Avoiding pitfalls in appointment versus employment

By Wen Junqi and Wu Xing, DOCVIT Law Firm
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The particularity of the duties of directors, supervisors and officers, and their close connection with a company’s business activities, mean there exists both appointment as well as employment relationships between most domestic limited liability companies and their directors, supervisors and officers.

温军旗, Wen Junqi, Senior partner, DOCVIT Law Firm
Wen Junqi
Senior partner
DOCVIT Law Firm

The application of law is clearly different in an appointment relationship from that in an employment relationship. In practice, to clearly define the appointment relationship and employment relationship of directors, supervisors and officers, the company can only place directors, supervisors and officers in two dimensions – that of a company’s governance system and that of its management system. This is to avoid legal risks and control obstacles in the handling of specific problems.

Concurrence of two relationships

Shareholders, directors and officers of limited liability companies often have more than one position. In practice, there are five main situations:

(1) a shareholder of a limited liability company serves as director and officer at the same time;

(2) a director of a limited liability company serves as an officer, but is not a shareholder of the company;

(3) a shareholder of a limited liability company serves as a supervisor but not as an officer of the company, and holds a middle-level management position in the company, or only acts as an ordinary employee;

(4) a shareholder of a limited liability company is engaged in ordinary non-officer work in the company; and

(5) a director of a limited liability company is engaged in ordinary non-officer work in the company.

吴星, Wu Xing, Senior partner, DOCVIT Law Firm
Wu Xing
Senior partner
DOCVIT Law Firm

Division of functions and powers

From the perspective of the governance structure, a shareholders’ meeting is the governing authority, the board of directors is the decision-making authority, the board of supervisors is the supervision authority, and the managers’ meeting is the implementation authority of the company. Therefore, if there is cross-employment, or if members of the board of directors and board of supervisors establish an employment relationship with the company at the same time, a corresponding division of management authority is involved.

In accordance with articles 37, 46 and 49 of the Company Law, the appointment relationship between directors, supervisors and officers and the company is an issue of the field of corporate governance, and their appointment, dismissal and remuneration are decided by the shareholders’ meeting or the board of directors of the company.

In accordance with chapter 5 of the Labour Law and chapter 4 of the Employment Contract Law, the employment relationship between directors, supervisors and officers and the company is an issue in the field of corporate management. Under the circumstance that an appointment relationship and employment relationship are established at the same time, the dismissal of directors and supervisors by the shareholders’ meeting, and the dismissal of managers, deputy managers and financial leaders by the board of directors can only lead to termination of the appointment relationship, and not to rescission or termination of the employment relationship.

In cases where the appointment relationship and employment relationship coexist, directors and supervisors should not only be paid for fulfilling their duties as directors and supervisors determined by the shareholders’ meeting, but also be paid for engaging in their employment obligations under their employment relationship.

Practical suggestions

Where directors, supervisors and officers and the company establish an appointment relationship and employment relationship at the same time, it is necessary to deal with the concurrence of these from the following aspects to ensure the orderly operation of the governance and management systems:

(1) Arbitrary termination reasons in an appointment relationship and statutory termination reasons in an employment relationship. The Company Law does not provide the specific reasons that must be given for the appointment and dismissal of directors, supervisors and officers, but only makes some procedural requirements. However, the Employment Contract Law requires that the termination of an employment contract should comply with the statutory circumstances in addition to being legal in procedure.

For example, if Wang is a director of company A, he can be dismissed as long as the requirement for a shareholders’ meeting vote is satisfied, even without the reasons for his dismissal being examined. However, if Wang is also a deputy general manager of the company, there must be statutory reasons and procedural requirements as provided in the Employment Contract Law for the unilateral termination of Wang’s employment contract, such as mutual agreement, serious violation of discipline, incompetence after post adjustment and so on.

(2) The company should establish a position management system based on duty management, and a post management system based on employment management. The appointment or dismissal of directors, supervisors and officers by the shareholders’ meeting and the board of directors is the practice of their function and power in terms of the management authority conferred by the Company Law, but the dismissal of these positions merely means that directors, supervisors and officers have no right to exercise their management responsibilities conferred by the Company Law, while the company still needs to arrange workers without the status of directors, supervisors and officers to continue to fulfil their employment contract obligations according to the post management system.

In addition, the company should establish a duty remuneration system and an employment remuneration system corresponding to the management system. If directors, supervisors and officers hold more than one position, their personal income includes duty remuneration and employment remuneration. When they only perform their appointment duties or provide labour, their personal income only includes duty remuneration or employment remuneration.

(3) Unilateral determination of position management and contractual negotiation of post management. The appointment and dismissal of a position and adjustment of duty remuneration are unilaterally decided by the shareholders’ meeting, the board of directors and the managers’ meeting. Except for the adjustment of posts due to incompetence according to the Employment Contract Law, other situations of adjustment of posts and employment remuneration shall be handled on the principle of mutual agreement, and reasonable factors should also be taken into account in the adjustment.

Wen Junqi and Wu Xing are senior partners at DOCVIT Law Firm

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