Assessment of employment relationship between executive director and management company

“Employee” is defined as any natural person who performs his or her job under a private-law employment format. Employees are insured against illness, unemployment and occupational disability. Liability for payment of the various employee insurance schemes rests with the employer. A private-law employment relationship is deemed to have come about as soon as the employee has entered into an employment agreement with his or her employer. These are the three criteria each of which is to be met in order for an employment agreement to be deemed to exist:

• a relationship of authority is entertained between the employer and the employee,
• the employee is under the obligation personally to perform the duties for which he or she has been hired,
• the employer is under the obligation to pay wages to the employee.

According to the Netherlands Supreme Court a relationship of authority is entertained between the executive director and the latter’s company on condition that the director should have undertaken to carry out director’s duties in exchange for wages. It is also possible for a director to have undertaken vis-à-vis his or her company to perform specific duties on the basis of an agreement for services. The full range of relevant circumstances are to be taken into consideration in assessing the employment relationship. The following two lawsuits, both of which were adjudicated by the District Court for Guelderland, show that the outcome can be quite different.

The first lawsuit involved the Court dispensing with the existence of management agreements between three managing companies (all three of them minority shareholders) and one operating company. The management agreements featured certain clauses that were deemed to be suggestive of an employment agreement rather than an agreement for services, such as the one prohibiting the managing companies without the operating company’s prior consent from having the work carried out by anyone other than the designated person, or the one that provided for a fixed monthly fee based on a 40-hour working week. The agreement provided for continued payment of the fee for a further 12 months in the event of illness. Each of the management agreements moreover featured a non-compete clause with a term of two years of the date of termination of the work.

Owing to the private-law nature of the employment, the directors had mandatory employee insurance. There was no question of any of the exceptions to the insurance duty as provided for in the 2016 regulation governing the designation of executive directors cum controlling shareholders. The executive directors did not collectively hold the full complement of shares in the operating company’s share capital, nor had the shares been evenly distributed between their holders.

The second lawsuit turned out quite different. Here too it was the qualification of the employment relationship of executive directors who worked for the operating company on the basis of management agreements under which they were required to carry out the designated duties in person. Their respective managing companies did not employ any additional staff. Both managing companies were minority shareholders in the company at whose behest the work was being performed. Deliberating that certain elements of the arrangement were suggestive of employment agreements being entertained whereas others pointed to agreements for services, the Court ended up deciding in favour of the latter because both directors also deployed their personal know-how and expertise in aid of the development of new concepts outside the company on whose Board they held seats. The Court stopped short of classifying the fact that the directors formally lacked the authority to block their own dismissal as decisive in assessing the employment relationship. What it did consider to be of consequence, by contrast, was the absence from the two management agreements of any provisos dealing with the actual performance of the work in terms of working hours and holiday leave or company car and expense allowance arrangements, as elements that were most definitely included in either director’s employment agreement with his own managing company. According to the Court it was acceptable for these directors not to have mandatory employee insurance.

Dutch version: Beoordeling arbeidsverhouding bestuurder met management-bv