How the new Labour Code will affect CEOs and top level employees in Lithuania

Dr Vida Petrylaite answerring questions about CEO employment contracts  Photo © Ludo Segers @ The Lithuania Tribune

With a new Labour Code being passed by Lithuania’s parliament, legal experts explained to the Lithuania Tribune the implications for the employment contracts for chief executives and top level managers in companies in Lithuania.

The employment terms and conditions of top-level managers are often negotiated on an individualised basis and the new Labour Code will allow even more opportunities to deviate from general employment conditions. In practical terms, top-level managers, particularly CEOs, will have more options to negotiate better employment conditions.

Dr Paulius Miliauskas and Dr Vida Petrylaite, two partners at the law office CONFIDENCE, explained the legal aspects of employing top level managers in Lithuania.

Miliauskas said the new Labour Code will affect the working time, overtime and payment, non-competition, and confidentiality obligations of CEOs and senior officers. Therefore, senior management will need to define these issues in their employment contracts. The new Labour Code was voted into law on Tuesday afternoon by the Seimas (Lithuanian Parliament) will be implemented on 1 January 2017.

Petrylaite pointed to the complexity of legal relationships between CEOs and their companies as being far from being homogeneous. The CEO is a single-person management body of the company and thus represents the company in relations with third parties, but at the same time a CEO is an employee with an employment agreement with the company. Therefore there is a need to define the employment and related conditions of the CEO‘s activity.

The status of the company’s board members is different as there is no need to enter into employment or services agreements. Nevertheless, services agreements are recommended to address unregulated areas in the law. However, contractual relationships can help solve and identify working time and payment issues.

One of the areas that will be affected by the new Labour Code is compensation for overtime, and how it is defined and affected by existing case law. It is often assumed that the working time of CEOs and other managers is legally unlimited.

According to the present Labour Code, regular working time must be written in the employment contract, even for CEOs it cannot exceed 40 hours/week. Up to now, CEOs and other managers exceeding set working time are legally not treated as working overtime.

This implies that ‘longer hours’ by CEOs are compensated by paying for it at the rate of normal salary. In contrast, ‘regular’ employees are entitled to a 1.5X rate for all overtime work.

Lithuanian case law demonstrates that it is possible to define in managers’ employment contracts a fixed amount of compensation for overtime work or other irregular work (night work, work on holidays, rest days), provided that the actual over-time does not exceed the amount of the additional compensation.

The new Labour Code intends to regulate this question more precisely with clear distinction between the CEO, other managers and common employees. The “overtime” hours of CEOs will need to be recorded with no additional payment guaranteed by the law, unless otherwise agreed in an employment contract.

In case of other senior officers, legal requirements will remain the same – payment for overtime is set at the standard rate as stipulated in employment agreements and the increased rate is not applied. To avoid possible abuse, the new Labour Code foresees a restriction in that the number of administrative officers within a company cannot exceed 20% of the total number of employees.

On the issue of confidentiality, CEOs and members of the board are under obligation to safeguard confidential information of the company. Particularly, there are strict regulations regarding the so-called trade secrets which are generally defined as information that is unknown or not readily accessible by outside parties, that has commercial value to the company and is subject to reasonable steps to keep it secret.

Examples of trade secrets are information about clients, strategic business plans, and manufacturing processes. A CEO leaving his employing company has an obligation to keep trade secrets as confidential even when there is no confidentiality agreement in place.

Lithuanian laws consider such confidentiality obligations to remain for one year after the employment relationships are terminated, unless another term has been agreed to in the confidentiality agreement (the term can also be shorter). Internal confidentiality rules usually state all categories of trade secrets in order to spell-out to employees what information should be treated as confidential.

Even if there are no such internal rules, in certain cases obligation to safeguard trade secrets can still be triggered. This would be the case when it is possible to understand that information is highly sensitive and circumstances dictate that it should be treated as a trade secret.

It is good practise to clearly document and detail internal confidentiality rules and issues in addition to the default statutory rules in order to protect company’s sensitive information and expertise.
Such documents should clearly state what information is regarded as confidential and how long such obligations should be valid and it prevents and facilitates former employees from using it against the interests of the company.

Finally, Miliauskas addressed non-competition obligations, often being combined with the confidentiality obligations. Lithuanian case law clearly states that non-competition rules should not be treated in the same way as confidentiality obligations as there is clear legal distinction between non-competition and confidentiality clauses even when they are inserted into the same agreement.

The most important legal requirement for non-compete obligations to be valid is adequate and proportional compensation. The more restrictions such as length of time, intensity, and breadth of territory are applied towards the employee, the higher the compensation should be. Current case law foresees compensation of approximately 20% of salary.

The new Labour Code sets the minimum threshold to 40% of the average salary of particular employee. When no compensation is paid, the CEO is not obliged to abstain from starting competing activities or working for direct competitors of the company.

It is best to insert confidentiality and non-competition clauses in an employment agreement, as well defining them in annexes to the agreement or even as separate agreements, provided they are valid and contain legally binding clauses.

Breaches of such obligations can be a cause of civil action against the employee in breach to compensate damages to the employing company.

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