Are directors also employees?

2005/02/01

By Sandesh Singh, attorney and head of Labour Assist, a division of Europ Assistance Worldwide Services (SA)

According to the recent precedent setting decision of P G Group (Pty) Ltd vs Commissioner L Mbambo N.O and 2 others (JR215/2004), directors are certainly employees and as such are protected by the Labour Relations Act (LRA).

The background to this case is

1. The services of Phillip Clatworthy, cited as the third respondent, were terminated in September 2003 by the board of PGSI, the holding company and sole shareholder of the PG Group (the applicant).

2. Clatworthy then referred a dispute about an alleged unfair dismissal to the National Bargaining Council for the Chemical Industries (second respondent).

3. According to Article 46.6: "The office of director shall ipso facto be terminated if the director is given notice, signed by members holding on the aggregate more than 50% of the total voting right of all members then entitled to vote on a poll at a general meeting requiring that director to resign” The second Article relied upon Article 52 provides: The appointment of any executive director or managing director shall, without prejudice to any claim of any nature whatever which any such director may have against the company, cease if for any reason he ceases to a director.

4. The Commissioner found that the Bargaining Council had the necessary jurisdiction to hear the matter. It is this ruling that the applicant wished to have set aside. The case was a review of the Commissioner’s decision.

The applicant argued that it did not dismiss Clatworthy, being a director of a company is not an employee by virtue of the applicant’s articles of association, which precludes a director’s recourse to the LRA when his or her appointment is terminated.

The court, in consideration of who dismissed Clatworthy, found that the decision taken by PGSI Limited to dismiss Clatworthy, is in law the applicant who terminated his appointment as a director.

The next question that the court posed to itself was whether Clatworthy, as a director, was protected by the LRA in sections and schedules of the Act, pertaining to collective bargaining, collective agreements, the status of unions, retrenchments and the like. It may also be observed in the provisions of the Act regarding the informal conciliations and arbitration proceedings. None of these provisions have a direct bearing on the situation where the services of a director as employee, are terminated. Yet this court has always treated directors as employees and protected unfairly dismissed directors under the LRA.

Section 213 of the LRA defines an employee as: “any person, excluding an independent contractor who works for another person or for the state and who receives, or is entitled to receive any remuneration; and any person who in any manner assists in carrying on or conducting the business of any employer”. This definition according to Justice Revelas, must surely apply to most, if not all, directors.

Section 78 of the LRA excludes senior managerial employees from the definition of ‘employee’. However, this is done in the context of workplace forums where such a manager is not regarded as an employee if he represents the employer in dealing with the workplace forum; or determines policy and takes decisions on behalf of the employer that may be in conflict with the representation of employees in the workplace. A director may act in certain capabilities and perform the kind of work which appears to disqualify him or her from having the status of an employee.

On the other hand, a director may also perform duties as an employee of the company. The office and duties of a director are separate. The type of work done by a director is not a dependable criterion as the nature of a director’s actual day to day may vary greatly.

Directors are the holders of an office within the company. Rights and duties attach to that office and flow from statutory and common law of companies. A contractual relationship between a company and a director may not be necessary. Yet, more often than not, contracts of employment are concluded between directors and companies, as was indeed done in this case. Clatworthy’s letter of appointment by the applicant contained the standard terms that one normally expects to find in a contract of employment.

The argument that the LRA does not apply to directors is largely premised on the argument that employment is characterised by an imbalance in bargaining power or subordination. Therefore, the argument is that financial managing and the ordinary directors have no claim to the status of an employee.

This imbalance is not capable of being described in such precise terms so as to particularly exclude a director from this definition. It has been held that a director’s position is a dual one - a holder of office on the one hand and an employee on the other hand. Neither the LRA nor the Companies Act nor, in this case, the applicant’s article of association, specifically precludes a director from enjoying the protection of the LRA. More importantly, Section 220 of the Companies Act, which allows a company to make short thrift of a director’s career, expressly requires a right to a hearing. The Constitution, which requires fair administrative action, demands that such a hearing must be fair. Whether that hearing was fair or not, should not be finally determined by the shareholders or the company’s Board of Directors.

It is inconceivable, as Justice Reveals puts it, that in such an enquiry the ordinary principles of employment law would not be relevant. It follows that the obvious remedy available to an unfairly dismissed director would lie in the provision of the LRA.

Consistently the courts have rejected the argument that employees should be excluded from protection against unfair dismissal. The fact that a person is a director of a company does necessarily mean that he or she cannot also be an employee in terms of the LRA. The court concluded that the Commissioner had only to decide who had dismissed Clatworthy. On the facts before him, which included an employment contract and termination of employment, Clatworthy was regarded as an employee. The Review Application was thus dismissed with cost.

For further information contact Sandesh Singh on (011) 359 5187 or via e-mail: labour@europassistance.co.za.