Is an Employment Agreement Desirable in the Case of an SRL Director?
Authors: Razvan Vlad, Vlad Anghel
In practice, we frequently encounter situations where the director of a limited liability company (SRL) has concluded, alongside the corporate mandate, an individual employment agreement with the same company.
Although Law No. 31/1990 does not expressly prohibit such cumulation in the case of limited liability companies, this situation raises issues of legal coherence.
In the case of joint-stock companies, the legislator has opted for a clear solution: if the director has an employment agreement with the company, it is suspended by operation of law for the duration of the mandate. The rationale is that the office of director is, in essence, incompatible with employee status.
For SRLs, no such express prohibition exists, and the rules applicable to joint-stock companies do not extend to SRLs unless the legislator has expressly stated otherwise. Nevertheless, the absence of an explicit prohibition does not automatically render the arrangement appropriate, even though in everyday practice many companies rely on this approach, invoking its permissibility under Law No. 31/1990 without fully considering the effects of such conduct.
As regards the legal nature of the director’s office, it should be noted that a director is not an employee in the classical sense. The relationship with the company is one of mandate, grounded in the trust of the shareholders and in the powers of representation and management of the company. As such, we are not typically in the presence of a subordination relationship specific to employment law, but rather of a predominantly corporate legal relationship. A director does not execute orders within a relationship of subordination; instead, a director exercises powers conferred by the articles of association or by the resolutions of the shareholders, being accountable to the shareholders.
The managerial nature of the director’s powers, deriving from the law, the articles of association and the shareholders’ resolutions, as well as the intuitu personae character inherent in the mandate relationship specific to the director, should determine the primacy of this relationship over any potential employment relationship based on hierarchical subordination. One may legitimately ask: to whom should a director report and submit in the exercise of his or her duties, if not to those who entrusted him or her with the management of the company, namely the shareholders? This is, in reality, nothing other than the fiduciary relationship toward the shareholders, a relationship that is conceptually inherent in the commercial mandate. Similarly, an employment relationship binding the company to its director in such a manner that the latter benefits from protections typical of employees (such as the dismissal procedure, which is evidently favorable to the employee; the possibility of challenging the dismissal before the courts, where the employee also enjoys protective mechanisms and may obtain reinstatement to the previously held position) does not respond to the imperative of control and accountability owed by those entrusted with the management of a company and, implicitly, undermines the principle of revocation ad nutum recognized by Law No. 31/1990.
Consequently, we are of the opinion that, as of lege ferenda, the solution applied with respect to joint-stock companies should also be extended to SRLs. The rationale is identical, pursuant to the principle ubi eadem est ratio, ibi eadem solutio esse debet: if the basis for the prohibition in the case of joint-stock companies lies in the structural incompatibility between the corporate mandate and the subordination specific to employment relationships, the same reasoning applies to SRLs. In these circumstances, we do not consider the inherent structural differences between these types of companies – the SRL being traditionally regarded as a company of persons, and the joint-stock company as a company of capital – to be a decisive argument. The role of the director is fundamentally the same from most perspectives in both forms of company.
Furthermore, maintaining exclusively the mandate relationship for an SRL director would produce beneficial effects from the standpoint of the company’s functioning, as follows:
- The director may be revoked ad nutum, in accordance with the rules governing mandate, subject to any clauses concerning compensation for untimely revocation.
- The rigid rules of employment law concerning dismissal are avoided.
- The flexibility specific to the commercial mandate is preserved.
Conversely, where the director also has an employment agreement alongside the corporate mandate, revocation from the corporate office does not automatically entail the termination of the employment relationship.
Naturally, the company may find itself in a situation of deadlock, with the director removed from office yet remaining employed until the completion of a dismissal procedure or the conclusion of a mutual termination agreement. A tension is thereby created between the logic of the mandate (based on trust and revocability) and the logic of employee protection (based on stability). Any company would be reluctant to find itself in such an ambiguous situation at the executive level, where day-to-day business decisions are made.
Equally, it is true that the exclusive mandate solution is not necessarily favorable to the director, who loses the specific protection afforded by employment law. From this perspective, and especially considering that the law permits such an arrangement, it is entirely reasonable for any SRL director to insist on concluding an employment agreement. Thus, the company, and in particular its shareholders, must be fully aware, in any negotiation, of the consequences of accepting such an arrangement. Nor do we exclude that, in certain situations, the company itself, through its shareholders, may be interested in offering such an employment agreement to the director, considering that the security afforded thereby may also serve as a means of incentivizing the director within a long-term relationship.
Ultimately, the analysis must be conducted from the standpoint of the nature of the office and the company’s interest. The director’s role entails a position distinct from that of an employee, and the overlap of the two legal regimes risks generating incoherence and potential disputes. In our view, the sound solution remains to maintain the mandate relationship, possibly accompanied by an administration or management agreement regulating remuneration and liability, without duplicating it through an individual employment contract.
In conclusion, although the law does not expressly prohibit such cumulation in the case of SRLs, and the shareholders and the director are free to agree upon the form of their legal arrangement, the legal desirability of an employment agreement for a director must be carefully weighed for the reasons set out above. The essential question is not whether this arrangement is permissible, but whether it is consistent with the nature of the office and the objectives of a company’s activity. From this perspective, the corporate mandate, implemented through an administration or management agreement, appears to be the more appropriate legal instrument.
