Navigating Promoter Salaries: Are They Legally Employees and Is This Common Practice?

Issue with Promoter's Salary and Legal Compliance

Kindly help me in resolving the following issue:

In one of the company's Director roles, the promoter of the company is taking a monthly salary. However, unlike other employees, they are not contributing to the Provident Fund, and the company is only deducting Rs 200 as Professional Tax since the company is located in Maharashtra.

Common Industry Practices and Legal Acceptability

Is this practice common in the industry? Is it legally acceptable to treat promoters as employees? What legal challenges might arise in the future?

Provident Fund and Payment of Wages Register

The company is not deducting Provident Fund contributions from the promoter's monthly salary; instead, they receive a fixed amount every month. Is it legally permissible to include their salary in the Payment of Wages register? What is the correct legal procedure to follow in this situation?

Authority and Grounds for Questioning

Which authority can question this practice, and on what grounds?

Please share your valuable insights.

Regards

Promoters as Employees and Provident Fund Contributions

A promoter can be an employee; there is nothing legally against it. They have to be a PF member only if they are eligible for it. Otherwise, show them as non-contributing employees and inform the RPFC Office. Get the Form II filled up for them and submit it to EPFO.

Dear Colleague,

All the Labour Laws contain two terminologies: 1) Employer and 2) Employee, for the ease of demarcating their responsibilities. In practice, many directors/promoters also come to the office regularly and work like other employees. It does not mean that they are not directors or employees, and vice versa. Any director can work in their business, and no law puts any bar of such kind. Normally, the listed directors are intimated under the provisions of the Companies Act, and they hold the status of Director for the purpose of the Companies Act and for other compliance status and responsibilities.

As long as the compliances are done by the directors, there is absolutely no bar that they are also working as employees in their company. However, be cautious that they shall not be paid any salary to fit into the definition of an employee and avoid landing in a lot of complexities and arguments from compliance authorities. You can show them as employees but do not pay any salary as they are eligible for their remuneration under the Companies Act, and they can be exempted from any Labour Laws compliance as they are the directors.

Thank you very much for writing and sharing in detail. It will surely help me. As you are aware, refusing to pay directors will surely annoy them, and we need to look at other legal possibilities to ensure that directors are paid monthly remuneration.

Sir, I need your view on the following points:

1. If the company, in the article of appointment, mentions the payment of remuneration to directors, or if a fixed amount is passed to be paid to these directors in BOD meetings and published in the P&L sheet, along with disclosing the names and amounts paid to them.

Or any other legal ways if possible.

Regards, Dharmendra Singh Negi