How should a Managing Director employment contract be formulated?

26 May 2011 How should a Managing Director employment contract be formulated? As the Managing Director of a limited company, you are in a special position of trust in relation to your employer. The fact that you are in a senior managerial position means that you will not be covered by either the Swedish Employment Protection Act or any collective bargaining agreements. As a Managing Director, it is of the utmost importance that you regulate all the terms and conditions of your employment in a written contract of employment. Failure to do this will leave you with virtually no protection at all. Although verbal agreements are valid, it is the person who contends that the parties have reached agreement on a specific term who must provide proof of this. In larger companies, people in the managerial level just under the managing director as well as certain specialist functions which in various ways participate in and are responsible for managing the company are also regarded as holding senior managerial positions. Whether they are deemed to hold senior managerial positions or not, in any event employers frequently want to terminate the employment of this type of manager with immediate effect. While this contract example is primarily intended for Managing Directors, relevant parts may also be used as a starting point if you will be working as a senior manager in the private sector. This information includes an example of an employment contract for Managing Directors complete with comments. You will be given advice on ways of formulating your contract and on the pitfalls you should avoid. It is impossible to cover every single aspect in one example. The idea is to allow you to include or exclude terms of employment based on your individual needs and the areas in which you have room to negotiate. You should not assume the duties of a Managing Director until your terms of employment have been agreed and your written employment contract has been signed. If you do, you will find yourself in a significantly weaker negotiating position. This is something that Jusek warns people about, as we regularly encounter this exact situation. This example of a Managing Director s employment contract is designed for use in positions based in Sweden. Completely different rules apply to positions based in other countries. Please call the Jusek Helpline for additional advice and help on +46 8-665 29 80. Catharina Klåvus Legal Counsel Jusek Anne Westerlind Ombudsman Jusek SWEDISH ASSOCIATION OF GRADUATES IN LAW, BUSINESS ADMINISTRATION AND ECONOMICS, COMPUTER AND SYSTEMS SCIENCE, PERSONNEL MANAGEMENT AND SOCIAL SCIENCE

2 (14) Example of managing director employment contract On this day, the following contract has been entered into between (Company s name in full AB, Corporate Identity Number), hereafter referred to as the Company, and NN. 1 Form of employment etc. NN is to be employed until further notice as Managing Director of the Company as from the. NN is to be in charge of the day-to-day administration of the Company in compliance with the rules of the Swedish Companies Act, as well as the Board of Directors guidelines and directions. The Managing Director is to carry out his/her work in accordance with the Managing Director Instructions approved by the Board of Directors. The instructions currently in force are set out in Appendix 1. NN is to report to. NN s base and workplace is to be. Always check the legal entity s identity and also check that the person who signs the contract has been properly authorised to sign on behalf of the Company. Just as your name and personal identity number should be correctly stated, the Company s name and corporate identity number should be correct. Contact the Swedish Companies Registration Office [Bolagsverket] for up-to-date information. Before you accept the position, it is a good idea to run a credit check on the Company so that the Company s financial status won t come as a surprise to you. This is of prime importance if you are considering accepting employment as Managing Director of a smaller company. Do not accept the position and assume the duties of Managing Director until your employment terms and conditions have been fully negotiated and your Managing Director employment contract has been signed by both parties. This advice may seem obvious, but in Jusek s experience far too many members in this situation accept the position and simply start working before the terms and conditions have been finally settled. This usually leads to the Managing Director being forced to accept the terms and conditions offered by the employer. In other words, your bargaining room will be reduced to such an extent that it may disappear entirely. The Company may be operating in multiple locations. Although as Managing Director you will be responsible for all business activities and consequently will be expected to visit other operational units, it is appropriate to specify the location in which you will be based and work in your employment contract. This will clarify your main place of work. This will also form the basis for determining whether or not you are entitled to a subsistence allowance. Instructions to Managing Directors may vary in the amount of detail they contain. Appendix 1 is just an example.

3 (14) 2 Monthly salary etc. On commencing employment, NN is to receive a salary of SEK per month at 20XX s salary level to be paid in connection with the Company s regular payment of salaries to salaried employees each month. In addition to this monthly salary, NN is to receive results-based remuneration (bonus, percentage of profits or other similar remuneration) in accordance with Appendix 2. As far as results-based remuneration and variable salary parts are concerned, there are a good many methods of calculation and models, which are adapted to the company in question. It is important to find out what the basis of calculation is in order to be able to assess your chances of meeting the specific criteria before signing your Managing Director employment contract. Results-based remuneration is frequently an important part of your salary and therefore should be incorporated into your Managing Director employment contract. If you deem your chances of meeting the results-based remuneration criteria to be small, you should try to negotiate a more generous monthly salary instead. Due to the large variation in results-based remuneration, no Appendix 2 is actually included here. Appendix 2 is mentioned in the contract in order to highlight that an agreement about this type of remuneration, including its criteria, belongs in the employment contract and should be incorporated either as an appendix or in the main body of the contract. 3 Salary Revision A salary revision is to take place on the 1 January each year. Salary revision should always be stipulated and take place at least once each year. There is no reason why salary revisions may not take place at more frequent intervals. Salary structure is individual and based on performance. 4 Vacation NN is to receive paid vacation days each year. NN is to receive vacation in advance without any deduction obligation. Vacation rules are contained in the Swedish Holidays Act and/or in the collective bargaining agreement that you can agree to follow. The maximum number of vacation days for managers and salaried employees without overtime compensation in the private sector is usually 30 days per year. As you are Managing Director and therefore hold a senior managerial position, we recommend at least 30 days paid vacation. 32 paid vacation days are not unusual at this level. You might be able to negotiate your way to additional vacation days, but other benefits are usually more important.

4 (14) Vacation in advance is offered to salaried employees at lower levels as well. The Swedish Holidays Act and collective bargaining agreements stipulate that vacation salary paid in advance should in principle be deducted from the employee s vacation pay if the employee leaves his/her employment of his/her own accord within five years, or if his/her employment is terminated for personal reasons. Agreements about vacation in advance without deduction do exist and can be justified on the grounds that Managing Directors are usually fired for reasons other than personal reasons or redundancy, as the Swedish Employment Protection Act does not apply to Managing Directors. 5 Ordinary pension benefits etc. Alternatives: a) NN is to receive pension benefits in accordance with the collective bargaining agreement for salaried employees in the private sector by which the Company is bound, currently the ITP Scheme, the collective bargaining agreement between the Council for Negotiation and Co-operation [PTK] and the Confederation of Swedish Enterprise [Svenskt Näringsliv]. In NN s case, (select either ITP 1 or ITP 2) is to apply, see the Comment below. b) In addition to this, the Company undertakes to pay % of NN s monthly salary into an occupational pension insurance scheme specified by NN. In the case of the Company not being bound by any collective bargaining agreement, the Company undertakes instead on NN s behalf to pay % of NN s monthly salary into an occupational pension insurance scheme and sickness insurance scheme specified by NN. In addition to this, the Company undertakes to pay the premiums for the following insurance schemes. TGL Group Life Insurance. TFA Work Injury Insurance. Business Travel Insurance, which provides insurance protection for all business travel anywhere in the world. Contacting a pension insurance expert is essential for navigating your way through the pension benefits maze. This is why Jusek is only able to provide general information in this section. In other words, this pension information is only intended to give you a rough idea of which pension solution might be right for you. The ITP Scheme is only available to companies in the private sector bound by collective bargaining agreements. The employer can be bound either by virtue of its membership of an employers organisation or by local collective bargaining agreements. An employee organisation and the employer enter into the latter collective bargaining agreement directly. If the ITP Scheme applies to all other salaried employees, the employer can register the Managing Director and other employees in senior managerial positions so that they are also covered by this scheme. Regardless of the way you choose to negotiate

5 (14) your pension terms and conditions, you should make sure that the pension benefits you obtain are, at the very least, equivalent to the ITP Scheme. Bearing in mind that you have no security of employment, you should obviously have at least the same pension benefits as the Company s other salaried employees. The major difference between ITP 1 and ITP 2 is that a person born in 1979 or later usually will have a defined premium occupational pension, while a person born in 1978 or earlier will continue to have a defined benefit pension and the ITPK complementary pension component. Even if you are born in 1978 or earlier, you may be included in a defined premium retirement pension if you switch employers and start a new job. An employer who joins the ITP Scheme after the 25 April 2006 can, subject to approval, opt to only apply the new defined premium ITP Scheme for salaried employees of any age. You will find more information about the ITP Scheme on the PTK website: www.ptk.se If your employer is not bound by any collective bargaining agreement, you should make sure that the Company undertakes to pay a certain percentage of your monthly salary into an occupational pension insurance scheme specified by you. You should always contact an insurance expert for advice about which pension solution is most advantageous for you. Influential factors are the insurance cover you already have and the coverage you would like. The TGL Group Life Insurance and TFA Work Injury Insurance mentioned in this paragraph are common insurance schemes regardless of the salaried employee position you hold or whether you are covered by a collective bargaining agreement or not. Business travel insurance is relevant if you will be conducting official business outside Sweden. 6 Early retirement If NN remains in his/her position as Managing Director of the Company when he/she reaches the age of 60 years, NN is to leave his/her employment and receive pension benefits in accordance with Appendix 3 three months after either NN or the Company has so requested. An early retirement agreement can be pertinent if you are relatively close to 60 years old, and both you and your prospective employer are agreed on this issue. Agreements like this are usually easiest to effect if the Company is bound by a collective bargaining agreement and it is possible to link agreements to the ITP system. For obvious reasons, it is difficult to say for certain in advance which pension solution will be most advantageous for you. Influential factors are the insurance cover you already have and the coverage you would like. Always contact a pension insurance expert to help you to identify which pension solutions might be suitable for you. You will find more information about the ITP Scheme on the PTK website:www.ptk.se. 7 Car benefit NN is to receive a free make/model car or some other car in the equivalent price range. The Company is to pay all costs for the car. NN shall be entitled to unrestricted private use

6 (14) of the car in Sweden and other countries. Members of NN s family shall also be allowed access to and use of the car. NN shall be entitled to exchange the car for a new car in the same price range every years or after driving kilometres. If the car benefit is no longer required or is cancelled, NN shall be compensated for this benefit with a monthly amount equal to XX % of the relevant income base amount. Repairs and petrol are included in all costs. According to this sample contract, the right to make private use of the car will also apply to journeys outside Sweden. If you do not use the sample contract s wording, you should expect the right to be restricted to Sweden. Whether or not you are interested in this benefit will depend on your income, travel habits, etc. This benefit is usually regulated by the Company Car Policy in force at any given time. This will restrict your chances of making specific arrangements just for you. Nor should you take for granted that smaller companies will offer the Managing Director a car benefit. Always check the tax implications of this benefit with the Swedish Tax Agency: www.skatteverket.se. 8 Business journeys and subsistence allowances Reimbursement for business journeys and subsistence allowances is to be paid in accordance with the Company Travel Policy in force at any given time. Information about tax exempt amounts can be found at www.skatteverket.se 9 Sick pay etc. By virtue of his/her employment, NN shall be entitled to the following sick pay etc. Alternative 1 The Company is to apply the rules relating to sick pay and sickness pension specified by the relevant collective bargaining agreement. Alternative 2 The Company undertakes to take out separate sickness insurance from an insurance company specified by NN. Arrangements under Alternative 1 assume that the employer has a collective bargaining agreement, i.e. that the employer is bound by general terms and conditions of employment and the ITP Scheme, etc. These arrangements apply to all salaried employees at the Company. The Company can also add you as Managing Director to these collective bargaining agreements. Before negotiating with the employer, it is worthwhile knowing that the collective bargaining agreement entitles you to the following compensation: The first day of sick leave is a qualifying day for which no sick pay will be paid.

7 (14) The Company has a statutory duty to pay sick pay, from Day 2 up to and including Day 14, at 80% of your salary and in accordance with the general terms and conditions of employment in the relevant collective bargaining agreement. From the 15th calendar day of your sick leave, the Swedish Social Insurance Office [Försäkringskassan] will pay your sick pay. In addition, in the Day 15-90 period your employer will pay sick pay at 10% of your salary below 7.5 price base amounts, as well as 90% of your salary above 7.5 price base amounts, in accordance with the general terms and conditions of employment in the relevant collective bargaining agreement. Sickness pension will be paid by Alecta as from Day 91. This sickness pension is stipulated by the collective bargaining agreement and is paid by Alecta as part of the ITP Scheme. For more information, please visit the PTK website: www.ptk.se. If the company is not bound by any collective bargaining agreement, the Company may take out separate sickness insurance, with provisions including compensation at 90% of your salary. 10 Health and Medical Care etc. The Company is to take out specific medical expenses insurance for NN in accordance with Appendix 4. This insurance is taken out to ensure that you receive immediate treatment in the event of an illness and any associated health problems. It makes sense to take out medical insurance to avoid absence due to slow or delayed medical care or a lack of preventive healthcare. This insurance is taken out by the employer on your behalf with an insurance company. There are a good many insurance solutions in this area. Nowadays, many employers frequently take out this type of insurance agreement. 11 Relocation costs The Employer is to defray relocation costs arising in connection with NN s relocation to his/her new place of work and, where appropriate, the relocation costs arising at some future date should the Company relocate its business activities to a different location. Relocation costs refers to the cost of moving household contents, as well as NN s and his/her family s travel expenses to the new place of work. In addition to this, NN is to receive a resettlement allowance of SEK for the extra costs arising as a result of the relocation. The value of this benefit varies. Always check current rules on employee benefit taxation with the Swedish Tax Agency: www.skatteverket.se

8 (14) 12 Notice of termination and severance pay Notice to terminate employment may be given by the employer or NN with three months notice. If the employer gives notice to terminate employment, a severance payment equivalent to at least twelve (12) monthly salaries (calculated on the employee s monthly salary at the time notice is given) is to be paid in addition to notice pay. Severance pay shall fall due for payment on the day after expiry of the period of notice, provided that the parties have not agreed to a later due date. NN shall be entitled to severance pay as above in the event that he/she gives notice to terminate his/her employment because his/her employment circumstances have been substantially altered, or if the Company commits a serious breach of contract. This shall also include the situation in which the Company changes the nature of its business, or the Company changes its business location, or parts or all of the Company s business is transferred to another employer pursuant to Section 6b of the Swedish Employment Protection Act. Notice to terminate or cancel employment shall be given in writing. Since the Swedish Employment Protection Act does not apply to Managing Directors or other senior managers, people in these positions have no employment protection. Accordingly, you should make sure that in addition to a period of notice you stipulate your entitlement to severance pay if the Company gives notice to terminate your employment. A long period of notice is not a good idea if you or the employer should want to terminate your employment. Your employment will continue for the duration of the period of notice. This means that you will not be able to start a new job until your period of notice has expired, unless you and your current employer agree to shorten this period. As it is not unusual for an employer to refuse to shorten the period of notice, it makes sense to negotiate a short period of notice three months, in our example and combine this with severance pay. Severance pay for a Managing Director equates to anywhere between 6 to 24 monthly salaries. 13 Alterations and additions Alterations and additions to this contract must be approved in writing by both parties. This clause stipulates that changes and additions to this contract must be made in writing. This stipulation is in both parties interests for the purpose of avoiding disputes.

9 (14) 14 Disputes Alternative 1: Disputes arising from this contract shall be settled by a Swedish court and Swedish law shall be applied. Alternative 2: Disputes arising from this contract shall be settled by an arbitration tribunal in accordance with the Swedish Arbitration Act and Swedish law shall be applied. The Company is to defray all costs relating to the arbitration procedure, regardless of the outcome of the dispute. Alternative 1 This alternative expresses the general rule, i.e. what will apply if the parties do not make any contractual provisions. Alternative 2 Employers frequently prefer that any disputes be settled by arbitration procedure (arbitral award) as this will normally be a speedier process involving less publicity. As a general rule, you should not accept this, as the costs of an arbitration procedure will frequently far exceed the costs of a court trial. It is not unusual for costs to amount to hundreds of thousands of Swedish kronor. If you are still contemplating the inclusion of an arbitration clause, it is important that the clause contains an undertaking from the employer to defray the costs of the arbitration procedure, regardless of the outcome of the dispute. You will find this wording in Alternative 2. We strongly advise you to seek Jusek s help if you expect to be involved in an arbitration procedure. This employment contract has been executed in two copies of which the parties have taken one each. Place and date: Place and date: Signature Signature

10 (14) Duty of loyalty, confidentiality and non-competition clauses Sometimes the employer will insist on including confidentiality and noncompetition clauses in the employment contract. In general, the following will apply. Duty of loyalty and confidentiality By virtue of your employment, you will already be under an obligation to observe discretion and confidentiality in relation to Company affairs. Your duty of loyalty means you will not be allowed to run a competing business as long as you are in your current employment. This means that if you want to undertake an assignment or a spare-time occupation, you should always consult your employer first. In this way, you will avoid discussions about your disloyalty which result in crises of confidence. The employer has a justified interest in preventing you from taking on assignments that would be detrimental to your work. In order to avoid problems of proof in the future, you should always make sure that you obtain written consent from your employer for any spare-time occupations you may have. Confidentiality As far as confidentiality is concerned, the Swedish Trade Secrets Act will apply under all circumstances. The provisions of this Act are usually sufficient to satisfy the employer s confidentiality requirements. An example of an acceptable confidentiality clause might be as follows: CONFIDENTIALITY NN undertakes not to reveal figures and information concerning business or operating matters in the Company that the Company keeps confidential and disclosure of which is likely to damage the Company s competitive position. Information refers both to data that has been documented in some form, including drawings, models and other similar technical prototypes, and to individual people s knowledge of a certain circumstance, even if it has not been documented in any way. Agreement about non-competition clauses As a general rule, the duties that the parties had towards each other during the employment period cease in the post-employment period and this includes the employee s duty of loyalty. If the employer wants protection against competition in the post-employment period, the only recourse will be contractual: a non-competition clause. The information below is mainly intended to add to what you may already know about non-competition clauses. As the material is complex, we strongly advise you to call the Jusek Helpline on +46 8-665 29 80 or +46 8-665 29 00 for advice before you accept these kinds of clauses. Questions about non-competition clauses arise more frequently these days, because businesses are increasingly reliant on the specific expertise their employees possess. You can summarise the needs of companies as the three main areas they want to protect. The Com-

11 (14) pany wants to keep its customers and prevent former employees enticing them to competitors or rival businesses that former employees have set up. The Company also wants to protect company-specific expertise and business secrets, and prevent this kind of information spreading to competitors. Finally, the Company wants to retain key people, especially if the Company has invested significant amounts of money in their training. The normal way to satisfy the employer s interest in protection is to include a specific provision in the employment contract which bans the employee from taking a job with a competitor or in any other way participating in or carrying on a rival business. The competition ban is usually combined with provisions about confidentiality and sanctions in the event of infringements, e.g. a contractual penalty. The employer s desire to protect its business is diametrically opposed to the employee s interest in having the greatest possible freedom to use his/her knowledge and experience in the post-employment period. In other words, there is a conflict of interest between the principle of professional freedom and the employer s interest in protecting its business. In this conflict, the employee s interest is deemed to carry great weight. In contrast to what applies to employees duty of loyalty during employment, the employer s interest in protection in the post-employment period is not deemed to carry as much weight. Therefore, a ban on competition must be reasonable in order to be binding on the employee. Non-competition clauses have a prima facie validity. Unreasonable non-competition clauses may, after legal proceedings, be declared invalid by the courts, but it may take several years to obtain such a ruling. It is frequently difficult to predict the outcome of such a ruling. As far as key people are concerned, the Swedish Labour Court has ruled that noncompetition clauses with the sole purpose of retaining employees with specialist individual expertise and skills are not acceptable. Reasonableness assessment The reasonableness assessment will be influenced by the time that the ban on competition is in force. The ban should be limited to the estimated useful life of the expertise the employer wants to protect, but should not normally exceed two years. The question of the length of the restriction period should be stipulated in each specific case in the individual contract. Another requirement is that the employee should receive reasonable compensation for undertaking not to compete. The following is an extract from

12 (14) 1969 agreement to limit the applications and content of noncompetition clauses in employment contracts Applications 1 Non-competition clauses should only be used by employers that depend on independent product and method development and that in the course of such development work acquire manufacturing secrets or comparable knowledge, the disclosure of which might be to their significant detriment. Companies which have acquired manufacturing secrets via contractual means etc. are placed on a similar footing to the above-mentioned employers. Furthermore, non-competition clauses should only apply to employees who, during their employment, obtain knowledge of manufacturing secrets or comparable knowledge which they have the opportunity to use by means of their training or experience. Comment During the negotiations for these agreements, the question arose of the extent to which sales and administrative personnel could be bound by non-competition clauses in accordance with the agreement. The white-collar parties confirmed that they could be, but only if the conditions specified in paragraph 1 of the agreement were met. 2 When determining the issue of whether a non-competition clause should be included in the employment contract for certain employees, as well as determining the content of the clause, consideration should be given, on the one hand, to the importance of the interest that the employer wishes to protect and, on the other hand, to the employee s interest in freely earning a living. In view of this, the issue of including a non-competition clause in an employment contract should be considered on a case-by-case basis. If a company which has acquired know-how or comparable expertise employs a person who has not yet reached the age of 27 years and who at the time of hiring has recently graduated from an educational institution and the company takes a decision to bind the employee with a non-competition clause, the clause should normally be worded in such a way that it will only take effect if the period of employment has lasted for longer than six months when it is terminated. Content 3 The post-employment period during which the employee is to be prevented from working for any business which competes with the employer (the restriction period) shall not be longer than the estimated useful life of the know-how or comparable expertise that the employer wants to protect. In view of the employee s interest in working freely, the restric-

13 (14) tion period should not normally exceed 24 months or, if the above-mentioned useful life is short, 12 months. 4 A contractual penalty should have a reasonable correlation to the employee s salary. In general, a penalty equal to six average months earnings should provide sufficient protection for the competition ban. Average monthly earnings in this context refers to the average of the amounts the employee received each month as fixed salary, commission, percentage of profits, etc. during his/her final year of employment. When calculating average monthly earnings, only time during which the employee has carried out a normal amount of work should be taken into consideration. 5 In other respects, the non-competition clause should be worded in conformity with this appendix to the main agreement. Wording of non-competition clause for insertion in employment contract 1 During a period of months, calculated from termination of employment, the employee is not permitted to a) take employment with companies competing with the employer within a business area that may be deemed to lead to utilisation of business secrets which the employee has learned with the employer, or b) become joint owner of such a company or in any other way assist the company by word or deed, or c) either on his/her own behalf or on behalf of another person start or run a business which competes with the employer. If the competing company has two or more business areas at the location in which employment is called into question, all of them shall be taken into consideration when applying paragraph a) above. The ban on competition will not apply in the following cases: a) When the employer has given notice to terminate the employment contract. But when the employer s notice to terminate is the result of breach of contract by the employee, the ban on competition will be valid.

14 (14) b) When the employee has given notice to terminate employment and this is a result of breach of contract by the employer. Breach of contract refers to such actions or omissions as entitle the opposite party to cancel the employment contract with immediate effect. 2 If the employment contract ceases to be valid after notice to terminate on grounds other than retirement, the Employer is obliged, as compensation for the detriment that the ban on competition involves for the employee, to pay to the employee each month the difference between the employee s income from work with the employer at the end of the employment period and the (lower) income that the employee subsequently earns in his/her new paid employment. This compensation, however, should not exceed 60% of monthly earnings from the employer at the end of the employment period and should not be paid for a longer time than the period during which the ban on competition is in force. In order to determine the amount of compensation, the employee has an obligation to continuously keep the employer informed of the amount he/she is earning in his/her new paid employment. Payment of the compensation specified above will commence as from the day on which the employer receives the employee s request to that effect via recorded delivery letter. 3 The employer may inform the employee that he/she is released from his/her obligation to observe the non-competition ban, upon which the employer s obligation to pay the compensation specified in paragraph 2 above will immediately cease. However, the following should be noted when utilising this: If the employee notifies the employer that he/she is considering ending his/her employment, the employer, if the employee so requests, shall notify the employee within one week whether and to what extent the employer intends to enforce the non-competition clause. Such notification may not be unilaterally altered by the employer within twelve months of the notification being given. You are welcome to contact Jusek if you have any questions prior to negotiating your Managing Director employment contract and to seek Jusek s assistance before accepting the Managing Directorship and signing the Managing Director employment contract. Good luck!