The general consensus amongst the public is that an impending election creates a need by all levels of government to deliver on previous campaign promises and this results in renewed revenue generation drive. One of the ways the government boosts its revenue is through taxes (some under the guise of statutory contributions) levied on individuals and institutions.
It had become quite a usual phenomenon for institutions to complain about the persistent demands made to them by the Governing Council of the Industrial Training Fund (the “ITF”) to contribute one percent (1%) of their total annual payroll to the ITF. The ITF’s demands are apparently hinged on the provisions of Section 6(1) of the Industrial Training Fund (Amendment) Act 2011 (the “ITF Act”) which provides that:
“Every employer having either 5 or more employees in his establishment, or having less than 5 employees but with a turnover of N50M and above per annum, shall, in respect of each calendar year and or the prescribed date, contribute to the Fund one percentum of his total annual payroll.”
What we were not expecting and found indeed astonishing, was the recent complaint by a client, that the ITF had considered the client’s non-executive directors as employees and was of the opinion that the fees and allowances due to such directors fall within the definition of “Payroll” under the ITF Act. Essentially, the ITF demanded that one percent (1%) of the fees and allowances due to the non-executive directors be paid to the ITF, ostensibly on the strength of the provisions of Sections 6 of the ITF Act.
In light of the above, the questions which need to be answered are whether non-executive directors can be construed as employees of a company and whether the fees and allowances due to such directors can fall under the definition of Payroll under the ITF Act.
Analysis of the definition of ‘Payroll’ under the ITF Act
It is not in doubt that by the provisions of Section 6(1) of the ITF Act every employer with either five (5) employees or more; or with a turnover of N50, 000, 000.00 (Fifty Million Naira) and above per annum, is supposed to contribute one percent (1%) of its payroll to the ITF. Section 16 of the ITF Act apparently goes further to define the word “payroll” as:
“the sum total of all basic pay, allowances and other entitlements payable within and outside Nigeria to any employee in an establishment, public or private.” (Underlining ours.)
It is crucial to note from the definition just reproduced that in order for a payment, allowance or entitlement to come within the scope of the definition of “payroll”, it must be payable to an “employee”. Accordingly, payments by an employer to non-employees should not come within the scope of its “payroll” and should therefore not be subject to the requirement to make a compulsory contribution to the ITF.
The position of the law on whether non-executive directors are employees of a company
The Nigerian Court of Appeal drew a distinction between the executive directors and the non-executive directors of a company in the case of Bernard Longe v. First Bank of Nigeria Plc  LPELR-7682 (CA). Salami J.C.A (as he then was) in the said decision, held as follows:
“Finally on the distinction between full directorial status and working director, Prof. G. A. Olawoyin also in his own book titled “Status and Duties of Company Directors”, 1977, University of Ife Press, page 17 at paragraph 2 thereof stated thus:- "... a Director who hardly goes to office or place of business of his company merely attends occasional board meetings can hardly be called an employee of that company even by any stretch of imagination. But it would not, it is thought, be unreasonable to regard a full time Director or present day Executive Director who devotes his whole time and attention to work of his company to the exclusion of any other paid job, as an employee ........”.
“The respondent’s board, in the instant case, consists of two classes of directors, executive and non-executive. The non-executive are directors appointed directly under sections 247, 248 and 249 of the Companies and Allied Matters Act, Cap. 59. The second tier of directors are not employees of the company as they do not have contract of employment and do not draw salaries. The remuneration paid to them are in the nature of fees or allowances fixed at the Annual General Meeting by resolution and draw or earn it only when and if they attend meeting of Board of Directors. Their appointments, duties, powers and removal are provided for in the Companies and Allied Matters Act. They are not usually required to report for duty at the office and their functions, being of part time nature, they could be engaged in some other endeavour which could be full or part-time”.
In our opinion, the decision of the Court of Appeal in this case clearly and simply establishes that non-executive directors are not employees.
Who is an Employee?
Section 16 of the ITF Act defines the term ‘employees’ as:
“all persons whether or not they are Nigerians, employed in any establishment in return for salary, wages or other considerations and whether employed full- time or part time and includes temporary employees who work for periods of not less than thirty days” (Emphasis ours)
Additionally, the Blacks Law Dictionary 8th Edition at page 564, defines an employee as:
“A person who works in the service of another person (the employer) under an express or implied contract of hire, under which the employer has the right to control the details of work performance”. (Emphasis ours),
Interestingly, the Employees Compensation Act 2010 and the National Industrial Court Act 2006 also contain similar definitions of the term ‘employee’ to the effect that they are persons employed under a written or oral contract of employment.
Based on the above pronouncement by the Court of Appeal and the combined definitions of the term ‘employee’ referred to above, it is clear that non-executive directors of a company are not employees of the company and any payments to them do not come within the scope of “payroll” as contemplated by the ITF Act. Consequently, it would be unlawful for the ITF to demand for the statutory contributions from the fees and allowances due to non-executive directors.
The rationale behind the charges and contributions such as that established under the ITF Act may be noble. However, as a famous saying goes “where there is overzealousness without knowledge, fallibility would abound”. Therefore, government agencies such as the ITF must act circumspectly by studying and understanding the enactments that provide for these charges and contributions before zealously making demands in respect of the same. The agencies must levy the charges and contributions in accordance with the provisions of the law or risk truncating the entire essence of the enactments that establish those charges and contributions.
 Please note that Salami J.C.A.’s reference to ‘second tier of directors’ was to non-executive directors.
 Whilst the Supreme Court overturned the ultimate decision reached by the Court of Appeal in this case, the Supreme Court’s decision did not affect the distinction made by the Court of Appeal between executive and non-executive directors.