Most of us have signed an employment contract at least once in our lives, we know what it should look like, what it should contain and what to watch out for when signing it. The same importance should be attached to the contract of perfomance. Unlike an employment contract, which is governed by the Labour Code, this type of contract falls under commercial law. You would find legal regulation in the Business Corporations Act. Let's take a look at the contracts of performance that are concluded in limited liability companies and joint stock companies in a little more detail.
The contract of performance is the basic document that governs the relationship between the company and a member of its elected body (for example, an executive officer, a member of the board of directors or a member of the supervisory board). Why is it good to have one? It provides legal certainty for both parties, ensures clear setting of remuneration and rights and helps prevent future disputes. Knowing what should not be missing in it is therefore key.
Do you need help with your corporate agenda ↗? We work with smaller companies and also with multinational corporations.
A written form of the contract is a necessity. However, simply concluding and signing of a contract is not sufficient to make it effective. The effectiveness is conditional on the approval of the contract by the highest body of the company, i.e. the general meeting. The general meeting must approve the contract by a simple majority of the shareholders present at the general meeting (unless otherwise specified in the articles of association or the statutes). If you change or amend the contract in the future, the new wording must also be approved by the general meeting.
It is good to know that the commencement of the office of a member of the governing body and the effectiveness of the contract of office are two different things. The office may arise even without an effective contract. On the other hand, the contract is often concluded only after the office has been established.
It is up to the contracting parties to decide which rights and obligations they wish to set out in the contract. However, as with any other contract: prevention is the best foundation. The better you write the contract and specify the rights and obligations, the fewer misunderstandings and problems you will face in the future. We always recommend to our clients to include at least the following in their contract:
Remuneration and how to set them up effectively
One of the usual provisions that should be included in the contract of perfomance is the determination of the remuneration for the performance of the office. In the absence of a remuneration clause in the contract, the office shall be deemed to be exercised without remuneration.
If the contract of office is not concluded, is not effective or is invalid for reasons beyond the control of the member of the elected body (e.g. the company stops communicating, the general meeting does not approve the contract or the text is unclear), the remuneration shall be determined as usual at the time of conclusion of the contract or at the time of taking office. However, a member of an elected body must actively seek to have the contract approved and not just passively wait. The usual remuneration may be determined, for example, by expert opinion or estimation.
Specify the remuneration sufficiently specific in the contract. We recommend:
Do you know how best to specify the remuneration in the contract? Get in touch with our experts ↗ in corporate law for clear answers.
Income from a contract of performance is taxed as income from dependent activity under the Personal Income Tax Act at rates of 15% or 23% depending on the level of income. In addition, it is subject to compulsory social security and health insurance contributions.
A breach of obligations can have consequences for both parties. It is therefore recommended to include in the contract a provision on possible sanctions, both for the member of the elected body and for the company. The sanction may be a financial penalty, an obligation to compensate for the damage caused or the possibility of immediate removal of the member from office.
Clear sanctions act as a deterrent and motivate both parties to comply with their obligations.
If the managing director of the company also holds the role of CEO, there is a so-called overlapping of functions. The position of CEO is exercised on the basis of an employment contract (under the Labour Code regime), but the position of managing director is exercised on the basis of a contract of performance (under the Business Corporations Act regime). What are the main risks of this model?
What can we do for your company in the area ofcorporate law and how does it work with us?
The wording of the articles of association shall always prevail. This does not, however, affect the possibility of negotiating more favourable terms in the contract of performance than in the articles of association. If you want to include better terms in the contract, they must be approved by the necessary majority of the general meeting.
No, the law doesn't require it. However, without a contract, the relationship is governed only by the statutory provisions and the articles of association, which can lead to legal uncertainty, especially on the issue of remuneration. We therefore recommend that you negotiate a contract.
Yes, for example, you can set the confidentiality obligation for a period after the office has ended. You should also clearly define in the contract exactly what you consider to be confidential information.
The performance contract is not a formality. It is an effective tool to ensure a fair and transparent relationship between the members of the elected bodies and the company. If you're not sure how to get it right, we'd be happy to help. Get in touch and we'll prepare a contract tailored to your needs.
Jsem vedoucí korporátního týmu a pražské pobočky advokátní kanceláře SEDLAKOVA LEGAL. Ve své praxi se zaměřuji primárně na vyjednávání investic (jak ze strany investičních fondů, tak ze strany startupů), právní pomoc startupům, nastavování holdingových struktur a vztahů mezi společníky a na zajišťování běžné korporátní agendy společností.
