WHAT IF AN EMPLOYEE IS BEING APPOINTED AS A DIRECTOR IN THE CURRENT HIRING COMPANY

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Sometimes, in the operation of a company, we might find an employee is being promoted/appointed to become a member of the Board of Directors by his/her hiring company.  This kind of action is indeed will cause certain pros and cons to arise in relation to the employment status of the employee, and whether the employment of such employee by the company is to be temporarily suspended, considered as retired or to be terminated.

The Status
First, we need to know that the status of an employee and the status of a Director is subject to a different provision of law, whereas the employee is subject to the manpower law, while the Director is subject to the limited liability company law.  In other words, an employee is engaged in an employment relationship based on employment agreement under the Law Number 13 of 2003 Concerning Manpower (“Manpower Law”), while a Director is engaged in a corporation legal relationship which subjects to the Articles of Association of the Company and Law Number 40 of 2007 concerning Limited Liability Company (“Company Law”).  Therefore, there are some differences between an employee and a Director, i.e:

  1. A legal relationship between employees with the company’s management is a superior-subordinate relationship or subordination, while a legal relationship between the Board of Directors with the shareholders or a General Meeting of Shareholders (GMS) is a fiduciary duty and legal mandatory or in other words it is a partnership/coordination relationship in which there is no superior-subordinate relationship between the Board of Directors and the GMS;
  2. A superior-subordinate relationship is contained with working element, order/performance, and wage/compensation (Article 1 Point 15 of the Manpower Law), in which these three elements contains no partnership relationship to be found in a Board of Directors working under corporation legal relationship.  Furthermore, the differences can also be seen in the following explanations:
    • A work in an employment relationship is the type of work where its specification and locations are being determined, the requirements for the position and the required specialization of such position are also being determined (Article 54 paragraph [1] point (c) and point (d) jo. Article 52 paragraph [1] point (c) of the Manpower Law).  While the specification of work in an engagement relationship of a Director is not determined, a Director is generally required to manage all of the works being mandated to him/her, including representing the company’s interest in and out of court (Article 98 paragraph [1] of the Company Law);
    • An order in an employment relations is a type of order that may cause a vicarious liability (Article 1 point 14 jo. Point 4 of the Manpower Law), while an order in an engagement relationship of a Director is a type of order with vicarious liability as stated in Article 97 paragraph [1] and paragraph [3] of the Company Law.
    • A wage in an employment relationship is compensation by the employer (entrepreneur and company) according to the employment agreement as a consideration of the performed works by the employees (Article 1 point 30 jo. Article 90 paragraph [1] and Article 91 paragraph [1] jo. Article 89 paragraph [1] of the Manpower Law).  The previous concept is different with the engagement relationship of a Director in the corporation legal relation, in which the wage/remuneration of a Director is a payment that is being determined by the GMS in reference to the company’s articles of association, and it is not a subject of any regulations concerning wage as a consideration of the mandatory duty being carried out by a Director as a legal mandatory of the shareholders (Article 96 paragraph [1] of the Company Law).
  3. Any rights provided by the regulations to the employees do not automatically apply to a Director, such as severance payment rights, annual leave rights, maternity leave, and any other rights being stipulated in the Manpower Law.  An exception to this may apply if such rights are being stipulated in the company’s articles of association;
  4. The dispute settlement mechanism between employees and a Director is also different.  The dispute settlement between employees and its company is conducted in stages through industrial relation mechanism.
  5. Whilst, the settlement of the dispute between a Director and the GMS, any other company organs and the company itself is conducted through district court dispute settlement mechanism or any mechanism as independently agreed/determined.

Therefore, based on the explanation on the difference of employment relation and engagement of a Director relationship, it is clear that the legal domain of employees and a Director is clearly different. Thus, the status of an employee that is being promoted/appointed as a Director should be sorted out first through a negotiation in order to terminate his/her employment status with the company.  Means, the company should first terminate the employment relation (PHK).

The Mechanism
Hence, in practice, the employment status of employees that are being promoted/appointed as a Director is terminated.
Then, the following procedures need to be followed when a company is promoting/appointing employees to become a Director:

  1. Negotiation on termination of employment (PHK) and the fulfillment of the employee’s rights;
  2. Then, an appointment to become a Director must be complied in accordance with corporate law mechanism.

We consider that this termination of employment is very necessary due to the difference of legal domain between the employees and the Director, and this difference may lead to problems or a mess of legal relationship in the future. 

How can SMART Legal Consulting help you?

SMART Legal Consulting is a corporate legal services provider with experience and capability to assist Clients in their corporate legal matters. Our one stop legal solution services include preparing for restructuring the Board of Directors and Commissioners and providing advisory services related to Indonesian Company Law.

Contact SMART for more details about our services, or schedule meeting with us at:
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