Dismissing an executive – is it really that simple?

Triniti

There are plenty reports in the press stating it is really easy to dismiss executives. This topic has become especially hot lately, as the turnover of executives of global corporations has increased and Lithuanian companies are following suit.

It is true that the dismissal of an executive is regulated in such a way that the shareholders of the company (directly or through other competent bodies) have the opportunity to effectively defend their interests and, if need be, can immediately separate an executive from the company and its assets. This is perfectly understandable as the executive is a company’s representative who is in a position to make certain quick and unfavorable decisions concerning the company’s assets and immediately put them into effect.

However, one should not forget that the status of an executive is of a dual nature. On the one hand, the executive should be seen as a trustee and authorized agent of the company, who is in a trust-based fiduciary legal relationship with the company. On the other hand, he/she is an employee. This has been repeatedly stated in the case-law and should also be taken into account when deciding on the removal of an executive from office and termination of his/her employment contract.

In the event of the loss of trust in an executive, a competent body of the company shall have the right to remove the executive at any time. The Supreme Court of Lithuania has noted that the removal of an executive from office is a fact of legal significance, which forms the basis for termination of the employment contract. This is a stand-alone basis for the termination of an employment contract and there is no need to look for any additional grounds. Moreover, giving additional grounds for termination of the employment contract (rather than of removal from office) is even superfluous and may make the dismissal and settling of disputes more difficult.

On the other hand, there are certain circumstances in which termination of the employment contract with an executive does not seem so straightforward anymore. The issue of severance pay is one of them. Article 104 (2) of the Labor Code provides that it must be paid under three conditions: 1) the employment relationship lasted more than two years; 2) the executive is removed from office before the end of the period of validity of the employment contract; 3) the cancellation was caused by reasons other than the fault of the executive. Article 69 (4) of the Labor Code, which also applies to an executive, lays down essentially the same conditions for payment of a severance pay: 1) the employment relationship lasted for more than two years; 2) the fixed-term employment contract has expired; 3) the basis for termination of the contract is expiry thereof rather than the fault of the executive or other reasons. In the latter case, only the basis for termination is different – instead of the removal of the executive from office, early termination of the contract applies.

The type of employment contract is the crux of the matter here.

The analysis of the provisions of the Labor Code leads to the conclusion that a severance pay in the amount of the average monthly salary is only payable to the executive if the contract is for a fixed term, as it concerns a removal from office before the end of the period of validity of the employment contract. The same conclusion is upheld in the Commentary to the Labour Code by Tomas Davulis, published in 2018 (p. 324). On the other hand, the position taken by the State Labor Inspectorate (hereinafter referred to the SLI) is slightly different. According to the Information and Consulting professionals of the SLI, severance pay should be payable regardless of the type of employment contract.

What is more, the SLI also draws attention in this case to the dual nature of the legal status of the company executive. According to the case law, it emphasizes that the right of the company’s management body to remove an executive from office is absolute and does not require any evaluation of the quality of the work of the executive or other grounds. However, this does not deny the company executive’s the right to social security. For instance, the SLI states that the competent body has the power to remove a company executive from office under Article 37 (3) of the Law on Companies, even during the parental leave; however, if he/she is on parental leave on the day of the removal from office, the date of termination of the employment relationships has to be postponed until the end of this leave. According to the SLI, the prohibition on dismissing an employee during the period of leave granted to him/her is inherently a social guarantee.

In conclusion, it should be noted that it is important to consider the advantages and disadvantages of a fixed-term employment contract when choosing the type of employment contract to be signed with an executive. It can be concluded that a fixed-term employment contract with a company executive has negative consequences for companies and creates no added value. Having a fixed-term employment contract concluded with a company executive highlights his or her more vulnerable social status, yet it does not change the essence – an executive can be removed from office at any time and without notice and an additional basis for entitlement to severance pay comes into play; furthermore, the company has to pay higher fees than in the case of an employment contract of indefinite duration. On the other hand, it must be borne in mind in each case that an executive of the company is not only a representative of the company acting on the basis of trust but also an employee who is covered by social security.

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