Directorship, Employment or Both?

When one considers the relationship between directorship and employment, various unseen issues can arise.  One of the major aspects, that few business owners consider, is that a Director is also an employee, and therefore the laws that govern such an employee will also govern the Director in his or her capacity as an employee. This creates complications that are often overlooked.

The central issue revolves around one person wearing two hats, being that of director and employee. Specifically, the question is whether such a person can resign as director whilst remaining an employee of the company.

Legislation

The two positions, or capacities, are governed by two different laws. The Companies Act governs the position of directorship, while the Labour Relations Act 66 of 1995 (as amended) governs the position as an employee. Effectively, an individual who acts both in the capacity of director and employee will consequently hold two positions.

These two pieces of legislation are often considered in isolation of each other. Savvy business owners often turn to the Labour Relations Act for guidance in respect of their employees and the Companies Act in respect of their directors. However, it is a common oversight to consider both properly when faced with the resignation of a director.

Case Law

The question of Director versus Employee was considered by the Labour Court in Chilliebush v Commissioner Johnson, an unreported decision dated 26 January 2010. Briefly stated, in this case, a managing creative director of a company resigned as director and tendered the return of his shareholding but indicated that he remained an employee of the company and tendered to perform his obligations as an employee. The remaining shareholders held a shareholders meeting in his absence and resolved that he be removed as director as well as from his post of managing creative director.

The Court held that the definition of an ‘employee’ as contained in section 213 of the Labour Relations Act would apply to most, if not all directors. Accordingly, where a director also holds a position as employee, his rights as an employee will be unaffected by the fact that he or she is also a director.

The Court found that an employee’s rights in terms of the Labour Relations Act will not be limited by the Companies Act. It has been argued that a conflict may arise between company law and labour law. However, section 210 of the Labour Relations Act unequivocally provides for the prevalence of labour law. The employee was held to be dismissed by the company.

Consequently, an individual’s resignation/removal as director does not affect his rights as an employee.

As obiter it is suggested that director has the duty to:

a. Communicate to the board any information that comes to the directors’ attention unless the info is immaterial or generally available to the public or known to the other directors or the director is not bound to disclose the info by reason of confidentiality;

b.  If a company does not meet the solvency and liquidity test (Section 4) it may not enter into certain corporate actions and the directors are duty bound to ensure that it does not;

c.  If a company is financially distressed it may potentially be obliged to initiate business rescue proceedings.

Conclusion

As such, this is why it is important to have a legal expert whom has extensive knowledge of the labour sector and whom properly understands the interplay of legislation which at face value could not be relevant to a business’s specific circumstance but later proves highly detrimental if neglected.

Prepared by Chinette De Beer