In this Case Update series, I share summaries of recent Malaysian court decisions to explore the current approach taken by the courts when deciding on employment-related issues. You can find all the posts in the series by clicking here, including case updates on other legal areas by TheMalaysianLawyer co-founder Lee Shih.
Technology has facilitated the increasingly global reach of many businesses, and now even small businesses find it easy to establish a multi-jurisdictional presence. This global footprint, plus the increasing popularity of remote-working arrangements which has been further accelerated by the COVID-19 pandemic has made it even more common for employers to hire employees in countries where they do not have a physical presence or legal entity.
Foreign companies use several options to engage individuals in Malaysia, broadly falling under the direct or indirect methods (or a combination). With the direct method, a foreign company would engage an individual directly, either as an employee or a contractor, using a contract either — (a) governed by Malaysian law; or (b) governed by the laws of the company’s home jurisdiction.
The indirect method is commonly known as “business process outsourcing” or “professional employer services” but also goes by many other names, and there are various interchangeable terminologies used. Essentially, this is a “third party employment” arrangement, whereby a foreign employer would engage a “local host employer” as a service provider, and this service provider would then engage the employees directly to perform services for the foreign employer. These local “professional employer organisations” would be responsible for arranging the payroll and statutory contributions and deductions for these “leased employees”, and would be the official “employer of record”. Using a local entity is unavoidable where the employee needs to apply for a work permit/visa.
I’ve advised employer clients on the engagement of employees using all of these options, and each of them have their respective advantages and disadvantages, and potential pitfalls for both employers and employees.
This article reviews the Industrial Court decision in Wong Wai Che vs. Quest BPO Sdn Bhd (Award No. 201 of 2021), involving an employee engaged by a foreign employer entity via a Malaysian service provider.
Brief facts
The Claimant’s employment was documented via the following three contracts:
- A letter of employment issued by CorDEX Instrument Limited (“CorDEX”) to the Claimant dated 20 July 2018. CorDEX is a company incorporated and registered in England and Wales (“the UK Employment Letter”).
- A Professional Employment Service Agreement between QBPO and CorDEX dated 20 July 2018 (“the PES Agreement”).
- An employment letter issued by QBPO to the Claimant dated 26 July 2018 (“the Malaysian Employment Letter”).
Some other relevant background to the Claimant’s employment:
- The Claimant was sourced, interviewed, and selected by CorDEX.
- The Claimant was employed under the direction and control of CorDEX.
- As CorDEX did not have a Malaysian entity to administer the monthly payroll to the Claimant, CorDEX engaged QBPO as a payroll agent pursuant to the PES Agreement, with payment of the Claimant’s monthly salary deposited to QBPO’s bank account.
- The Claimant primarily worked from home.
- The Claimant held himself as an employee of CorDEX in the discharge of his duties.
- The Malaysian Employment Letter stated that the Claimant’s employment with QPBO “shall be governed by and is subject to [the PES Agreement]” and that the Claimant is being “hired by QBPO as a leased employee, and QBPO, as the legal employer on record, will be responsible to submit payroll taxes, pension funds, social security and secure worker health/compensation insurance” on the Claimant’s behalf.
CorDEX terminated the Claimant’s employment via an email, which was copied to QBPO. The Claimant said he only received a termination letter via email from CorDEX, and QBPO did not issue any formal termination letter. However, QBPO did stop paying the Claimant his salary.
QBPO gave evidence that their role was solely administrative in calculating the monthly payroll, statutory deductions and contributions, and claims. CorDEX would then approve these calculations, transfer the relevant funds to QBPO, and QBPO would then make the relevant payments to the Claimant and authorities. QBPO explained that the relationship with the Claimant was a “leased employee” arrangement, where a person receives salary from QBPO as the “staffing firm” but performed services for CorDEX.
Court’s findings
The Court found that it was clear that there were two employment contracts, and that the UK Employment Letter came before the Malaysian Employment Letter. The Claimant confirmed that he agreed to the clause in the UK Employment which states that both parties irrevocably agree that the courts of England and Wales shall have exclusive jurisdiction to settle any dispute or claim that arises out of or in connection with that agreement.
The Claimant also confirmed that while he sent weekly sales reports to CorDEX in addition to his various other duties, he did not report to QBPO for any work done. The Claimant also testified in court that QBPO was merely a payroll agent, and that CorDEX was his employer at all material times.
Based on the evidence, the Court found that it was clear that QBPO “as the hosting and payroll agent was only responsible for ensuring that all statutory submissions and returns […] were complied with and duly paid to Malaysian authorities” and that this “was the core business […] from which it earned its fee as a payroll agent” and concluded that it “cannot agree that via this platform there existed an employee and employer relationship between the Claimant and [QBPO]”.
The Court further concluded that despite the Malaysian Employment Letter and QBPO referring to the Claimant as a “leased employee”, “there never existed an employer employee relationship” and that it was the Court’s opinion that the Claimant “was not a workman as the contract of employment he signed with [QBPO] did not employ him under the contract for hire or reward”.
The Court’s conclusion was that the Claimant’s employer was CorDEX, and it is well-established that the Industrial Court does not have extra-territorial jurisdiction, and can only regulate relations between an employer and workman within Malaysia.
With this, as QBPO “was not the appointing or the dismissing authority, the issue of whether the Claimant’s dismissal was with just cause or excuse does not arise”. The Claimant failed to prove that QBPO was his employer (and the Court does not have authority to regulate a dispute with the foreign employer CorDEX), and therefore the Claimant’s claim was dismissed.
Takeaways
As mentioned at the beginning of this article, these sort of engagements are put in place either directly or indirectly, or via a combination of methods. The lack of uniformity of approach means that it is not always clear to all parties (foreign employers, employees, and local employers or service providers) what their legal obligations, rights, and standing are.
While the arrangement in this specific case was deemed by the Court to be fairly clear, any of the following differences in other cases could result in a different outcome (non-exhaustive list of examples):
- If the Malaysian employment contract was worded or structured differently, with less (or no) reference to the parent contract/employer.
- If the Malaysian employment contract was based on a more “regular” employment template, with no reference to leased employee.
- If the Malaysian employer / service provider was the named employer with the immigration authorities for sponsorship of an employee’s work permit.
- If the Malaysian employer / service provider exercised more control over the employee.
- If there was no contract between the foreign employer and the individual (two contracts instead of the three in this case).
There are potential pitfalls for the Malaysian parties with these arrangements. For the Malaysian employer / service provider, there is a risk of being deemed to be the employer and being exposed to an unfair dismissal claim or other related claim. For the Malaysian employee, there is a risk of not having any protection from unfair dismissal, or having any realistic avenue to pursue any other potential claims.
I’ve also previously covered related issues in a previous article (“Case Update: Factors considered by the Industrial Court in determining the identity of the employer in a multi-jurisdictional employment relationship”), where I discussed two cases involving complicated employment relationships where employees have contractual relationships with a foreign entity and a Malaysian entity.