Management of limited liability companies under the microscope: director, employee or all of the above?

The basis of a manager's mandate is the company's trust. Naturally, when trust is broken, revocation follows irrespective of misconduct. In practice, management positions are generally retained under management contracts, as these present the advantage of increased flexibility for both parties.

The appointment of directors for the most popular vehicle to start a company in Romania – the limited liability company – comes with a question: should an employee be chosen for the role of executive director?

While Romanian Company Law (Law No. 31/1990) expressly provides that the directors of joint-stock companies cannot enter into employment contracts throughout the term of their mandate as directors, there is no such limitation for limited liability companies.

Without delving into the legal nature of the relationship between directors and companies, Article 72 of Romanian Company Law establishes that the obligations and liability of directors are governed by the provisions relating to the mandate. Given the absence of an express legal prohibition, however, the relationship between a company and a director may also take the form of an employment contract. This is why in some cases appointed directors of limited liability companies double as employees. The consequence is a rather novel practice in which courts scanned directors' management contracts for their potential intrinsic but hidden employment nature. The essential distinctive element between management and employment contracts was found to be the director's subordination (or lack thereof) to the company.

Case study

A director's challenge against the termination of his management (mandate) contract, which included an arbitration clause, generated some mixed case law practice and initiated a procedural saga. The labour courts found in the first instance that the contractual agreement with the company had a typical employment nature and that the arbitration clause was therefore ineffective (due to the non-arbitrability of employment disputes), while in appeal the employment nature of the relationship was invalidated by the higher court, declining jurisdiction and deferring to arbitration. Subsequently, the arbitral tribunal ruled on its jurisdiction and enforced the arbitration clause as it was included in the management agreement.

From a material standpoint, the termination of the agreement was at stake. The mandate agreement was terminated by simple revocation, while termination of the employment contract should have been subject to mandatory requirements. The former director, exploiting the protective nature of employment law and the alleged unlawful termination of his so-called "employment" contract (based on his specific duties, remuneration and the company's conduct), requested to be reinstated within the company.

The employment protective regime is based on the subordination relationship, while management contracts are founded on the equality of the parties. Therefore, based on this distinction, former directors may not obtain reinstatement within companies after the revocation of trust.

Companies should be urged to adopt appropriate (non-supervisory) conduct and remain vigilant against directors who may claim their alleged rights based on employment law. Concerned about the potential abuses against directors engaged by the company as employees, employment courts could be called upon to intervene.

authors: Nora Olah, Adina Rusănescu-Horge