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Dismissing an executive – is it really that simple?

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

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.