30 Dec 2019

Partner, Employee, or Both?

Partners in commercial companies often take on more roles than just injecting cash. Should they be compensated for these roles? And, in doing so, do they become employees?

In practice, the role of partners in commercial companies in Bahrain has been increasing. It is no longer limited to the injection of funds; in many cases, one or more partners are appointed to manage the company and to oversee its day-to-day business. Would such hands-on partner be eligible for employment entitlements, in addition to their share of profits?

Delineating Relationships

It is important to highlight that, in the above example of a hands-on partner, there are two distinct relationships; the first being a relation of partnership (governed by the memorandum of association and/or the shareholders agreement), and the second being a relation of employment (government by the employment contract).

Each relationship has its own provisions in the law in terms of proof, execution, and consequences. For instance, an employer can prove the existence of an employment relationship exclusively through written evidence (i.e. the contract), whereas an employee can prove the employment relationship by all valid means, including through the use of witnesses. As for the company’s contract, it must be in writing and further notarised in order to be enforceable against third parties, otherwise it will be limited to its executing parties only.

Ending Up in Court

There are many live examples where partners with dual relations to their respective companies filed lawsuits to claim their employment entitlements (e.g. end-of-service gratuity, amounts in lieu of annual leave, etc.). In this regard, the Court of Cassation established the following principles:

  • If a partner in a company was assigned to work in the company pursuant to an assignment by the managing director or pursuant to the company’s articles of association for certain remuneration, such partner shall be deemed an employee in respect of this relationship. There is nothing in the law that prevents combining the two capacities (i.e. partner and employee) in one person.
  • If a partner in a company was, solely, assigned to carry out a specific job under the supervision of the other partners, he shall be considered as an employee and therefore subject to the provisions of the Labour Law.

These principles suggest that the Court of Cassation applied the definition of the employment contract to determine whether such partner is an employee or not. Bahrain’s Labour Law defines the employment contract as “An agreement made by and between employer and the employee, whereby the employee commits to perform specific work for the employer under his management and supervision for a specific salary”. Accordingly, if it can be established that a partner is working under the supervision/management of any person in the company in consideration of any form of remuneration, such partner shall be deemed as an employee of the company as well.

A Shari’a View

It is possible that the Court of Cassation’s reference that there is nothing in the law that prevents combining the two capacities of partner and employee in one person, might have been driven by Shari’a concepts such as “By default, transactions are permissible” and “there shall be no infliction of harm on oneself or others”. These Shari’a foundations essentially dictate that all transactions are permissible unless explicitly prohibited, or unless the transactions are inherently injurious to persons. What’s your take on this?

This Shari’a view is especially relevant when taking into consideration that the court may apply Shari’a principles in the absence of a provision in the law. Civil Code Article (1) states: “Provisions of legislative texts govern all matters to which these provisions apply in letter or in spirit. In the absence of a provision of a law that is applicable, the Judge will decide according to custom and in the absence of custom in accordance with the principles of Islamic Shari’a that suit the conditions and circumstances of the country. In the absence of such principles, the Judge will apply the principles of natural justice and the rules of equity”.

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