Combining a corporate mandate and an employment contract in France

1. General principles governing dual status

1.1 – Corporate office and employment contract: two distinct legal relationships

A corporate officer (such as the president, directeur général, gérant or a member of the management board) performs the functions of a corporate office conferred in accordance with the company’s governance arrangements. Holding that office does not, in itself, create an employment relationship with the company. An employee, by contrast, performs work for remuneration under the authority of an employer empowered to issue instructions, supervise their performance and impose disciplinary sanctions.

1.2 – A requirement common to all company forms: legal subordination

Whatever the company’s legal form, dual status is valid only if the employment contract relates to technical or operational duties distinct from those of the corporate office and those duties are performed under a genuine relationship of legal subordination to the company. The existence of an employment contract depends on the actual circumstances in which the duties are performed, not on the designation given to the agreement.

2. Rules applicable to each form of company

2.1 – Société anonyme (SA): French public limited company

In an SA, the rules depend on the corporate office concerned. For members of the board of directors (administrateurs), Article L. 225-22 of the French Commercial Code establishes, in particular, the following principles:

• An employee may be appointed to the board of directors only if the employment contract relates to genuine employment; the individual retains the benefit of that contract.
• The number of directors who are also employed by the company must not, as a general rule, exceed one-third of the directors in office, subject to statutory exclusions applicable to certain employee-representative directors.
• As an exception to the requirement that employment precede appointment, a director of an SA meeting the statutory SME criteria may become an employee during their term of office, provided that the contract relates to genuine employment (Article L. 225-21-1).

For members of the supervisory board (conseil de surveillance), the combination of board membership with genuine employment, and the one-third limit, are governed in particular by Article L. 225-85. The rules applicable to the directeur général and members of the management board (directoire) must be considered separately. The French rules on conventions réglementées (related-party agreements subject to statutory oversight) apply where required by law, taking account of the relevant exemptions.

2.2 – Société à responsabilité limitée (SARL): French private limited liability company

As a general rule, a majority gérant of an SARL cannot demonstrate legal subordination to a company which that person controls; combining the corporate office with an employment contract is therefore generally precluded. Majority status is assessed by reference, in particular, to interests held by the gérant, their spouse or civil partner under a PACS and their unemancipated minor children, as well as, where relevant, the rules applicable to joint management (cogérance). This assessment is not limited to whether the individual personally holds more than 50% of the shares. By contrast, a minority or 50% shareholder-gérant may combine the corporate office with an employment contract, provided that:

• The person performs technical or operational duties distinct from the corporate office;
• The person is subject to a genuine relationship of legal subordination to the company;
• The procedure governing related-party agreements under Article L. 223-19 of the French Commercial Code is followed where applicable, taking account of statutory exemptions and the circumstances of the gérant concerned.

2.3 – Société par actions simplifiée (SAS): French simplified joint-stock company

An SAS offers considerable flexibility in its constitutional arrangements, but that flexibility does not exempt its officers from the requirements for a valid employment relationship. Its president or another corporate officer may also perform genuinely distinct duties as an employee, provided that the work is genuine and those duties are carried out under actual legal subordination. Where relevant, the related-party agreement regime must be considered under Articles L. 227-10 and L. 227-11 of the French Commercial Code, as well as the company’s articles of association. Dual status may be particularly difficult to establish where the president controls the company or, in practice, enjoys autonomy inconsistent with legal subordination in the purported employment duties. The fact that a remunerated SAS president is treated as an assimilé salarié for French social security purposes does not, in itself, make that person an employee under employment law or confer unemployment insurance cover.

2.4 – Other forms of company

In a société en nom collectif (SNC), or French general partnership, the powers and liabilities associated with being a partner make it particularly difficult in practice to establish genuine subordination to the entity, especially for a managing partner. In a société civile (civil-law company), dual status cannot be ruled out solely because an individual is a member or gérant: the outcome depends on the powers actually exercised, the existence of separate employment duties and genuine legal subordination. Each case requires an individual assessment.

3. Requirements for a valid dual-status arrangement

3.1 – Genuine and distinct operational duties

The employment contract must relate to genuine employment involving specific, identifiable duties separate from those inherent in the corporate office. A vague job description or duties overlapping with those of the corporate office are common grounds for challenging the existence of a separate employment relationship.Examples of duties that may support a dual-status arrangement include:

• Technical or IT duties distinct from the responsibilities of corporate management, provided that actual legal subordination exists;
• Clearly defined operational sales duties separate from the governance of the company;
• Specialist professional functions (such as engineering or architecture), where the actual working arrangements are those of an employee.

3.2 – An actual relationship of legal subordination

A corporate officer claiming employee status must, in the performance of the employment duties, be subject to an authority which genuinely has the power to issue instructions, supervise their implementation and, where appropriate, impose sanctions for non-compliance. Oversight by shareholders over the exercise of the corporate office is not sufficient in itself. Where an officer exercises sole control over the company, such control is generally incompatible with the necessary relationship of legal subordination.

3.3 – Identifiable remuneration

Employment duties must attract identifiable remuneration for genuine work performed. Clearly allocating remuneration between the corporate office and the employment contract is important for evidential purposes and risk management, although it does not by itself establish legal subordination.

3.4 – Compliance with applicable approval procedures

Whether an agreement constitutes a convention réglementée, which corporate body has jurisdiction and which procedure applies depend on the legal form of the company and the position of the person concerned. Certain transactions entered into in the ordinary course of business on arm’s-length terms are exempt. A procedural irregularity therefore does not automatically render the contract void: its consequences and any resulting liability depend on the applicable statutory provisions.

4. Risks of an improperly structured arrangement

4.1 – A challenge to the existence of the employment contract

In a dispute, a court may find that the requirements for a genuine employment contract have not been met, in particular because the duties are not distinct or because legal subordination is absent. This is not necessarily a case of an employment contract being “reclassified as a corporate office”. The consequences depend on the facts, the sequence of appointments and any suspension of an earlier employment contract:

• No entitlement to rights arising on termination of a non-existent employment contract, including notice or statutory dismissal compensation;
• No unemployment insurance cover by virtue of holding the corporate office alone, without prejudice to other potential entitlements;
• Potential scrutiny of the social security treatment of remuneration and contributions paid, without any automatic reassessment;
• Possible disputes concerning the existence, suspension or resumption of an employment contract predating the corporate appointment.

4.2 – Risks in insolvency proceedings

In insolvency proceedings, the existence of a genuine employment contract may be examined when claims are verified and their eligibility for protection is determined. A corporate officer does not, merely by virtue of holding office, benefit from the French wage guarantee scheme (AGS). By contrast, claims arising under a genuine employment contract may qualify for that protection, subject to applicable statutory conditions, caps and exclusions.

4.3 – Tax risks

A finding that no employment contract exists does not automatically mean that the remuneration paid is non-deductible for tax purposes. Both employment remuneration and remuneration paid to company officers may, depending on the applicable tax regime, be deductible where the statutory conditions are met, notably where the payments relate to work actually performed and are not excessive in relation to the services rendered (Article 39(1)(1°) of the French General Tax Code). The tax position must be assessed by reference to the true nature of the payments, the evidence supporting them and the relevant tax regime.

4.4 – Company-law risks

The consequences of failing to comply with the rules governing conventions réglementées vary with the company’s legal form. In an SARL, agreements which have not been approved nevertheless remain effective, subject to the liability of the persons concerned for any loss caused to the company (Article L. 223-19). Subject to the conditions laid down in Article L. 227-10, a similar principle applies to an SAS. In an SA with a board of directors, certain agreements requiring prior authorisation may be set aside if entered into without that authorisation and if they have caused harm to the company (Article L. 225-42). There is therefore no general rule of automatic invalidity.

5. Frequently asked questions about corporate office and employment contracts