Combining Corporate Office and Employment Contract: Absolute Nullity Since 1974

Imagine the scene: in Parentis-en-Born, a property developer, also a director of a société anonyme (SA) managing a portfolio of holiday homes, is given a mandate as managing director. After a few months, he is abruptly dismissed. He then brings a claim before the employment tribunal (conseil de prud'hommes) seeking termination compensation, claiming that he was in fact bound by an employment contract. But the Cour de cassation rejects his claim: a director in office cannot benefit from an employment contract in the same company. The question that every SA director asks is therefore: can I combine my corporate office with an employment contract? This 1974 decision, still in force, provides a clear and definitive answer: no, and any attempt is void.

But what does this actually change for an owner or real estate professional in Saint-Vincent-de-Tyrosse? Much more than it seems. In company law, the distinction between corporate office (administrateur, président, directeur général) and employment contract (employee) is fundamental. The former implies independence of decision, the latter subordination. Combining them risks the director being both his own boss and his own subordinate, which the law expressly prohibits.

In this article, we will dissect this landmark ruling, understand why it was made, and above all, draw practical lessons to avoid pitfalls. If you are the owner of a family SCI, manager of a SARL, or even a shareholder of an SA, the rules laid down by the Cour de cassation in 1974 directly concern you. So, how should you react? Follow the guide.

The facts: a story that happens every day

Mr X, a property developer in Saint-Vincent-de-Tyrosse, is appointed director of an SA formed to build a housing development. A few months after his appointment, the general meeting also gives him a mandate as managing director (directeur général). In practice, he does not actually exercise it: the parties consider that he is in fact an employee, bound by an employment contract. But when he is dismissed, he brings a claim before the employment tribunal for redundancy compensation. The company contests the jurisdiction of the employment tribunal, arguing that he was a director, therefore a corporate officer, and not an employee.

The employment tribunal declares itself competent, considering that since the mandate of managing director had not been executed, the parties were in fact bound by an employment contract. The company appeals, then appeals to the Cour de cassation. The Cour de cassation quashes the judgment of the court of appeal. It recalls that under articles 93 and 107 of the Law of 24 July 1966 (now articles L.225-21 and L.225-43 of the Commercial Code), a director cannot obtain an employment contract in the company during his term of office, unless he was already an employee for at least two years before his appointment. In this case, Mr X did not have that length of service. And even if the parties had concluded an employment contract in fact, that contract is void because it violates a mandatory provision.

In other words, it does not matter that the mandate of managing director was not executed: as soon as Mr X was a director, he could not become an employee. The nullity is absolute, and the employment tribunal has no jurisdiction. What should have been an employment dispute becomes a company law dispute, falling within the jurisdiction of the commercial court (tribunal de commerce).

The reasoning of the court — explained

The Cour de cassation relies on a combination of two provisions of the Law of 24 July 1966 on commercial companies. Article 93, paragraph 1 (now L.225-21 of the Commercial Code) provides that an employee can only be appointed as a director if he has a prior employment contract of at least two years. Article 107 (now L.225-43) prohibits directors from receiving any remuneration other than attendance fees (jetons de présence) and directors' fees (tantièmes) provided for by law. Reading these two provisions together, the Court concludes that a director in office cannot obtain an employment contract in the company. The reason? An employment contract implies a relationship of subordination, incompatible with the independence of the corporate officer. If the director became an employee, he would be both the person giving orders and the person receiving them, which would create a conflict of interest.

This reasoning confirms previous case law, and is not a departure from it. As early as 1966, the law was clear, but some tried to circumvent it by creating factual situations. The Cour de cassation puts an end to these practices: it does not matter whether the employment contract is real or fictitious, it is void if granted to a director in office. This nullity is a matter of public policy, meaning that it cannot be waived.

Note, however, that this decision only concerns sociétés anonymes (SAs). For SARLs, the rules are different: a manager (gérant) can combine his office with an employment contract, provided that the employee duties correspond to an actual and distinct position. But for SAs, the rule is absolute: no employment contract during the term of office of a director.

What this means for you — in practice

If you are a director of an SA and wish to become an employee, you must either resign from your directorship before signing an employment contract, or wait until the end of your term of office. Otherwise, the employment contract is void, and you cannot claim redundancy compensation before the employment tribunal. You will have to bring proceedings before the commercial court to obtain, for example, damages for wrongful termination of your mandate.

Let's take a concrete example in Parentis-en-Born. A landowner is a director of an SA that manages a forest. He also wishes to be employed as a forest ranger. If he signs an employment contract during his term of office, that contract will be void. He will lose all employment protection. On the other hand, if he first resigns from his directorship, he can be an employee lawfully.

For a property developer in Saint-Vincent-de-Tyrosse, the lesson is the same: if you are a director of an SA, do not try to obtain an employment contract alongside it. If you want to be an employee, choose another legal form for your company (SARL, SAS, etc.) or comply with the two-year prior employment rule.

Finally, for real estate professionals (agents, notaries, lawyers) who are sometimes directors of civil real estate companies (SCI) converted into SAs, vigilance is required. Check your status carefully before signing any employment contract.

Four tips to avoid this type of dispute

• Before accepting a directorship, check your length of service as an employee: if you are already an employee of the company for at least two years, you can combine. Otherwise, you will have to choose between the directorship and the employment contract.
• If you are a director and wish to become an employee, resign first: terminate your directorship before signing any employment contract. Then wait a reasonable period (a few months) to avoid any challenge.
• Choose a different corporate form: if combining is essential, prefer an SARL, SAS, or EURL. In these structures, the director can be an employee under certain conditions (distinct technical functions).
• Have a clear mandate agreement drafted: if you are appointed managing director in addition to director, specify the terms of remuneration and termination. This will avoid any confusion with an employment contract.

Further reading: related case law and developments

The 1974 decision has been confirmed several times. In a ruling of 9 December 1992 (No. 90-44.069), the Cour de cassation held that even if a director exercises technical functions distinct from his mandate, he cannot be an employee. More recently, in 2010, the commercial chamber recalled that the nullity of the employment contract is absolute and can be invoked by any interested party.

However, for sociétés par actions simplifiées (SAS), the rules are more flexible: the president can be an employee, provided that the employment contract corresponds to distinct technical functions. The trend in case law is therefore towards liberalisation for SAS, but the rule remains strict for SAs.

What this means for the future: if you are setting up a company, favour an SAS if you wish to be both director and employee. But if you are already a director of an SA, do not expect a reversal: the Cour de cassation maintains its position.

Checklist before taking action

• What is your current situation? Are you already a director of an SA? Do you have an existing employment contract? If so, it is probably void.
• What to do if you are in this situation? Consult a lawyer specialising in company law to regularise your situation: either resign from the directorship, or terminate the employment contract.
• Which court has jurisdiction? If your employment contract is declared void, you cannot go to the employment tribunal. You must bring proceedings before the commercial court for any dispute relating to your mandate.
• What are the time limits? An action to annul an employment contract is subject to a 5-year limitation period from its signature. If you signed a contract more than 5 years ago, you may be protected by the limitation period.
• How to anticipate? When setting up a company, choose the corporate form that suits your needs. For a property development activity, an SAS is often more flexible than an SA.

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FAQ:

Can I be both a director and an employee of an SA? No, unless you were already an employee for at least two years before your appointment as director.

What if I signed an employment contract while I was a director? The contract is void. You must consult a lawyer to regularise your situation and possibly take legal action to obtain compensation on the basis of the corporate mandate.

What are the risks for the company? The company may be ordered to repay the salaries paid under the void contract, and may be prosecuted for undeclared work (travail dissimulé) if social security contributions were not paid.

Does this rule apply to SAS? No, SAS have more flexible rules. But be careful: the president of an SAS can be an employee, but only for technical functions distinct from his mandate.

Are you in a similar situation? A first 30-minute consultation with Maître Zakine (€45) can save you months of proceedings — and often much more. Book an appointment →