Only employees can file a complaint of unfair dismissal under the Industrial Relations Act 1967 (“IRA 1967”). A question arises as to whether a director or shareholder who “works” for a company can also enjoy such rights.  There have been occasions where the courts have held that directors can also be employees and therefore may receive the protections under the IRA 1967.  The lines between employees, shareholders and directors can therefore become increasingly blurred in a world where individuals are sometimes expected to carry out multiple functions and roles.

The recent Court of Appeal decision of Gopala Krishnan Chettiar A/L Muthu v Sealand Marine Inspection and Testing (M) Sdn Bhd & Ors [2022] MLRAU 303 provides some helpful insight on this issue, when considering the case of a director (who is also a shareholder) who filed a complaint of unfair dismissal.


Brief Facts

  • The Appellant joined the Company as an Operations Director. He was also the second largest shareholder in the Company.
  • The Appellant did not have a contract of employment with the Company, but was paid a sum of RM 20,000 monthly that was labelled as director’s fees. This payment was subject to EPF and SOCSO deductions.
  • The Company alleged that the Appellant was responsible for the resignation of several employees of the Company.  This led to the Appellant claiming constructive dismissal and lodging a representation for reinstatement.
  • At the Industrial Court, one issue was whether the Appellant can be a “workman” under the IRA 1967. The Industrial Court held that the Appellant is a workman, as he had been performing the duties of an employee (eg: reporting to the other director, carrying out site visits etc). Even though the Appellant was holding the position as an Operations Director, he was not the controlling mind of the Company. Ultimately, the Industrial Court held that he was dismissed without just cause or excuse.
  • The High Court quashed the Industrial Court’s award because the Appellant was a director and was not entitled to the statutory protection under the IRA 1967. The High Court relied on several factors such as the Appellant’s monthly remuneration being described as a director fee (as opposed to salary) and that he was the second largest shareholder of the Company.   
  • The Appellant appealed to the Court of Appeal.

Court’s Findings

The Court of Appeal allowed the Appellant’s appeal and reinstated the Industrial Court award: 

  • Although the Appellant was a director/shareholder, he was nevertheless carrying out functions or duties as a workman in his capacity as an Operations Director. There was no evidence that the Appellant was an independent contractor. 
  • Even though the Appellant had described himself as a “director” in his police report (where he claimed that he was being constructively dismissed), this does not ipso facto result in him abandoning or waiving his rights as an employee. 
  • If the Appellant was truly in total control of the Company or was the directing mind and will of the same, it was peculiar that others could still try and force him to resign even though he is the second largest shareholder of the Company. 
  • The Company also announced that the Appellant had been “terminated/removed”. This meant that he left his position as Operations Director; yet there is no position in the board of directors as Operations Director. Therefore, it was obvious from the evidence that although he was both a shareholder and a director, the Appellant was in reality an employee carrying out executive functions as an Operations Director.
  • That his monthly payment was labelled as director’s fees does not detract from there being no evidence that the Appellant had discharged any corporate duties as would be the case if he was just a director. 
  • The Appellant was a “workman” and could have recourse under the IRA 1967. As for the Industrial Court’s factual findings that he was unfairly dismissed, the Court of Appeal was of the view that no error was committed. 


Key Takeaways

The Court of Appeal’s decision follows the general principle that merely being a company director does not preclude a person from carrying out functions and duties as an employee, and to be remunerated as such. A person can wear two hats – ie: one as a director, and one as an employee. In those circumstances, the label of “director” will take a back seat and the Industrial Court will forensically examine the nature and function of the person to determine whether he was working under a contract of service (workman) or under a contract for services (independent contractor).

As held by the Federal Court in Court in Hoh Kiang Ngan v Mahkamah Perusahaan Malaysia & Anor [1996] 4 CLJ 687 (referred to by the Court of Appeal in this case), the central issue to whether a person is an employee was the nature, degree and extent of control of his duties and functions, which are not limited to the terms of a written contract. It includes the conduct of the parties at all relevant times. 

In a world where there is a plethora of impressive job titles and increasingly complex organizational structures, employers would need to take greater care to ensure that individual employees or directors are appropriately classified and treated as such. As evident from this case, the mere absence of an employment contract or some tweaks in the labelling of directors may not withstand the courts’ scrutiny of the parties’ true relationship.

***

This article was written by Leow Ho Eng (Associate) from Donovan & Ho’s employment law practice. 

Donovan & Ho is a law firm in Malaysia, and our employment practice group has built a reputation for providing strategic employment advice to local and global organisations.  Our team of employment lawyers provide advice on employment law and industrial relations including review of employment contracts, policies and handbooks, advising on workforce reductions, and managing dismissals of employees for poor performance or misconduct. We also represent clients in unfair dismissal claims and employment-related litigation. Have a question? Please contact us.

 

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