Legal update on applying the legislation regulating employment of company CEOs

08.09.2015

Legal update No 535

Goltsblat BLP advises that the Plenum of the Russian Supreme Court has adopted Resolution No. 21 dated 2 June 2015 clarifying in detail the most disputable aspects of applying the legislation regulating employment of company CEOs and summarising court judgements on application of the relevant Chapter of the Russian Labour Code (the “Resolution”).

The concept of CEO has been clarified

Pursuant to the Russian Labour Code, a company CEO means “a person who manages a company, including by performing the functions of its sole executive body”. There used to be quite a number of disputes as to whether the special rules regulating CEO employment can be applicable to employees who actually manage certain areas of company activities, such as a head of the branch, representative office or separate structural subdivisions and so on. For instance, may an employer dismiss the Head of Branch under the rules applicable to CEO dismissal, i.e., due to a decision of the authorised corporate body with payment of at least three average earnings?

In its Resolution, the Supreme Court clearly explains that the above-mentioned special provisions applicable to CEOs do not apply in regulating relations with employees managing certain areas of company activities or structural subdivisions, including branches, representative offices and other separate structural subdivisions, since they are not charged with the duties of the company's sole executive body. Consequently, an editor-in-chief or a branch director may not be dismissed under the rules applicable to CEOs.

Specifics of dismissing a CEO by a decision of competent corporate body and compensation payment

Summing up recent court practice, the Plenum of the Supreme Court advises that a competent company corporate body may cancel an employment contract with a CEO by taking a relevant decision without specifying any reasons.

At the same time, the Supreme Court points out that cancellation of an employment contract on the above grounds does not constitute a legal liability measure, so it is possible only if compensation of at least three average earnings is paid. Yet this position of the Supreme Court does not imply that compensation has to be paid under any circumstances.

In particular, the position that cancellation of a CEO’s employment by decision of a competent corporate body is possible only if compensation is paid originally appeared in Rulings of the Constitutional Court. Yet both the Constitutional and the Supreme Courts consider dismissal of a CEO by decision of a competent corporate body solely in the context of the employer’s right to dismiss a CEO “without specifying any reason”. In this case, dismissing a CEO without either explaining the reasons or paying compensation evidently testifies to abuse by the employer of its rights.

At the same time, both the Constitutional Court and the Supreme Court consider it possible to dismiss a CEO by decision of a competent corporate body without paying any compensation if the CEO has culpably failed to perform his/her duties. Before the termination, however, the employer should follow the formal disciplinary process and must carefully prepare the dismissal documents and proof to support its positions in case the matter goes to court.

It should be specifically noted, however, that the Supreme Court expressly states that failure to pay compensation does not suffice as grounds for reinstatement of the CEO in the previous position anyway.

Severance amount may, in certain cases, be established by a court

In its Resolution, the Supreme Court significantly extends the powers of courts in relation to severance pay, compensation and other payments due to a CEO as a result of employment contract termination.

In particular, employment contracts with CEOs may sometimes establish significant compensation to be paid to a CEO in the event of dismissal. Sometimes, such compensation is due to the CEO in the event of dismissal on any termination ground whatsoever (even voluntary resignation or dismissal owing to culpable actions). Previously, if the employer did not pay out the agreed severance, courts often recovered the full amount agreed between the parties.

Under the new rules, the court is empowered to reject claims seeking payments from the employer due to employment contract termination or significantly reduce them, should it be established that the relevant employment contract terms are in breach of:

  • legislative requirements;
  • the general legal principle of inadmissibility of abuse of rights;
  • legitimate interests of a company;
  • legitimate interests of other employees;
  • legitimate interests of other persons (for example, a company’s shareholder(s)).

The court is, however, obliged to specify the reason and justify the rejection of a claim or reduction of the amount.

In certain cases, the court may, on the basis of its own view and decision, determine the severance amount payable to the CEO. In particular, the Russian Labour Code states that, if an employment contract is terminated in the absence of culpable actions (omissions) by a CEO, the latter is paid the compensation specified in the employment contract but no less than three average monthly earnings.

Previously, therefore, if no amount of severance compensation was agreed in the employment contract, the court would confine itself to recovering the minimum statutory amount (three average monthly earnings) in favour of the CEO.

Now the Plenum of the Supreme Court states that if, for some reason, an employment contract is silent about the specific amount of severance or there is a dispute over the agreed amount, the court is allowed to decide the sum itself, without considering the statutory minimum. This can be done on the basis of the following criteria: the period for which the dismissed person was employed as CEO, the time left to expiry of the employment contract, the amounts the dismissed person might have received if they continued to hold their position, etc. (CEOs of state organisations and companies with more than 50% state or municipal participation are the only exceptions to this rule).

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