21-11-2023
Under certain circumstances board members may be classified as employees, leading to various legal implications.
Do board members have employee rights?
Activities of board members are namely governed by contractual, labor and social security laws. However, do they have employee rights? Under certain circumstances they may indeed qualify as employees, leading to various legal and practical implications.
Introduction
Board members exercise their mandate in a company. Often, a board member may appear to hold an employee-like position. Does that mean that board members have employee rights? Why is it crucial to evaluate the legal relationship between a company and its board members?
Depending on the classification of the legal relationship, the company may face various significant legal consequences from a Swiss contract law, labor law and social security perspective. This blog will guide you through these various areas.
Gaurav Bhagwanani
Director, Head Employment Law Services, Attorney-at-Law, KPMG Law Switzerland
KPMG Switzerland
Contract: employee status under the Swiss Code of Obligations (CO)
If a board member is in an employment relationship with the company, they are entitled to employee rights, e.g. protection against dismissal.
The relationship between a board member and the company can be evaluated from a corporate law as well as from a contract law perspective (“dual relationship”). To define the contractual relationship, the Federal Supreme Court has recently applied mainly employment or agency law (elements). An employment relationship may arise, for example, when a serving board member simultaneously takes up an operational position with the same company or when a serving employee is subsequently elected as a board member. The following are the main criteria determining whether an employment relationship exists:
- Subordination relationship (main criterion; is the individual subject to the control and instructions of the company or the company’s entire board of directors; is the individual dependent from a personal, organizational and temporal perspective as well as integrated into the company’s work organization?)
- Performance of work
- Element of continued duration
- Payment of remuneration
Whether these criteria, in particular the subordination relationship, are fulfilled, must be decided on a case-by-case basis. If a board member has employee rights (e.g. continued payment of their salary in the event of illness), further (retroactive) wage and vacation claims could be made, which could put the company at risk.
Employee status under the Swiss Labor Act (LA)
Imagine, for instance, a scenario in which a pregnant board member is unable to perform her regular board duties due to her pregnancy. If she qualifies as an employee under the LA, she is covered by the protection provisions for pregnant women. Another example is that virtual board meetings with international colleagues cannot be scheduled for e.g. 5:15 am or 11:15 pm, as the LA generally prohibits night work.
The LA applies its own and – compared to the CO – broad employee definition, by applying the following main criteria:
- A person is engaged permanently or temporarily during part or the entire working time at a business subject to the LA.
- A person, in the performance of an activity, is required to be subordinated to a certain work organization.
- The work must be performed under personal subordination, which means the work needs to be done according to instructions.
Again, the employee qualification must be assessed individually. Besides, even if a board member qualifies as an employee under the LA, they may hold a higher leading position, which would again largely exempt them from the LA (except for health protection rules, namely during pregnancy). In short, such a position is held by employees who, among other things, due to their position in the company, have large decision-making powers and/or can significantly influence decisions of substantial importance. This largely depends on the board structure. Hence, a thorough evaluation is critical, as non-compliance with the LA may lead to fines for the company. Finally, a board member who resumes her duties before the end of her maternity leave, may forfeit her maternity benefits.
Employee status from a Swiss social security law perspective
Swiss social security legislation generally distinguishes between employed persons (employees) and self-employed persons (contractors). In principle, unless the board mandate is essentially carried out as part of work activities for a third party (e.g., mandate to represent a third party on the company’s board of Directors), any board member remuneration is considered their (employee) salary and must be treated as such. A misclassification may trigger retroactive social security contributions for the company for generally up to five years, which is why a careful assessment is essential. Finally, if a board member (also) works and/or lives abroad, the social security status is determined by international treaties and national regulations.
Summary
Whether a board member qualifies as an employee from a Swiss contractual, labor and social security law perspective must be assessed on a case-by-case basis to avoid any risks. If a board member is deemed to be an employee, they may (retrospectively) be able to claim certain employee rights against the company, or the company may face sanctions for non-compliance. Therefore, it’s crucial to pay special attention when structuring such setups and enlist the help of experts in complex situations – especially in international settings.