Shareholder’s Claim for Labor Remuneration Rejected by the Court

On 15 September 2015, three shareholders concluded a Cooperation Agreement to set up a company. The amount of contribution and duties of the three shareholders were specified in the Cooperation Agreement. As the majority shareholder, Kong held the position of legal representative and was responsible for operation and management of the company. It was agreed both in Cooperation Agreement and Article of Association of the company that shareholders were entitled to dividends according to their contribution proportion. The company did not sign labor contract with Kong or pay social insurance for him. On April 2019, Kong claimed that the company shall pay him double salary for not concluding labor contract with him. This claim was not supported by Labor Arbitration Committee. Kong then submitted this case to the court.

The court rejected Kong’s claim and ruled that there was no employment relationship between Kong and the company. As the person in charge of running the company, Kong did the management work as a shareholder to earn dividends, rather than performing duties in exchange of salary as an employee. Therefore, Kong’s claim for double salary was unjustified.

It is common for shareholders to hold positions or engage in management work of enterprises, which leads to a disputable question: whether there is employment relationship between shareholders and enterprise? Generally, employees are obligated to perform duties under the supervision of enterprise in return for labor remuneration. However, shareholders or directors usually act as the decision makers to run the enterprise. Unless otherwise agreed in specific labor contracts, they perform their fiduciary duties to enterprise only in return for dividends.  Under this circumstance, they are not defined as employees and are not eligible for employees’ rights under Chinese Labor Law.