcelona, we recommend seeking specialist advice.
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