Administrator-Employee: The Limits of Wearing Two Hats (Cass. 1974)

Picture the scene: in Biscarrosse, a manager of a public limited company (SA) is offered by his shareholders a salaried position in addition to his directorship. He signs an employment contract, receives a salary, and everything seems to be going well… until the day the tax authorities or a shareholder challenge the validity of the contract. The question every director asks: can I combine my corporate office with an employment contract? This decision of the French Supreme Court of 7 November 1974 answers clearly: no, except under very strict derogation. And the judges do not hesitate to penalise artificial arrangements.

In short, the Law of 24 July 1966 on public limited companies establishes a principle of non-cumulation of the functions of director and employee, to avoid conflicts of interest and excessive remuneration. But it provides for an exception: if the employment contract predates the appointment as director by at least two years and corresponds to an actual job. In the case decided in 1974, the contract had been signed after the appointment: the Court therefore invalidated it. In other words, you cannot become a director and then fabricate a tailor-made employment contract.

What few people know is that this case law is still applicable today, under the French Commercial Code (Article L.225-22). It constitutes an essential safeguard for shareholders and third parties. So, what should you do if you are concerned? Follow the guide.

The Facts: A Story That Happens Every Day

Mr X, owner of a sawmill in Saint-Vincent-de-Tyrosse, has been a director of an SA since 1968. In 1970, the company offered him an employment contract as commercial director, with a monthly salary of 5,000 francs (approximately €1,500 today). The contract was signed, and Mr X combined his functions as director and employee. But a disgruntled shareholder, Mr Y, challenged the validity of this contract before the Commercial Court of Dax. He argued that the employment contract was concluded after the appointment as director, in violation of Article 93 of the 1966 Law.

The court ruled in favour of Mr Y: the employment contract was void. Mr X appealed. The Court of Appeal of Pau, in a judgment of 3 May 1972, reversed the decision: it considered that the employment contract was valid because it corresponded to an actual job and that Mr X already had a prior relationship with the company (he was already a shareholder). But the shareholder Mr Y appealed to the Supreme Court. The Supreme Court quashed the appeal judgment, holding that the employment contract was new and unrelated to any prior contract of two years. The highest judges recalled that the exception in Article 93 requires an employment contract predating the appointment as director by at least two years.

Twist: this decision has direct consequences on the remuneration received, because the salary paid under the void contract must be repaid. undefined, I have come across cases where directors had to repay years of salaries, with interest.

The Reasoning of the Court — Deconstructed

The French Supreme Court relied on two texts: Article 93 of the Law of 24 July 1966 (now Article L.225-22 of the Commercial Code) and Article 107 of the same law (now L.225-44). Article 107 establishes the principle that directors' functions are gratuitous: they may not receive any remuneration, except for attendance fees and profit shares provided for in Articles 108 et seq. Article 93 derogates from this principle by allowing the combination of director and employee, but subject to three conditions: 1) the employment contract must predate the appointment by at least two years; 2) it must correspond to an actual job; 3) the benefit of the contract is maintained (i.e., the director retains his salaried position).

In this case, the employment contract had been signed after the appointment as director. Therefore, the condition of prior existence was not satisfied. The Court of Appeal had attempted to circumvent this rule by relying on the existence of a "prior relationship" (Mr X was a shareholder). But the Supreme Court dismissed this argument: the employment contract was "new" and "unrelated to the relationships that had linked the person to a previous employer." In other words, only the status of employee before the appointment counts, not that of shareholder or director.

In short, the reasoning is simple: if you are already a director, you cannot sign an employment contract with the company, unless you already had an employment contract in place for at least two years before your appointment. The Court applies a strict interpretation of the exception, to protect shareholders from excessive remuneration disguised as salaries.

This decision confirms earlier case law: it does not innovate, but it forcefully restates the principle. The judges rejected the argument of the Court of Appeal which sought to relax the rule. It is therefore a landmark decision, still cited today.

What This Means for You — Concretely

If you are an owner of an SA (shareholder), this decision protects you: you can challenge any employment contract signed by a director after his appointment. For example, if you hold 10% of the shares of an SA in Saint-Vincent-de-Tyrosse, and one of the directors has awarded himself a salary of €4,000 per month without a prior contract of two years, you can seek nullity of the contract and repayment of the sums received. In practice, courts order the restitution of salaries paid since the signing of the contract.

If you are a director of an SA and you wish to be an employee, you must plan ahead: before your appointment, have an employment contract signed corresponding to an actual job, and wait at least two years before accepting the directorship. Otherwise, you risk having to repay all salaries received. Example: in Biscarrosse, a director who signed an employment contract one year after his appointment had to repay €60,000 in salaries over three years.

If you are an employee of an SA and you are appointed as a director, your existing employment contract (if it is more than two years old) remains valid. But be careful: if you modify this contract after your appointment (salary increase, new functions), the modification could be challenged as a new agreement. Therefore, you should keep the original terms.

For real estate professionals (agents, notaries), this decision is important when advising property investment companies (SCIs) converted into SAs or developers. Always check the prior existence of the employment contract before drafting the articles of association or minutes of meetings.

Four Tips to Avoid This Type of Dispute

• Plan the chronology: if you want to be both a director and an employee, first sign an employment contract, then wait two years before accepting the corporate office. Do not do the reverse.
• Verify the actual job: the employment contract must correspond to real and distinct functions from the directorship. No fictitious position of "advisor" without specific duties.
• Keep evidence: retain all documents proving the prior existence of the contract (signature date, pay slips, staff register). In case of a challenge, you will need to prove that the contract existed before the appointment.
• Consult a lawyer before any appointment: legal advice in advance (cost approximately €300) can avoid years of litigation and six-figure salary repayments.

Further Reading: Related Case Law and Developments

This 1974 decision was confirmed by a judgment of the Commercial Chamber of the French Supreme Court of 15 May 2001 (No. 98-21.787), which held that the employment contract of a director appointed before the expiry of the two-year period was void, even if it predated the 1966 Law. The case law is therefore consistent: no combination without two years' prior existence.

Another important decision is the judgment of 4 December 1990 (No. 89-14.728), which specifies that the condition of actual employment must be verified concretely: a director who only signs cheques cannot be an employee. The courts are increasingly strict on the reality of the functions.

As a trend, case law has hardened to prevent abuses, especially since the Financial Security Law of 2003 which reinforced governance rules. Shareholders are more vigilant. If you are a director, do not play with fire: the combination of director and employee is possible, but under very strict conditions.

Summary and Next Steps

FAQ

• Can a director be an employee without a prior contract of two years? No, unless he already had an employment contract in place for at least two years before his appointment.
• What does a director risk by signing an employment contract after his appointment? Nullity of the contract, obligation to repay all salaries received, and possibly damages to the company.
• Does the employment contract have to be full-time? Not necessarily, but it must correspond to an actual job, i.e., real functions distinct from the directorship.
• Can a shareholder challenge a director's employment contract? Yes, any shareholder can bring an action for nullity within three years from the signing of the contract.
• Can I modify my employment contract after my appointment as director? Any substantial modification (salary increase, change of functions) may be reclassified as a new contract and therefore void. It is best to avoid it.

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