Employee, Director or Employee-Director?

The lawfulness of the legal concept of employee-director in the context of private limited companies has been a contentious issue in labor law for some time. This is because, with regards to this type of company, this legal concept is not expressly prohibited by law.

In a judgment dated September 22, 2022 (Case 2859/20.6T8BCL.G1), the Guimarães Court of Appeal ruled that a person can simultaneously be an employee and a director.

In this case, a clothing and knitwear company dismissed its director, who then claimed that her dismissal had been unlawful.

According to the director, she worked as a normal employee, receiving a monthly salary, working to a specific timetable, and being subject to the powers and authority of the company’s owners. Therefore, she claimed that she should be recognized as having an employment relationship with the company.

The courts have already analyzed the legal concept of employee-director extensively. The judgments of the Évora Court of Appeal of April 6, 2017 (Case 127/15.4T8STR-B.E1), the Porto Court of Appeal of January 21, 2019 (Case 12602/16.9T8PRT.P1), and the Guimarães Court of Appeal of February 13, 2014 (Case 2690/12.2TBGMR-B.G1), among others, all concluded that this concept is lawful.

However, the concept is still considered unlawful under certain Portuguese case law. For example, in a judgment dated May 24, 2005 (Case 0414989), the Porto Court of Appeal equated the regime for private limited companies to that of public limited companies and applied article 398 of the Portuguese Companies Code by analogy to private limited companies. This article prohibits anyone from being simultaneously a director and an employee.

What about the court’s judgment on the matter in question? In short, the facts proven did not substantiate a finding that the director was legally employed by the company, for the following reasons: 

First, although the director received a monthly salary, this alone was not enough to conclude that an employment contract was in place. In fact, in certain cases—such as this one—a salary may be paid in compensation for management duties, not for the work carried out.

 Second, although the director worked to a timetable, it was proven that she, and not her alleged employer, set the timetable.

Third, concerning the claim that the director’s tasks could be equated to those of other employees, the court of appeal ultimately held that whether the director carried out the duties of a production line manager was wholly irrelevant. In fact, it has become increasingly more common for the owners and directors of small companies (such as this one) to carry out the same tasks as their employees. However, this does not mean that there is an employment relationship and, consequently, that an employment contract is in place.

Therefore, as the facts did not support that an employment contract existed between the parties, the court of appeal ruled that it was not an employee-director relationship, rather a management one. Hence, there was no unlawful dismissal, but only the (lawful) removal of the director. 

To conclude, although Portuguese case law generally allows for the concept of employee-director, each case must be assessed individually to ascertain whether a genuine employment contract is in place—considering the usual characteristics of an employment relationship—to determine whether the termination of the relationship should only comply with corporate rules or also with the (much stricter) employment regulations.