29 August 2022 by , and Employment Law Alert

How companies may mitigate claims for unfair termination by non-executive directors

What happens when a company does not define the type of engagement of a director? Can a director claim to be an employee of the company? How can companies mitigate against claims from non-executive directors for employee benefits, and protection?

Companies often distinguish directors that render an advisory role, from those that work full time as independent or non-executive directors.

The expectation being that non-executive directors would devote only part of their time for the affairs of the company. In addition, these independent or non-executive directors are not expected to claim employee benefits or protection from dismissal under the Employment Act of 2007 (Employment Act).

What happens though when a company does not define the type of engagement of a director? Can a director claim to be an employee of the company? How can companies mitigate against claims from non-executive directors for employee benefits, and protection?

Five key elements of an appointment letter 

Claims for employee benefits and protection may be mitigated through the appointment letter. There are five key elements that may be discerned from the recent Court of Appeal case of Rift Valley Water Services Board & 3 Others vs Geoffrey Asanyo & 2 Others (Civil Appeal No. 60 of 2015). These include that the appointment letter: 

  • should clearly stipulate that the type of engagement is as a non-executive director;
  • it should expressly provide that it is not an employment contract but a contract for services;
  • it should clearly define the roles and duties of the non-executive director;
  • it should provide that the appointment is subject to confirmation by the shareholders at a general meeting as provided by the company’s articles of association; and
  • it should provide that continued appointment is subject to re-election by the shareholders, the company’s articles of association and any provisions of the Companies Act 2015 relating to removal of a director.

Case summary

Geoffrey Asano, the first respondent, was appointed as a director of by the first appellant, Rift Valley Water Services Board (the company). Geoffrey had been appointed to the Board for a term of three years, which was subsequently extended by a further three years. The appointment letter indicated that his duties as a director would be restricted to the common law duties of a director but, he would be required to attend quarterly board meetings. The company subsequently amended its memorandum and articles of association to enable it to reconstitute its board. Geoffrey was not appointed to the new board, effectively terminating his membership before the end of his extended term. He was aggrieved by this new turn of events and proceeded to file a suit before the Employment and Labour Relations Court (Employment Court) alleging that the company had unfairly terminated his employment.

The Employment Court heard the matter and held that Geoffrey was an employee of the company and that he was terminated without following the requisite procedure under the Employment Act. The company was dissatisfied with the judgment of the Employment Court and filed an appeal.

The crux of the appeal was whether the Court of Appeal was right in finding that Geoffrey was an employee of the company. The appellate court started by identifying who is defined as an employee according to the Employment Act. It noted that under the Employment Act, an employee is a person employed for wages or a salary and includes an apprentice and indentured learner. The Court of Appeal further noted that Geoffrey was not employed for wages or salary by the company and in addition, he was neither an apprentice nor an indentured learner of the company. The Employment Court held that since his appointment was governed by both the Companies Act of 2015 and the Memorandum and Articles of Association of the Company, the Employment Act did not apply to this employer-employee relationship.

Further to this, the court held that since there was no employment contract, in terms of which a director is engaged as a full-time employee, he was merely an officeholder of the company and not an employee. It relied on the English case of McMillan vs Guest (1942) AC p.561 (UKHL J0427-4) which held that unless a director is engaged full-time by a company, they are not a company employee.

In view of the above, the appellate court held that Geoffrey Asano was not an employee of the Rift Valley Water Services Board.

Conclusion

It is prudent for companies to follow the practical guidelines discussed above in preparing appointment letters for non-executive directors to reduce the chances of such claims. This would save the company time and resources spent in litigation in ascertaining the type of engagement and applicable remedies in the event of removal from office.  

download PDF

The information and material published on this website is provided for general purposes only and does not constitute legal advice.

We make every effort to ensure that the content is updated regularly and to offer the most current and accurate information. Please consult one of our lawyers on any specific legal problem or matter.

We accept no responsibility for any loss or damage, whether direct or consequential, which may arise from reliance on the information contained in these pages.

Please refer to the full terms and conditions on the website.

Copyright © 2022 Cliffe Dekker Hofmeyr. All rights reserved. For permission to reproduce an article or publication, please contact us cliffedekkerhofmeyr@cdhlegal.com

You may also be interested in