Are directors also employees?

Are directors also employees?

INTRODUCTION:

If you have a business of your own, then you will know that the role of a business owner is multi-faceted and often requires the wearing of many different hats. These relate to the roles of a shareholder, a director and an employee. Many business owners wear all three of these hats at once which can be quite challenging if they are not kept distinct and separate. As a shareholder, your attention should be focused on the return you are receiving from your business. As a director, your responsibility is to govern the business in a way that substantially delivers the return that shareholders expect. As an employee, your main obligation will be the tendering of personal services and to further the business interests of the employer. However, outside of the owner-managed scenario, the question arises as to whether a director can generally also be an employee? Let us examine this question in more detail below.

EMPLOYEE VS DIRECTOR AND REMUNERATION:

Generally speaking, there are usually two sources of a director’s remuneration: the one source flows from the fees that he receives for his services as director (example, fees for attending board meetings) and the other source flows from such director’s employment contract (if any) which would provide for the payment of a salary.

A director in his capacity as director is not necessarily an employee of the company and will not always be entitled to the standard rights flowing from an employment contract. It therefore follows that a director is not entitled to be remunerated for his services as a director simply because he has been appointed as a director. Granted, if such director enters into a contract of employment with the company, then he or she will be entitled to those rights that flow from an employment relationship and he would then stand in a position of both an employee and a director.

As a director only, he is not automatically entitled to be remunerated for his services as director. Under the Companies Act, 71 of 2008 (“the Companies Act“), a company may pay remuneration to a director for his services as director, unless it is prohibited by the company’s memorandum of incorporation (“MOI“). Should the MOI prohibit the payment of remuneration to a director, he will not be entitled to remuneration for his services, which is thought to stem from the rule that people in a fiduciary position are not entitled to use their office to profit themselves, unless they have the consent of the majority of the shareholders.

In terms of section 66(9) of the Companies Act, remuneration paid to directors for their service as director may only be paid in accordance with a special resolution approved by the shareholders within the previous two years. However, the words “service as directors” are ambiguous because it is not clear if approval is required only for directors’ services as directors or whether the words are broad enough to include remuneration paid to executive directors in terms of their employment contract.

CORPORATE GOVERNANCE:

The King IV offers some guidance. It embraces the underlying philosophy of ethical leadership, sustainability and corporate citizenship. On the issue of leadership, the board should ensure that all decisions and actions are based on the four values underpinning good corporate governance: responsibility, accountability, fairness and transparency.

As such, King IV differentiates between executive and non-executive directors. An executive director is involved in the day-to-day management of the company. He or she is normally in the full time salaried employ of the company and is generally under a contract of service with the company. A non-executive director, on the other hand, is a part time director who is not considered an employee of the company. Such non-executive director does not manage the company, but rather plays an important role in providing objective, independent judgement on various issues relating to the company. An executive director can therefore be an employee and a director at the same time.

TERMINATION OF SERVICES:

Flowing from the above, there are obvious complications that present itself when a company wants to terminate an executive director’s services. Where the company wishes to remove a director from his office as director and as an employee of the company, the procedure is twofold and reference must be given to both the Companies Act as well as the Labour Relations Act, 66 of 1995 (“the LRA“)

In some instances, the employment contract with the director as employee contains an automatic termination clause which provides that if the director is removed from his office as director, his employment with the company will be automatically terminated or vice versa. In other instances, the MOI of the company will have an automatic termination clause.

However, in the case of Chilliebush v Commissioner Johnson & Others the court held that the insertion of an automatic termination clause into a company’s MOI is in direct contravention with the LRA. The reasoning provided for the court’s decision is that an employer is not at liberty to contractually negotiate the terms of an employee’s dismissal, despite that employee also being a director. Should a company rely on an automatic termination clause as its reasoning for the automatic termination of the director/employee’s contract of employment, such termination does not constitute a fair dismissal for purposes of the LRA. The director/employee will then be well within his rights to proceed to the CCMA on the grounds of unfair dismissal.

The decision is significant because in situations where a director holds two positions (one as a director and one as an employee) his rights as an employee will not be affected by the fact that he is also a director.

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