The Extinction of the Management Contract in Spain

Due to their particular position in the company, senior management personnel have a special legal status, which involves the non-application of common rules imposed on other employees. In the paragraphs below, we will focus on the assumptions and consequences of the end of the labour relationship between a senior management professional and a company.

The Royal Decree 1382/1985 (RD 1382/1985), of August 8th, regulates the Senior Management Contract, a unique employment contract.

Employees are considered management workers if they comply with certain requirements. A senior management worker is an employee who:

• Executes powers concerning the company’s leadership, and the scope of these powers refers to the company’s general objectives
• Acts with substantial autonomy and liability, which is only limited to direct instructions and criteria from a person with superior governmental functions or a managing member of the company

The special position of this personnel rests on the reciprocal confidence between the parties, who will adapt the exercise of their rights and duties to the requirements of good faith.

The following are excluded from the specific legal status of the senior managers’ employment contract, and where appropriate, from the application of the Spanish Workers’ Statute:

• The activities are strictly limited to the duties they perform as members of the Board of Directors or as members of the management bodies of companies that have the legal appearance of corporations, as long as the activity only involves performing tasks related to the position
• Common managerial personnel

The Spanish labour courts have jurisdiction over disputes that arise between senior- management personnel and their companies as a consequence of the application of labour rules.

Contract Extinction

The Workers’ Statute and other legal proceedings may present causes that extinguish this type of contract. However, despite these considerations, we advise reviewing the special assumptions below.

The parties will be able to determine the duration of the special-employment contract. However, if they do not produce a written agreement, the contract duration will be presumed indefinite.

Extinction of the contract upon the worker’s request

According to Article 10 of the RD 1382/1985, a senior manager may request to extinguish this special-employment contract. The method for carrying out this request requires that the condition be expressly stated either on indefinite contractual agreements or on contractual agreements with durations longer than five years. In either case, the senior manager must give advance notice of three or six months before extinguishing the contract. However, the senior manager does not need to comply with the advance notice requirement if the employer seriously breaches the contractual agreement.

Where the senior manager does not meet the advance notice requirement, the employer will have the right to receive compensation equivalent to the salaries that correspond to the duration of the period with which the senior manager did not comply with the advance notice.

The senior manager may terminate the special-employment contract with the right to indemnification, or if the employer extinguishes the contract, the following are reasons for justification of termination:

• Any substantial change in the senior manager’s working conditions that results in prejudice to the senior manager’s professional training, to the detriment of his or her dignity, or because of serious transgressions of good faith by the employer
• Delays in the payment of the agreed salary
• Any other serious infringement of contractual obligations by the employer, except in the case of force majeure, in which case the payment of indemnification will not apply
• The transfer of the company or any other significant change in the company’s ownership that produces a renewal of either (1) the company’s governmental bodies or (2) the content and planning of the company’s main activity, provided that the extinction occurs within the first three months following these changes

Considering these cases, despite the wording of Article 10.3 of the RD 1382/1985, relevant case law adopts a posture that indicates that the causal contract resolution by the senior-management worker is not extrajudicial; in fact, the resolution is judicial in the same terms as for common workers as established in Article 50 of the Workers’ Statute. See Judgment of the Supreme Court of May 30, 1991.

Extinction of the contract upon the employer’s request

As opposed to the common labour relationship, the senior-management contract may be extinguished by the employer’s inability to continue the relationship without the need to justify the termination.

Article 11 of the RD 1382/1985 allows for this possibility. However, the employer must provide a prior written communication to the senior manager about the employer’s inability to continue the labour relationship. In these cases, the senior manager has the right to receive the agreed compensation. In the absence of an agreement, the compensation will be equivalent to the senior manager’s cash salary of seven days worked for each year of service, with six monthly payments as the limit.

When a total or partial infringement of a previous notice obligation occurs, the senior manager has the right to receive compensation equivalent to the salary referring to the duration of the infringed period.

The employer may extinguish the contract due to a dismissal based on a serious and guilty infringement by the senior manager in a formal manner and with the effects that Article 55 of the Workers’ Statute establishes. However, considering the compensation due to the senior manager, if the dismissal is unfair the compensation will be calculated according to the amounts agreed upon in the contract. In absence of an agreement, the compensation due to the senior manager would be equivalent to the cash salary of 20 days for each year of given service with 12 monthly payments as the limit.

Furthermore, if the dismissal is declared unfair or null, the employer and the senior manager will agree on whether the senior manager shall be readmitted or receive compensation.

The Spanish Supreme Court has indicated in its judgments of November 8, 1999 and March 12, 1993 that senior managers will not receive payment of procedural salary in cases of unfair or null dismissals.

For additional information regarding management contracts in Spain,