Executive employees within the employer's organisation

In most employer organisations, there are employees who hold higher positions in the organisational hierarchy, make decisions, and significantly influence the operation of the company. These employees are often referred to as executives, even though their employment agreements may not explicitly refer to their executive status. Therefore, it is particularly important to learn whether they are considered executives from an employment law perspective as well, as an executive status does not only mean an important and responsible role within the organisation but also determines the employment law provisions applicable to the employment relationship.
The Labour Code determines special provisions applicable to executives, which may affect, for example, the rules for terminating the employment relationship, the liability and conflicts of interest provisions, etc. Therefore, correct classification of the employee (general or executive status) is of fundamental importance for both the employer and the employee.
This questions often becomes particularly relevant for the parties upon termination of the employment relationship, when a legal dispute arises between the employer and the employee (for example, regarding whether the employer’s notice of termination must be justified). To avoid potential future conflicts, it is advisable to clarify upon the establishment of the employment relationship - or upon modifying the employee’s position or base salary - whether the given employee qualifies as an executive, and to reflect this accordingly when agreeing on the content of the employment agreement. This not only provides security for both the employee and the employer but can also prevent future misunderstandings and legal disputes.
In my article, I provide a brief overview on which employees are/ or may be considered executives under the Labour Code, what special provisions apply to them, and what practical questions may arise in connection with the employment of the executive employees.

Who is considered an executive employee?

Under the Labour Code, there are two types of executive employees: executives based on law (pursuant to section 208 (1) of the Labour Code) and executives based on the agreement of the parties (pursuant to section 208 (2) of the Labour Code). 

A. Executives based on law – Organisational leaders

Pursuant to the Labour Code, executive employees are the managing director of the company, and other employees who work under his/her direct supervision and are partly of fully authorised to act as the managing director’s deputy. These are the so-called organisational leaders, who are considered executive employees based on law.

1. 1. Top Executive – This category includes the employer’s legal representatives from a corporate law perspective (e.g., managing director or board member) if they perform their duties within the framework of an employment relationship.

   2. Deputy Leader: The company registry provides clear guidance regarding top executives, but it is not as straightforward to determine which employees qualify as their deputies. In this case, it must be examined whether the employee works under the direct supervision of the top executive and whether they are authorised to act as the top executive’s deputy (partly or fully). It is therefore clear that the content of the position and the employee’s duties and responsibilities are of great importance; we cannot rely solely on the title “deputy.”

2. Executive based on the agreement of the parties – Classified executive
   

   In light of the above, in the case of organisational leaders, no separate agreement or contractual provision is required for an employee to qualify as an executive employee; they are considered executives under the law based on their role in the organisational hierarchy. 

   However, it is possible for the parties to agree in the employment agreement on the executive status of a key employee, provided that certain conditions are met.

   The Labour Code determines the following three criteria, all of which must be met for an employee to be considered an executive:  

   - the parties’ agreement to apply the provisions of executives,
   - a position of significant importance for the operation of the employer or a position of significant trust; and
   - a base wage reaching seven times the minimum wage.

   Accordingly, solely the agreement between the parties is not sufficient for an employee to be considered an executive; the employee’s position and base salary must also meet the above conditions. This raises numerous practical questions, such as: does the employee’s position truly have outstanding significance; does he/she have decision-making authority; does he/she exercise employer rights; does he/she have access to large amounts of confidential information, etc.? In practice, another question may arise regarding whether the employee’s base salary needs to be adjusted in line with the annual minimum wage increase, or if it is sufficient that, at the time the agreement was concluded, the amount met seven times the minimum wage at that time.

    

    

Special provisions applicable to executive employees

A number of special employment law provisions apply to the employment relationship of executive employees that generally provide the employer with more favourable deviations from the standard provisions of the Labour Code. One such deviation is that the employer is not obliged to provide justification when terminating the indefinite-term employment relationship of an executive employee. Executives are also subject to stricter rules regarding conflicts of interest and liability, and the provisions of the collective agreements do not apply to them. 

It is important to note that, while for general employees an agreement between the parties can, as a general rule, only deviate from the provisions of the Labour Code to the employee’s benefit, in the case of executives, the parties are free to deviate from most employment law rules in the employment agreement.

What challenges may the parties face in practice?

As the above illustrates, careful consideration is required to determine which employee qualifies—or may qualify—as executive employee.

In practice, a common challenge is that neither the employers nor the key employees are always aware of the employee’s executive status and the provisions applicable to their employment relationship.

Although organisational leaders are considered executive employees under the law - regardless of their base salary and even in the absence of a specific agreement thereof - employers often still apply the standard employment agreement template to these employees. In such cases, the provisions of the employment agreement govern their employment relationship, rather than the special rules for executives, which would provide a more favourable position for the employer. Furthermore, regarding matters not explicitly addressed in the employment agreement, uncertainty may arise between the parties.

It is also common for an employer to employ actual key employees within the organisation whose positions and base salaries meet the criteria for classified executive status, yet the parties have not agreed on their executive status.

Considering that the employment of executives is subject to numerous provisions that are more favourable to the employer, it is in every employer’s interest to classify their organisational leaders, as well as those key employees whose positions and base salaries meet the legal criteria, as executives and to apply the special rules for executives to their employment relationships.

Proper classification is also extremely important for employees, as it allows them to understand the employment law rules that apply to them, exercise their rights accordingly, and fulfil their duties in line with these regulations.

Failure to identify an employee as executive employee, or incorrect classification, can lead to serious legal disputes. This issue most often arises in connection with the termination of employment, and lawsuits filed for unlawful termination can be lengthy and costly.

To avoid potential disputes, it is therefore extremely important to first examine whether the key employee in question: (a) qualifies as an organisational leader? (b) if not, whether the parties can agree on executive status based on the employee’s position and base salary? (c) if the answer to either question is yes, which special rules apply to the employee’s employment relationship?