Dismissal of a CEO on Sick Leave

Julia Borozdna
Head of Employment and
Migration Law Practice
Pepeliaev Group

Can you terminate the powers of a CEO without actually dismissing the individual? What is the link between terminating the powers of the CEO of a limited liability company, (hereinafter “LLC”), and the individual’s employment contract? When resolving this issue within the scope of employment law, many civil law, administrative law and other implications also arise.

If a doctor has acknowledged that the CEO is seriously ill and unable to work, the employment contract is terminated because of circumstances beyond the control of the parties (Clause 5, Part 1, Article 83 of the Labor Code). However, what steps should be taken if the illness is protracted but does not result in complete disability?

The employment contract with the CEO may be terminated prematurely following a corresponding decision made by the authorized body of the company (Clause 2, Article 278 of the Labor Code). However, the employment contract with the CEO may not be terminated on the basis of Clause 2, Article 278 of the Labor Code during the individual’s temporary disability, as Chapter 43 of the Code on the work of executives does not contain provisions that deprive them of the guarantees established by Part 3, Article 81 of the Code, which is a general prohibition on an employee’s dismissal during a term of illness on the employer’s initiative (Letter No. 1333-6 of the Federal Labor and Employment Service dated Sept. 5, 2006).

Andrei Slepov
Pepeliaev Group

The board of directors of an LLC may terminate the CEO’s powers at any time (inter alia, if the individual is ill) subject to compliance with the requirements of the law on limited liability companies, (hereinafter “Law on LLC”), as this guarantees the freedom of business. However, such termination does not lead to the dismissal of the CEO, who may be dismissed after recovering from illness.

Some courts hold a different view, ruling that termination of powers means that the CEO is unable to exercise functions granted by law, the foundation documents and the concluded employment contract. If a company concludes an employment contract with the CEO, the inability to discharge contractual obligations means that the employee has been dismissed.

As existing approaches in law enforcement practice are ambiguous, one solution would be to defer the decision to terminate the CEO’s powers and employment contract until the CEO returns to work. In this case an interim CEO should be appointed. Employment relations with an interim CEO can be formalized in different ways.

Fixed-Term Contract With an Interim CEO During the Absence of the CEO

Until the actual termination of the employment contract, the CEO retains his title. Accordingly, no other person may be appointed with this title for the term of the CEO’s employment established by the articles of association.

In this case a fixed-term employment contract could be concluded with the interim CEO (Paragraph 2, Article 59 of the Labor Code).

Under the Labor Code, a fixed-term employment contract concluded with the interim CEO during the absence of the ill CEO is automatically terminated as soon as the absent employee returns to work, meaning that the grounds for concluding the contract disappear (Part 3, Article 79 of the Code). Therefore, even if the CEO is dismissed on the day of his return to work, the fixed-term contract with the interim CEO will be deemed terminated anyway and will need to be concluded again, which is clearly inconvenient if the company plans to remove the prefix “interim” from the title of interim CEO and appoint him CEO.

Transfer of the CEO’s Powers to Another Employee

Powers can be transferred based on the CEO’s order or based on a power of attorney issued by the CEO. The transfer of the CEO’s powers on this basis involves the employee’s transfer to another position or combination of positions, requiring the consent of this employee (Part 1, Article 60.2 and Part 1, Article 72.1 of the Labor Code). An employee only may be transferred to another position for up to one month without his consent to replace a temporarily absent employee if a replacement is needed owing to an emergency (Part 3, Article 72.2 of the Code).

It is advisable to prepare in advance for a transfer of the CEO’s powers to an interim CEO, instead of assuming that a CEO on sick leave will be able to promptly issue the relevant powers of attorney. Some of the following steps may be taken.

• The job description of an employee with the relevant skills, such as deputy CEO, may stipulate that if the CEO is absent for specific reasons, including illness, this employee shall exercise the CEO’s functions. In this case, the employee agrees to a potential transfer upon signing up for the job description. However, if the employee continues to exercise his duties at the main place of work, he may demand additional remuneration for combined positions (Articles 149 and 151 of the Labor Code).

• The procedure for appointing an interim CEO should be stipulated in the articles of association of the LLC.

• A CEO may issue in advance a power of attorney for exercising the CEO’s functions for a term of up to three years, with or without the right to transfer the power of attorney.

However, the powers transferred in this way constitute only some of the CEO’s powers, as some documents may be signed only by the CEO.

Yet, to ensure the normal operation of an LLC if the CEO is temporarily absent, another individual should fully exercise the CEO’s functions. In practice the interim CEO is appointed by an order of the head of the LLC when the latter is able to issue such an order.

In some cases, courts have acknowledged the interim CEO as the individual authorized to act on the company’s behalf in situations in which only the CEO’s order on the appointment of the interim CEO is available. However, in other cases, courts have refused to acknowledge the authority of the interim CEO appointed by the CEO’s order, as the company’s articles of association did not stipulate the individual’s authority and the instances where such an individual should temporarily exercise the CEO’s functions.

Consequently, the most appropriate way to transfer powers to an interim CEO is to use a set of organizational solutions, including the issuing of the order, formalizing of the power of attorney and establishing in the company’s articles of association of the procedure for appointing an interim CEO.