Labor Law in Indonsia: How Shareholders Dismiss the Company Director
Can stakeholders remove the company director from his job? What kind of procedure to follow and which laws apply to this situation? Take a look at the detailed information regarding this matter.
In a Limited Liability Company, or best known as Corporation, the Director plays an important role as the company leader. However, this position can be removed by those who have higher power and responsibilities, that is, the shareholders.
Some questions then arise when such situation occurs in Indonesia. Which laws or acts should be applied? And how does the corporation fulfill the right of the director whose position has been removed? The answers to those questions can be found in the rest of this article.
The Company Director and the Board of Commissioners: A Definition based on the laws
Before entering the discussion about the dismissal of a company director or how the board of commissioners handles this matter, the first things that need to be cleared up is the definition and the roles of both positions. The director, in general, is in charge of the management and administration of a company. In other words, he serves as the leader who is in control of the organization.
As the highest leader in the company, the director is responsible for guiding, advising, as well as providing any help needed by the employees. This role should be in line with the corporation’s visions and principles. The Board of Commissioners also has slightly similar roles.
While serving the high position of leadership like the Director, the board consists of several members who collaborate and cooperate to manage and lead the company.
The above concept can be used as a basic principle to determine the roles and definitions of the director. The term “Director” or Direksi in Indonesia is also discussed in the Laws number 40 year 2007 concerning the Limited Liability Company. In those laws, the director belongs to the corporation element that has full responsibility to manage and administer the company while following its needs, goals, and interests.
Meanwhile, according to the same laws, the Board of Commissioners is supposed to play the role of a supervisor who monitors the way how the corporation works, either directly or indirectly.
Who can be hired as the Company Director?
The Director can be hired and appointed by the shareholders through the Shareholders’ General Meeting (Rapat Umum Pemegang Saham, or known as RUPS). The following are some requirements that should be fulfilled by the Director, as cited in the Laws number 40 years 2007.
- An individual who is appointed as a director should be capable of performing legal matters, particularly in the leadership role.
- The individual has never been stated insolvent or guilty in the financial sectors or inflicted financial loss to the corporation or the state.
- The individual has never been a member of the Board of Commissioners that is proven guilty or causes the corporation a financial loss.
In addition to the main requirements above, RUPS has the right to give additional or special requirements which are considered suitable for the corporation’s needs and interests. All steps of recruitment procedures are administered directly by RUPS, from nominating the candidates, recruiting, appointing, to replacing and firing the director.
In some particular cases, the employee may be appointed as the Director. However, such cases are administered by the Board of Commissioners instead of the RUPS.
The official position of the Director in a Company
The official position of the company director is stated in the Laws number 13 years 2003 concerning Manpower, or known as the Indonesian Labor Law. According to this law, a Director is not classified under the term ‘employee’. Instead, he is categorized as an entrepreneur who manages either his own corporation or the corporation owned by other people through a partnership, as concluded in the Article 1 paragraph (5).
Moreover, the position of the Director is also discussed in the Laws of Limited Liability Company, Article 94 paragraph (1) as well as Article 92 paragraph (1) and (2). The articles state that the Director is a corporate leader who is appointed in the RUPS while being responsible for particular duties related to the vision of the company.
It can be concluded that the relation between the Director and the company owner or the shareholder is based on the fiduciary duties and legal mandates. Unlike the employees who build a subordinate relation with the company’s management board, the Director and the shareholders build an interconnected coordinate partnership.
However, a different rule applies when the Director comes from the appointed employee. In this case, he still holds the position as an employee in addition to performing management and administration duties. Some of the employee’s rights are also still owned by that particular director.
Even when his position is dismissed or removed, the Director who comes from the employee might have his former job if he is not completely fired from the corporation. Nevertheless, the rules regarding this matter may differ from one company to another as they based on the corporation’s statues and policies.
Roles and Responsibilities of the Company Director and the Board of Commissioners in an Indonesian Company
Duties and responsibilities of the Director and the Board of Commissioners have also been claimed in the Laws of Limited Liability Company, the Article 92 paragraph (1). As stated in the laws, the company director is obliged to manage and administer the corporation in accordance with its goals and intentions.
Additionally, the Director has the authority to be a company representative when discussing legal matters internally as well as when he is appointed to appear in the court. The realization of this authority is chosen with the aim of giving the advantage to the corporation.
Furthermore, the Board of Commissioners’ roles and duties are discussed in the Article 108 paragraph (1) of the same laws. Because the members of the board are selected by the shareholders, it is a fair thing to say that the Board of Commissioners is a representative of the shareholders themselves, in which they have direct management contact with the corporation.
While the administration and management duties are done by the Director, the Board of Commissioners supervises the administration policies and monitor how the policies are applied within the company. In addition, the board members can give general advice to the director regarding his duties.
The duties and responsibilities of the Director and the Board of Commissioners can actually be described under the concept of fiduciary duties. The term ‘fiduciary’ is associated with the responsibility of managing other people’s money or shares in a company. This duty also applies to another branch of the Director Boards, that is, the Director of Finance.
In general, the duty of Director of Finance is preparing an annual report to the RUPS after it has been revised and accepted by the Board of Commissioners. The financial report itself must include the company flow, the equity modification report, loss and profit statement, and other additional notes related to the above points.
Moreover, the report must also show the comparison of financial activity in the previous year. All aspects should be in accordance with the standards of financial accounting.
When stakeholders fire the company director, which laws should be applied?
Despite the fact that director and shareholders are the parts of corporation elements, both of them have distinct roles and authorities. In some cases, the shareholders have the authority to remove the director from his job or position when the person in question is incapable of managing the company or dealing with his responsibilities.
The dismissal of the director is arranged according to the Laws of Limited Liability, in the Article 105 paragraph (1) as well as in the Article 10 paragraph (1) and (4). The former article serves as the law principle of the director dismissal, stating that the shareholders may dismiss the company director if he is no longer fulfilling the requirements, causing a financial loss to the corporation, or due to other reasons as decided by the RUPS.
However, the dismissal of the Director cannot be directly done by the shareholders. Before the final decision is made, there are a number of legal procedures to follow that may take a lot of time. In this case, the Board of Commissioners as the supervisors has the authority to apply temporary dismissal, as ruled by the latter article.
The procedures of the dismissal
If the Director avoids his responsibilities or proven guilty, the dismissal must be based on the legal procedures as stated by the Laws of Limited Liability Company. In terms of the form, there are two types of director dismissal: Complete Dismissal by RUPS and Temporary Dismissal by the Board of Commissioners.
Direct and Complete Dismissal by RUPS
The shareholders have a right to fire or dismiss the Director at any time by mentioning the reasons in the RUPS. Once the board meeting is organized, the Director in question will be informed about his dismissal plan before the board of shareholders come to their final decision.
The general board meeting regarding the dismissal is not only attended by the shareholders, but also by the Director. This is because the Director himself is granted a right to state his defense. However, when the defense is out of the questions, and the Director accepts his dismissal, the argumentative part should not be included in the board meeting.
To reach the final decision, at least 50 percent of the whole shareholders should attend the board meeting. The dismissal of the director is valid as soon as the board meeting is completed, while the date of the meeting becomes the dismissal’s valid date.
Temporary Dismissal by the Board of Commissioners
The Board of Commissioners, along with the approval from the shareholders, may apply temporary dismissal to the Director if he is considered incapable of leading the corporation, but there are not enough reasons yet to prove that statement. When the Director is dismissed temporarily, he is no longer having the authority in the management and administration field, as well as cannot represent the company in the legal court.
Within no later than 30 days after the Director is informed about his temporary dismissal, RUPS shall hold a meeting between the shareholders, the Board of Commissioners, and the Director in question. Similar to the procedures of complete dismissal, the Director is also given the defense right that will be considered in the board meeting to decide whether the dismissal is revoked or confirmed.
If the RUPS confirms the dismissal, then the Director will be dismissed completely. On the other hands, when the decision has not been made within 30-days-period, the temporary dismissal must be canceled, and therefore, the Direction gains his position back while waiting for other confirmations made by the shareholders in the RUPS.
The Rights of the Company Director in Question
Besides the rights of the Director in dismissal, the Director’s rights, in general, are not less important to discuss. The following are several rights of the Director which differentiate him from the company employees.
- The right to represent the corporation, either in an internal case or in the legal court.
- The right to receive bonus and honorarium for administering the corporation. The amount of remuneration for the Director is decided based on the consideration of the RUPS.
- Additional rights may be arranged in the company’s article of association. These include leave rights and the rights to receive severance pay on the dismissal.
When the dismissal plan is decided, the Director will automatically lose the first right, that is, serving as the company’s representative. Nevertheless, another right is obtained; the Director has a right to defend himself before the dismissal is finalized.
If his defenses are refused by the RUPS, and the dismissal is still processed to the next level, the Director gains another right to receive the severance pay according to his working period. However, it should be noted that the above rule only applies to two cases. First, when the dismissal is considered invalid, and second, if the shareholders do not fulfill the minimum quorum in the general board meeting (50 percent of the whole members).
The Consideration of Severance Pay for the Dismissed Director
The discussion regarding the severance pay for the dismissed director should be based on several considerations and policies. It also brings us back to the director status—whether he is appointed directly by the shareholders or coming from the employee. The severance pay is not obliged for the former status, but is imperative for the latter.
As stated in the Article 96 paragraph (1), the Law of Limited Liability Company, the honorarium, remuneration, including severance pay if there’s any, should be based on the RUPS. Therefore, the amount may differ from one company to the others.
Another policy used in this case is the Indonesian Labor Law (Laws number 13 years 2003 concerning Manpower), the Article 164 paragraph (3). The article describes the calculation of severance pay for the dismissed director or former employee, as follows:
1. The severance payment by the company
The severance pay according to the years of employment refers to the Labor Law Article 156 paragraph (2):
- for the years of employment less than a year, one-month wage;
- for the years of employment more than a year but less than two years, two-month wage;
- for the years of employment more than two years but less than three years, three-month wage;
- for the years of employment more than three years but less than four years, four-month wage;
- for the years of employment more than four years but less than five years, five-month wage;
- for the years of employment more than five years but less than 6 years, six-month wage;
- for the years of employment more than six years but less than seven years, seven-month wage;
- for the years of employment more than seven years but less than eight years, eight-month wage;
- for the years of employment more than eight-year, nine-month wage.
2. The reward of service payment
It is important to mention that the reward of service is only valid if the Director has more than three years of employment. The calculation itself is based on the Article 156 paragraph (3) in the Labor Law.
- two-month wage for 3-6 years of employment;
- three-month wage for 6-9 years of employment;
- four-month wage for 9-12 years of employment;
- five-month wage for 12-15 years of employment;
- six-month wage for 15-18 years of employment;
- seven-month wage for 18-21 years of employment;
- eight-month wage for 21-24 years of employment;
- ten-month wage for more than 24 years of employment.
3. The compensation payment
The compensation pay is based on several reasons, such as the transport fee, unexpired annual leave, or the 15-percent compensation of the total severance pay and rewards of services for those who are considered eligible to receive such compensation.
That’s all the discussion on how the shareholders of a corporation dismiss the Director as well as how the severance pay is arranged. On certain occasions, the rules may not be applied as a whole. In this case, legal corporate advice is needed with the aim of granting the right of Directors, or the employee for that matter.
Relefance: Condition is regulated in the Indonesian law
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