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Director or employee? Apply the “reality test”.

Are directors employees? The question is an important one because our labour laws, particularly the Labour Relations Act, provide substantial protection only for “employees”.

Now our courts have held that directors are to be regarded as employees “in appropriate circumstances”, and that the nature of an employment relationship should be determined primarily via three factors (any one of which could be decisive) :

  1. The employer’s right of supervision and control;
  2. Whether the employee forms an “integral part” of the employer’s organisation;
  3. The extent to which the employee was economically dependent upon the employer.

The court will look at “substance rather than form”. In other words it will apply a “reality test” to determine what the true relationship is between the parties regardless of how the relationship may be labelled or described in agreements.

A case in point

Thus in a matter recently before the Labour Court, a director holding 45% of the shares in a company was held, in all the circumstances of the matter, to be in reality also an “employee” and therefore entitled to the protection of the LRA against unfair dismissal.
Each case will be different, and there are plenty of grey areas here – proceed with caution!

For more information contact Andre du Toit at +27(0) 28 271 3031, Jacques du Toit at    +27(0) 28 312 3626 or Charl Cilliers at +27(0) 28 212 1060.

© DotNews, 2005-2012. This newsletter is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.

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