When does a company director qualify for employee protection? Malaysian court decides
The Industrial Court of Malaysia recently dealt with a case involving the dismissal of a company director who claimed to be an employee entitled to unfair dismissal protection.
The director argued that he should be considered a "workman" under the Industrial Relations Act 1967 due to his executive functions and employment-like arrangements.
The director's case centred on several key arguments: he had been receiving monthly salary payments with Employees Provident Fund (EPF) and Social Security Organisation (SOCSO) contributions, he continued performing duties for the company even after being stripped of his executive title, and his removal from the board constituted unlawful dismissal rather than standard corporate governance.
The company, however, maintained that as a shareholder-director, he was never truly an employee and that his removal was simply a matter of shareholders choosing not to re-elect him.
The director had been with the company since its establishment in 2017, which he claimed was founded through his efforts alongside financial contributions from other shareholders.
He started as sales and marketing director while another shareholder served as account and operations managing director. The director was also a legal and beneficial owner of 500,000 ordinary shares in the company's paid-up capital.
Despite having no written employment contract, the director argued he was assigned specific responsibilities in the company's sales and marketing department and successfully performed his duties.
His monthly payments varied significantly over the years, starting from RM16,000 including allowance from September 2018, dropping during the pandemic period in 2020, and eventually being reduced to RM4,800 from June 2022 onwards.
Throughout his time with the company, his monthly payments were subject to EPF and SOCSO contributions, which he later argued demonstrated his employee status.
The company maintained that all directors receiving fees were subject to these contributions "as a form of general protection and/or savings although they are not employees of the Company."
A major dispute arose in March 2022 when the company accused the director of being in conflict of interest. The company alleged that as director and majority shareholder of another business, he had approved special pricing for this external company without informing the board of directors.
According to the company, this external business enjoyed an additional 12% discount compared to other customers, causing financial losses.
The director denied these allegations, arguing they were baseless since the company always knew about his involvement with the external business and had agreed to the special pricing arrangement.
He maintained that the company's decision to demote him was made in bad faith to pressure him to resign. The company presented evidence that the director had instructed sales managers to assist the external business instead of focusing on the company's own sales.
On 24 May 2022, the company terminated the director from his position as managing director of sales and marketing after finding him guilty of gross misconduct.
The director was then reduced to a regular director role with a monthly payment of RM4,800 without allowances. Importantly, the director did not challenge this termination within the required timeframe, which the company later argued was time-barred under employment law's 60-day limit.
The central legal question was whether the director qualified as a "workman" under employment law. This determination is crucial because only recognised employees can claim protection against unfair dismissal.
The Federal Court established in a landmark case that "the degree of control which an employer exercises over a [worker] is an important factor, although it may not be the sole criterion."
The court explained that when no written contract exists, it must examine the working relationship's actual circumstances.
The Federal Court stated that the director bears the responsibility to prove employee status. A previous court ruling established: "In the absence of such a written employment contract, the [director] must go on to show that there exists an oral contract which will show the existence of implied terms of employment that he is a workman and that he was serving his employer as a workman."
Malaysian courts recognise that directors can hold dual roles – serving simultaneously as company directors and employees. This principle allows directors to claim employment protection if they can prove they performed employee functions.
In another case, the Court of Appeal stated that directors "may wear 'two hats' – as a director under the Companies Act and as the most senior and highest-ranking staff of the Company, reporting to the Board of Directors."
However, courts emphasise that successful applicants typically held executive positions like managing director or operations director at the time of their dismissal.
The industrial court said that the present case differed because the director was no longer performing executive functions when removed from the board in March 2023.
Unlike successful cases where applicants held active executive roles, this director had already been terminated from his executive position in May 2022.
The director argued that receiving monthly payments with statutory contributions proved his employee status. However, evidence showed his post-May 2022 payment of RM4,800 matched other non-executive directors rather than the RM16,000 earned by the current managing director.
The company's witness confirmed that two other directors who held no executive positions received similar amounts.
The court found this payment alignment significant, stating: "if he was holding an executive position after his termination on 24.5.2022 as managing director surely his salary would have matched the salary of [the managing director of production and operations]." The evidence showed the director's earnings were "very much similar to the other non-executive directors of the Company."
The Industrial Court ruled against the director, finding insufficient evidence of an employment relationship at the time of the March 2023 board removal.
The court determined that the shareholders' meeting involved standard director retirement and re-election procedures, not employment termination.
The director's claim for reinstatement was dismissed, establishing that removing non-executive directors through proper corporate procedures falls outside employment law protection.
