Directors are often seen as individuals looming over employees on top of the company pyramid. Generally, a directorship is an office and is a separate persona altogether from an employee but in the modern company sphere, it is not uncommon to have directors wearing “two hats” at the same time; an employee and a director.
In the recent case of Chin Chee Fui v Wisma Rakyat Holdings Sdn Bhd  MELRU 1, the claimant was the General Manager of the company who was dismissed due to alleged misconduct. In addition to being the general manager, he was also a director and shareholder of the company. The Court held that in certain situations, a director can also be an employee at the same time, and would be entitled to file a complaint of unfair dismissal in the event he is terminated from employment.
Sec. 2 of the Industrial Relations Act 1967 defines an employee or workman as any person employed by an employer under a contract of employment. If the law postulates that there should be an employer on one side and a workman on the other, how then can a director be classified as an employee in some instances? Where does the distinction lie?
The “Contract of Service” Test
The Federal Court case of Hoh Kiang Ngan v Mahkamah Perusahaan Malaysia & Anor  1 MELR 1 clarified the confusion by reaffirming a contract test set forth in Dr. A. Dutt v Assunta Hospital  1 MLJ 304 to distinguish directors from employees. If an individual is engaged under a contract of service, they are deemed as an employee.
A contract of service is predominantly determined by the degree of control one has over the work and also through the terms of one’s contract. Although degree of control is not the sole determining factor, it is often seen as the primary one to be taken into account by the Courts. While this may not be conclusive, these are some of the other key factors which are typically considered by the courts in assessing the employment status of an individual:
- The degree of control exercised by the employer;
- 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;
- The provision of equipment;
- Tax and insurance;
- The parties’ own view of their relationship; and
- The structure of the trade and profession concerned and the arrangements within it.
If one’s work is dictated by a superior, then it is quite possible that he fits the role of an employee as he has limited control over his work. However, the exact determination of one’s degree of control is a question of fact that can only be established on a case by case basis.
Payment of wages, tax & EPF Deductions
The Courts will also take into account payment of wages, tax deductions and monthly provident contributions in determining a director’s status. A director may receive an allowance from the company but they generally do not receive “wages” or “salary” unless they wear “two hats” at the same time.
The Court in Phua Cheng Wai v Katecs Asian Sdn Bhd  2 MELR 146, held that although EPF, SOCSO and tax deductions are not conclusive evidence, it is among the factors to be taken together with the contract test to determine the issue of whether one is an employee. That being said, although it is an inconclusive factor, the courts will likely see it as a positive indication that the individual retains the character of an employee if payment of wages and EPF contributions are made.
Similarly, employees who are subsequently “promoted” to directorship may also still be classified as an employee so long as the contract of service remains intact and they continue to receive wages or salary.
Distinguishing directors and employees are important given the role it plays in deciding the rights of the individual involved, and which courts have jurisdiction to hear a matter if a dispute arises. The Industrial Court does not have the power to hear any claims made by a director if he is not an employee and does not fall under the definition of a workman under the Act. Individuals who are purely and solely directors will have to seek avenue in the civil courts to settle any dispute.
As such, the key points to look out for in determining whether a director could also be an employee (and therefore be granted the corresponding legal rights of an employee) are:
- Whether there is a contract of service or contract of employment;
- Whether the contract of service was terminated when the employee was made a director;
- Whether the individual receives wages or other benefits typically reserved only for employees, or whether the individual was otherwise treated as an employee;
- The nature of the individual’s role in the company and the degree of control possessed;
- Whether the company makes statutory contributions or deductions for the individual as if they were an employee (eg: EPF, SOCSO, and income tax).
One should also take care to note the distinction between the legal office of a “director” of a company, and a job title which has the word “director” in it. For example, a receptionist given the title of “Director of First Impressions” is definitely not a company director in any legal sense.
This article was written by Donovan Cheah (Partner) and Amirul Izzat Hasri (Associate) from the employment law and dispute resolution practice group of Donovan & Ho. If you have a query, please feel free to contact us.