“Lita, I plan to promote my employee to a Director position in my company. What is the proper way to do this?”

Promoting an employee to a Director position involves two different legal frameworks, as the role of an employee and a Director carries distinct rights, obligations, and legal consequences. Understanding these distinctions is essential before proceeding.

A. Key Differences Between an Employee and a Director

1. Employee (Employment Relationship)

• Governed under the Manpower Law.

• The existence of an employment relationship is assessed based on the presence of the following three elements:
  a. Work,
  b. Supervision/Command,
  c. Salary/Remuneration.
  If these elements are present in the contract or daily practice, the relationship falls under the category of industrial relations.

• Employees do not have authority to represent the company unless such authority is expressly delegated by the Board of Directors.

2. Director (Member of the Board of Directors)

• Governed under Law No. 40 of 2007 on Limited Liability Companies.

• Appointed by the General Meeting of Shareholders (GMS).

• The legal relationship falls within the scope of Civil Law, not employment law.

• A Director has legal authority to represent the company, subject to limitations set by law and the company’s Articles of Association.

B. Step-by-Step Process to Promote an Employee to Director

Given the distinct legal nature of these two roles, it is crucial to first terminate the employment relationship before appointing the individual as a Director.

A. Terminate the Employment Relationship

This can be done in one of the following ways:

1. Resignation

When an employee resigns from their employment, the following provisions under the Manpower Law apply:

1. For Employees with an Indefinite Employment Contract (PKWTT):
   The company is required to pay separation compensation, the amount of which should be specified in the Employment Contract, Company Regulation (Peraturan Perusahaan), or Collective Labor Agreement (Perjanjian Kerja Bersama), as applicable.

2. For Employees with a Definite Employment Contract (PKWT):
   According to Article 62 of the Manpower Law, if either party terminates the contract before its expiration, the terminating party is obliged to pay compensation to the other party equal to the remaining wages until the end of the contract period.
   However, the employee and the company may mutually agree to waive this obligation through a separate agreement.

2. Mutual Termination

If both parties agree to terminate the employment relationship, the following steps are recommended:

• Conduct a bipartite meeting and document the discussion in Meeting Minutes.

• Sign a Settlement Agreement that clearly states:

  • The mutual intention to end the employment relationship amicably,

  • The agreed-upon compensation (in accordance with the Manpower Law or mutual agreement).

  • Note: The company should ensure the compensation is paid and not returned by the employee.

• Register the Settlement Agreement with the Industrial Relations Court to validate its enforceability.

Important: The termination must be carried out voluntarily and without coercion, especially from the company’s side.

C. Appoint the Individual as a Director

Once the employment matters are fully resolved, the company may proceed with the Director appointment through the following steps:

1. Notification and Acceptance Letter

   • Issue a written notification to the individual, outlining:

     • The company’s intention to appoint them as a Director,

     • A summary of the role and responsibilities,

     • Proposed remuneration or compensation.

   • Ensure the individual signs and returns the letter as evidence of acceptance.

2. Conduct a General Meeting of Shareholders (GMS)

   • Appoint the individual as a Director through a formal GMS resolution.

   • Record the resolution in the GMS Minutes.

3. Register the Appointment

   • Report and register the new Director’s appointment with the Ministry of Law and Human Rights, as required under the Company Law.

Conclusion

By following the above procedures, the company can clearly transition the individual from an employee to a Director, while also ensuring compliance with both labor and corporate regulations. This approach minimizes legal risks and avoids potential disputes arising from unresolved employment relationships.

If you need assistance in drafting relevant documents or facilitating the GMS process, I’d be happy to help.