Is a management agreement an employment contract or a contract for services?

Publication date: 26 August 2021
Do the new rules of the Supreme Court for the assessment of employment contracts also have consequence for management agreements? Case law has not decided yet. This can be seen from the judgments of the Arnhem-Leeuwarden Court of Appeal and the District Court of Midden-Nederland about the management agreement of the CFO of Volksbank.

onderhandelen contract

It does make a difference if a director with a management agreement is an employee or a contractor. A management agreement will be deemed to be a contract for services. This is financially attractive because, for example, no wage tax and social security contributions have to be paid. However, the manager then lacks the protection against dismissal that an employee enjoys. The dismissed Volksbank CFO presented himself as an employee for the latter reason, even though he had concluded a management agreement.

Management agreement is an employment agreement

The CFO referred to a judgment of the Supreme Court of 6 November 2020. It states that in order to answer the question whether an employment contract exists, the rights and obligations the parties agreed upon must first be examined. Substance takes precedence over appearance. Based on this, it can be determined whether an employment contract exists. An employment contract has the following characteristics:

  1. a person performs work
  2. for a certain period of time
  3. in return for payment
  4. under the direction of an employer.

When qualifying the contract, it is not important whether the parties indeed intended to conclude an employment contract. But it is important how the parties have performed the contract.

In summary appeal, the CFO indeed managed to convince the Arnhem-Leeuwarden Court of Appeal that he was an employee. The contract explicitly stated that the parties did not want conclude an employment contract. However, according to the Court of Appeal, the contract did contain the four essential characteristics of an employment contract. The director:

  1. would work as a CFO
  2. for 40 hours per week until 2024
  3. for a management remuneration, holiday pay, thirteenth month, pension, etc.
  4. and had to comply with obligations from the law, articles of association, management regulations and “instructions from the competent body”.

Moreover, the provisions regarding holidays and continued payment of wages during illness, for example, were expressly in line with the statutory regulations on employment contracts. This meant that there was an employment contract. The Court of Appeal therefore ruled that the CFO could invoke the prohibition against termination during an employee’s sickness. Therefore, Volksbank had to continue paying his salary.

Management agreement is an employment agreement

The judge in interlocutory proceedings or summary appeal gives a provisional ruling. The judge must make an assessment on what the verdict in the proceedings on the merits will be. In this case, the assessment was “that it is sufficiently plausible that the judge on the merits will not rule that the termination is valid”. That assumption turned out to be incorrect. The District Court Midden-Nederland found that there was a contract for services. The termination was legally valid and the CFO had to repay the unduly paid wages. Why this difference?

The District Court emphasizes that the legal protection against dismissal compensates employees for their dependence and subordination to the employer. This is also the background to the Supreme Court’s ruling of 6 November 2020. It is mainly about preventing pseudo-self employment. However, this is not the case when a management agreement is concluded. The Court, therefore, saw no reason to look through the management agreement to see whether there was an employment contract after all. This applies all the more because the other managers of Volksbank had all concluded a contract for services.

In addition, an essential element of the employment contract is missing. There is no relationship of authority between Volksbank and the CFO. The rules to which he must adhere stem from legislation and regulations. They are no instructions from the employer.

The fact that provisions are in line with statutory regulations for the employment contract does not prove the existence of an employment contract either. All provisions are in favour of the CFO. This points to successful negotiations and a strong position, rather than a vulnerable employee who needs extra protection. In short: there is a management agreement and the CFO’s dismissal was legally valid. He is not entitled to transition compensation or reasonable remuneration.

Employment contract or contract for services?

The ruling by the District Court is the most socially desirable. The question is, however, whether it will stand up in appeal, which will undoubtedly come. After all, the content of the agreement points more to an employment contract than to a contract for services. If parties want to conclude a management agreement – and this can certainly be the case with such managers – then a management agreement should really be concluded. We will keep you informed of the developments through our website and our newsletter.

Corporate and employment lawyer

Do you have any questions as a result of this blog? Would you like us to draft or assess a management agreement? Or do you have a dispute about the legal position of the statutory director? Russell Advocaten will be happy to help you. We assist both entrepreneurs and directors. Please contact us:

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