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Nov 30, 2023

Navigating senior management contracts: understanding the fine print in employment agreements (part 1)

Admittedly, ‘senior management’ has a nice ring to it, however, for multiple reasons, it frequently leaves individuals dissatisfied when it comes to the termination of their contract/redundancy.

I have to say, there is a clear lack of understanding in companies when deciding to enter into one of these three agreements with an executive:

  1. a contract for managing director (Article 249 of the ‘Ley Sociedades Capital’ on commercial matters);
  2. a senior management contract (art.1of the Real Decreto 1382/1985, on specific employment law matters), and;
  3. a standard employment contract.

My focus is on the differences between the last two types of employment contract. Starting from this premise: with the general rule being a normal employment contract, senior management is the exception. This is because, for a senior management contract to be possible, all these requirements must be met(art.1.2 RD AD)

Senior management are those workers who have the power to exercise the same powers inherent to the legal owners of the company, and to exercise power in relation to the company’s overall objectives, with their autonomy and full responsibility only limited by the criteria and direct instructions issued by the individual or higher governing and administrative bodies of the entity.

This would imply that the senior manager would need to have very extensive and collective notarial powers that relate to the general objectives of the company, such as hiring and firing employees, making purchases, overseeing sales, incurring debts on behalf of the company, and representing it at the highest level before various bodies and administrations. Whilst this would include general directors, it would exclude those in higher positions of authority in areas of finance, HR and commercial, who despite their position being one with ‘managerial responsibilities’, would not be considered senior.

Directing our attention to senior management as “only limited by the criteria and direct instructions issued by the individual or higher governing and administrative bodies of the entity", this again excludes any manager/director who has someone of higher authority above them, (between them and the governing body). For example, an assistant manager who reports to the general management, would not qualify.

It can be said that ‘every senior manager is a general manager, but not every general manager is a senior manager.’ Only those who have the authority to exercise these extensive powers will be considered senior managers.

However, for the individual, the role of senior management comes with significant drawbacks:

  • The Employer's right to terminate without cause - presumed loss of trust is the basis (not applicable in ordinary employment relationships).
  • Without a redundancy agreement, the compensation is only 7 days/year (33 days/year in a regular employment agreement).
  • In the case of an unfair disciplinary dismissal, only 20 days/year (vs 33 days/year) is given, unless otherwise agreed upon.
  • If more days of compensation per year were agreed upon, only the first 7 days/year for a termination agreement and the first 20days/year in unfair dismissals would be tax-exempt (vs 33 days/year in an ordinary employment contract).

In part two we will discuss 'Navigating senior management contracts: decoding termination and redundancy'

Further information

on the topics raised in this article, contact José María Fernández Mota

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