Senior executives have a special employment relationship with their employer that is governed by the specific provisions of Royal Decree 1382/1985, of August 1, 1985, which regulates the special employment relationship of senior management executives.
As stated in the regulation’s preamble, the nature of this relationship is characterized by the mutual trust that must exist between the two parties, arising from the unique position that the senior executive accepts within the company in terms of powers, authority, and responsibilities.
This is why the main element that shapes the content of this specific relationship is the idea of agreement; nonetheless, the regulation has made a point of defining the causes and effects of terminating this type of contract.
In this article, we will identify the possible causes for termination and the consequences associated with each of them.
What Is a Senior Management Contract?
The so-called senior management contract is a special employment contract identified in paragraph a) of Article 2.1. of Royal Legislative Decree 2/2015 of October 23, which approves the consolidated text of the Law on the Workers’ Statute and, as mentioned above, is articulated through Royal Decree 1382/1985.
This type of contract is characterized, on the one hand, by the absence of subordination in the provision of services(autonomy and full responsibility), and, on the other hand, by the exercise of powers that correspond to strategic decisions for the company as a whole and not for the different units that conform the company (powers inherent to the legal representation of the company and relating to the general purposes of the same).
When and How May a Senior Management Contract Be Terminated?
First of all, it should be noted that a management contract may be terminated at the senior executive’s request or the employer’s request.
When the contract is terminated at the employee’s request, the employee must give at least three months’ notice, which may be extended to six months if stipulated in writing in indefinite contracts or contracts lasting more than five years. This notice period does not apply in the event of a serious breach of contract by the employer.
Non-compliance with the notice period leads to the employee having to pay a compensation equivalent to the salary corresponding to the period over which the non-compliance extends. The senior executive may terminate the special employment contract with the right to the agreed compensation, or, in the absence thereof, to the compensation corresponding to termination by the employer, on the following grounds:
- Substantial changes in the working conditions that are notoriously detrimental to his/her career, or to his/her dignity, or that are decided in serious breach of good faith by the employer.
- Non-payment or persistent delay in the payment of the agreed salary.
- Any other serious breach by the employer of the contractual obligations, except in cases of force majeure, when the payment of the compensation shall not apply.
- Company succession or significant change in the company’s ownership, resulting in a renewal of its governing bodies or in the content and approach of its main activity, provided that the termination occurs within three months of the changes having taken place.
When the contract is terminated at the employer’s request, we must, in turn, distinguish between the following situations:
- Termination of the senior management contract due to contractual withdrawal by the employer:
- Dismissal of the senior executive due to serious and culpable breach.
- In addition to the cases mentioned above (withdrawal by the employer and disciplinary dismissal), a senior management contract may be terminated due to other reasons contemplated in the Workers’ Statute, such as objective dismissal (individual or collective), employee’s retirement, employee’s death, etc.
Termination of a Senior Management Contract Due to Contractual Withdrawal by the Employer
In this case, the requirements for the termination of the senior management contract due to the employer’s contractual withdrawal are:
- Employer’s withdrawal from the employment contract requires written notice.
- The senior executive must be given at least three months’ notice. This period may be extended to 6 months if stipulated in writing in indefinite contracts or contracts lasting more than five years.
Non-compliance with this notice period by the employer will entitle the senior executive to receive payment in the amount of the salaries foregone due to the failure to have been given appropriate notice (proportional to the period over which the non-compliance of the notice obligation extends).
- The senior executive will be entitled to the severance payment agreed upon in the contract or, in the absence thereof, to receive a severance payment equivalent to seven days’ pay per year of service, up to a limit of six months’ pay (this seven-day indemnity is considered income exempt from Personal Income Tax (IRPF).
Dismissal of Senior Management Due to Disciplinary Reasons
The disciplinary dismissal of a senior executive can only be based on the serious and culpable breach by the senior executive and must comply, in any case, with the legal requirements established in Article 55 of the Workers’ Statute.
In this regard, the following terms must be met:
- Written notice of the dismissal that must include a description of the facts that the employee is accused of, so that they are fully informed and may appropriately defend his/her case.
- The termination letter due to disciplinary dismissal must indicate the date on which the dismissal becomes effective.
- If applicable, the additional legal requirements provided in the Collective Bargaining Agreement that would apply to the employment relationship must be complied with.
- The statute of limitations for any type of misconduct shall be twelve months from the date in which the misconduct occurred or from the date the employer became aware of it.
- If the disciplinary dismissal is declared unfair, the employer must pay the amount agreed upon in the contract; if no amount has been agreed upon, the payment due will amount to twenty days’ pay per year of service up to a maximum of twelve months’ pay.
When the dismissal is declared unfair or null and void, the employer and the senior executive shall agree whether to opt for reinstatement or to disburse the severance payment mentioned in the previous paragraph (the amount agreed upon or, in the absence thereof, twenty days); In the event of disagreement, it shall be understood that the preference is the disbursement of the corresponding severance payment.
The Termination of the Senior Management Contract During Insolvency Proceedings
The Bankruptcy Law establishes the following provisions in relation to senior management contracts:
- During the processing of the insolvency proceedings, the bankruptcy administration, ex officio or at the debtor’s request, may terminate or suspend the contracts between the debtor and the senior management executives.
- In the event of contract suspension, the senior executive may choose to terminate the contract with one month’s notice, and they would retain the right to compensation under the terms set forth in the paragraph that follows.
- In the event of termination of the employment contract, the judge of the insolvency proceeding may moderate the indemnity to which the senior executive is entitled, in which case the indemnity agreed upon in the contract shall not apply, with the indemnity limit established in the labour legislation for collective dismissals.
What Happens If the Employee Has Reached a Senior Executive Position After Building Their Career Within the Company?
Many companies foster a career plan for their potential managers, so it is increasingly common in multinational organizations to become a senior executive through an employment relationship’s internal promotion of employees linked to the company (or companies in the same group). When this happens:
- The senior management contract must be formalized in writing.
- It must be specified whether the new special relationship replaces the previous common one, or whether the latter is suspended. In the absence of a specific statement in this regard, it will be understood that the common employment relationship is suspended.
On the other hand, if the common employment relationship is expressly substituted with the special one, this novation will only come into effect two years after the corresponding novation agreement.
- In the event of suspension of the previous common employment relationship, whenever the special employment relationship is terminated, the worker will have the option of resuming the original employment relationship, without prejudice to any compensation to which they may be entitled as a result of such termination.
This rule does not apply if the special senior management contract is terminated due to a disciplinary dismissal declared to be fair.
Dispute of the Dismissal by the Senior Executive
The dismissal of the senior executive may be disputed by the employee within the general expiration period of twenty working days following the date on which the dismissal becomes effective.
The Spanish labour courts have jurisdiction to deal with conflicts that arise between senior management executives and companies.
In any case, we advise you to contact our Spanish labour law experts. They can provide tailored legal advice while ensuring the privacy and confidentiality required in these kinds of situations