Director or Employee? Contract trumps! 

A decision that will be of interest to directors and organisations alike, the case of Feldschuh v Strong Room Technology Pty Ltd [2024] FWC 216 involved a general protections application involving dismissal bought by an ousted non-executive director of Strong Room Technology.  

The decision discusses and confirms the approach to identifying the true character of the relationship.   

Mr. Feldschuh filed a general protections application alleging wrongful dismissal by Strong Room Technology Pty Ltd. The company defended the application on jurisdictional grounds, arguing that Feldschuh was a director, not an employee, and thus not subject to employment protections under the Fair Work Act. 

The FWC decision confirms the primacy of contractual terms and provides some useful clarification around the legal distinction between employees and directors, offering insights for organizations and directors. 

Key Takeaways for Organizations 

Organizations should take care when appointing directors, to ensure the contract clearly defines the roles and responsibilities of directors to distinguish them from employees, ensuring agreements explicitly outline the nature of the relationship. 

Well drafted contracts and engagement documents are essential to mitigate employment risks in relation to directors. 

Key Takeaways for Directors 

Directors should understand their legal status within a company, recognizing that directorship does not necessarily confer employment rights under the Fair Work Act. 

A director (whether described as executive or non-executive) performing operational work and seeking to be recognised as an employee, should ensure that the terms of their engagement for that work are properly documented in an employment contract.  

Summary of the facts 

Feldschuh began working with the Respondent in December 2019 and was involved in activities that went beyond the typical responsibilities of a non-executive director. This included business development, staff management, mentoring, sales, and client liaison duties. He reported directly to Mr. Mito, the CEO, indicating a level of integration and responsibility within the company that is characteristic of an employee. 

From early 2021, Feldschuh was working over 40 hours a week, suggesting full-time employment. Despite the written agreement referring to him as a non-executive director, he was paid a significant salary, which increased from $120,000 to $200,000 annually over his engagement with the company. This compensation structure aligns more closely with that of an employee than a non-executive director, who typically receives remuneration in the form of director’s fees or share options rather than a salary. 

In support of his claim of employment, Feldschuh contended: 

• the company referred to him as being “employed directly” by the CEO in internal documents. He also received business cards identifying him as an “Executive Director” and “Co-Founder,” titles that imply a level of authority and responsibility within the company beyond that of a non-executive director; 
• the absence of a written contract or a contract that does not comprehensively commit the terms of the relationship between the parties allows for the application of a multifactorial test to determine the existence of an employment relationship. He contended that his relationship with the company was not limited to or comprehensively defined within the written agreement between them. 

Feldschuh’s submissions aimed to demonstrate that, despite the formal label of “non-executive director,” the totality of his relationship with Strong Room Technology Pty Ltd resembled that of an employee, suggesting that his dismissal should fall within the jurisdiction of the Fair Work Commission. 

Strongroom argued that the relationship was defined by a written Non-Executive Director Agreement that commenced informally in December 2019, was formalized in December 2020, and extended in August 2021. This agreement was presented as the entire agreement between the parties, indicating that Feldschuh’s duties and remuneration were in line with those of a non-executive director rather than an employee. 

The agreement specified Feldschuh’s duties, which included partnering with technology providers, establishing supply agreements, and securing investment commitments. His success in these roles contributed significantly to the company’s growth, but these activities were consistent with the strategic, non-executive contributions rather than day-to-day employee tasks. 

In his evidence, CEO Max Mito: 

• said there was never an expectation for Feldschuh to perform services outside those outlined in the agreement. The relationship did not evolve into employment at any point, and Feldschuh was never considered an employee but always a director. 
• emphasized that Feldschuh’s involvement and contributions, including mentoring roles and KPI discussions, were initiated by Feldschuh himself.  
• said there was no directive control or capacity to influence Feldschuh’s activities, distinguishing the relationship from typical employment where the employer exerts significant control over the employee’s work. 

Strong Room Technology argued that these factors collectively demonstrated Feldschuh’s role as a non-executive director, distinct from an employee, with responsibilities and compensation structured accordingly. This classification would mean Feldschuh did not fall under the protections offered to employees under the Fair Work Act for the purposes of his application. 

Summary of Findings and Reasons: 

Upon consideration of the evidence and submissions made by both parties, the Fair Work Commission decided that Mr. Feldschuh was not an employee within the meaning of the Fair Work Act. The key determinants for this decision were based on the nature of the written agreement between Mr. Feldschuh and Strong Room Technology Pty Ltd, the expectations from the agreement, and how these were realized in their professional relationship. 

The Commission closely examined the terms of the written contract, the obligations imposed on Mr. Feldschuh, the manner and method of his remuneration, and any variations to the agreement that may have occurred during the period of his engagement with the company. Despite the variation in the payment method from shares or options to cash and the extension of the agreement in August 2021, there was no substantial evidence to support a shift in the nature of the relationship to that of an employer-employee. Payments were made on a quarterly basis, a method not typically associated with employment relationships, and references to PAYG deductions and superannuation payments were deemed not exclusively indicative of an employment relationship. 

Moreover, the Commission was not convinced that the labels of “employed,” “co-founder,” “annual leave,” etc., which were applied to Mr. Feldschuh, could determine the character of his relationship with the company. It was satisfied that these labels were used mistakenly and without intent to signify an employment relationship. 

The ultimate conclusion drawn by the Commission was that the relationship between Mr. Feldschuh and Strong Room Technology Pty Ltd did not fulfill the criteria of an employment relationship as defined by the Fair Work Act, and therefore, the application concerning a dismissal could not proceed. The Commission encouraged both parties to reflect on and acknowledge the value of their achievements through their collaboration, despite not finding in Mr. Feldschuh’s favor regarding the nature of his relationship with the company. Consequently, the application was dismissed, with an order reflecting the decision to be issued separately.