Can a Director of a Limited Company Draw a Regular Salary Along With Dividends?

Question:

Assalamu alaikum
I and three others are shareholders in our company which is a limited company.  Two of the four work and receive salaries.  We have been told that this setup is impermissible.  Is it permissible for me as a director to get paid? If it is haram, do I have to give all my salary in charity?   Can you kindly guide us on this matter. 

In the Name of Allah, the Most Gracious, the Most Merciful.

As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.

Answer:

It is permissible to draw a salary from your company on condition[1]:

1)     You have an employment agreement with a defined job description, hours of work and salary which is independent to your contract and shareholding as a director

2)     Your salary is independent to dividends you receive or retain in the business such that you receive salary in lieu of work regardless of profits or loss
 
The Fiqh (jurisprudence of the answer):

A shareholder in a partnership cannot fix a wage for himself along with dividends as that nullifies the risk of his capital investment and in addition, there is an element of gharar (uncertainty) as to whether the fixed amount will be reaped or not.  Bearing risk in an investment is a requirement for the return to be lawful.  The possibility of loss and gain are vital for a venture to be regarded as a valid investment.  The Fuqahā’ (jurists) state: 
“Profit is in accordance to the agreed ratio & loss is proportionate to the amount of wealth staked.”[2]
The Fuqahā’ have placed down the following principles and maxims to highlight the importance of risk taking:  
“Al-Kharāj bi al-ḍamān” (profits come with liability)[3]
 “Al-ghunm bi al-ghurm” (reward comes with risk)[4]

Risk comes with one of three factors[5]:
1) Staking wealth
2) Staking labour
3) Assuming responsibility

Hence, a person who hasn’t staked his wealth or labour or has not assumed responsibility has not assumed risk and cannot gain a profit. However, when the contract of employment is independent to the contract as a director, the risks and rewards of each contract is independent.  The risks as a shareholder are independent and exogenous to the risks as an employee.  Dividends received as a shareholder are dependent upon the number of shares and performance of the company, whereas, the salary received is based on one’s own performance and services delivered in the company.  In addition, a shareholder can liquidate his shares and still continue to work as an employee.  In the same manner, an employee can resign from work and keep his shares in the company.  Therefore, the agreements are independent with the rewards and risks of each arrangement independent of the other.  Therefore, in your scenario, as long as the two are independent, it is permissible to withdraw a salary.      

The wisdom of the law:

Note: The law is not dependent on wisdom and benefits.  It is possible that not all said benefits are found at a given time.  The absence of any or all benefits will not change the ruling or law.  The law is not deduced nor determined through benefits.  The benefits of the law are enumerated to complement rationale minds.

Investment risk is necessary to prevent a person gaining wealth without risk which is unfair and unjust.  Equality demands every person in a transaction to bear risk to gain. Shariah promotes justice and equality which is exhibited by every partner bearing risk to gain profit. 
 
And Allah Ta’ālā Alone Knows Best
Mufti Faraz Adam,
www.darulfiqh.com
 
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