Can a director be an employee of the company after he is promoted to be a director? While in theory this seems impossible, in reality, it is the other way round. This is because directors are usually regarded as the person that charts the course of the company and while the employees are usually the ones who implement the directives given by the directors. So how does a person wear two hats in such a situation? Why is it an issue if a director is an employee or vice versa?
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Why is it an issue at all?
This issue resurfaced recently in the case of Chin Chee Fui v Wisma Rakyat Holdings Sdn Bhd, where Chee Fui was dismissed from the Wisma Rakyat due to an alleged misconduct on his part. Prior to his dismissal, it must be noted that Chee Fui wore multiple hats in the company. Not only was he a general manager of the company, he was also a director and shareholder of the company.
The contention is that if a person is not a employee of a company (i.e. a director of the company), he is not entitled to file a complaint under the Industrial Relation Act if he is wrongfully dismissed (the director could still pursue his grievances by relying on other statutes, but that is another story to tell).
In this case, the court held that a person can actually be a director while at the same time be an employee of the company.
How does that work?
Firstly, the court has to determine whether the director is an employee. Section 2 of the Act defines an employee (or in legal terms, workman) as:
“…any person, including an apprentice, employed by an employer under a contract of employment to work for hire or reward and for the purposes of any proceedings in relation to a trade dispute includes any such person who has been dismissed, discharged or retrenched in connection with or as a consequence of that dispute or whose dismissal, discharge or retrenchment has led to that dispute.”
The court in Hoh Kiang Ngan v Mahkamah Perusahaan Malaysia & Anor noted that the definition given in Section 2:
“…is that a person is a workman if the contract of employment under which he is employed requires him to serve his employer as a workman and in the case of a trade dispute a person is a workman if the dispute between him and his employer is connected with his employment as a workman. The definition, therefore, does not go very far and in gacy it goes in a circle. I am still left with the same question: who is a workman?”
After a lengthy determination, the court decided that the test to be applied in determining whether a person is a workman under the Act is enunciated by the court in Dr A Dutt v Assunta Hospital, where it was held that a workman is a person who is engaged under a contract of service instead of a contract for service.
So how do we know whether a person is engaged under a contract of service? In Hoh Kiang Ngan, the court held that whether a person is engaged under a contract of service is dependent on the degree of control which an employer exercises over the person is an important factor. However, the court noted that this is not the only factor. Some of the other factors that can determine whether a person is engaged under a contract of service are, for example:
- Whether the worker’s interest in the relationship involved any prospect of profit or risk of loss;
- Whether the worker was properly regarded as part of the employer’s organization;
- Whether the worker was carrying on business of his own account or carrying on the business of the employer;
- Tax and insurance;
- The parties’ own view of their relationship; and/ or
- The structure of the trade and profession concerned and the arrangements within it.
Why knowing whether an employee is hired under a contract of service is important? The court noted that if a person is hired under a contract for service instead of contract of service, he is not an employee but a third party working on a contractual basis for the company.
Once that is done, the court will look at the nature of the employee’s title i.e. whether he is a director with the benefits and obligations of an employee or whether he is purely a director (after being promoted). In Phua Cheng Wai v Katecs Asian Sdn Bhd, the court noted that even if an employee is promoted to be a director, he can still be an employee if (for example):
- There still exist a contract of service between the newly promoted director and his employer;
- The contract of service was not terminated upon his promotion;
- The employee still retains wages/ benefits typically reserved only for employees; and/ or
- The company still makes statutory contributions or deductions for the newly promoted director as if he was still and employee.
So yes, if an employee fits the definition and condition enunciated above.
Make an appointment with Company Secretary and Business Lawyer for advice and consultation
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