Case Update: Employees hired under a PEO or outsourcing service provider structure have limited legal protection

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.

The global PEO (professional employer organisation) industry has grown significantly in the past decade. While outsourcing or manpower service providers are certainly not new, the increasing professionalism and sophistication with which these services are provided has seen their adoption grow exponentially.

PEO arrangements are particularly ubiquitous in situations where a multinational entity does not have a local presence but wants to provide services locally, or hire a small number of local employees. This structure is also very useful for businesses operating in industries where work is project-based, and they therefore do not want the commitment of taking on permanent employees, or navigating the maze of employment law obligations.

But while PEOs offer companies convenience and flexibility, what sort of protection does it offer the individuals who are employed by the PEO or service provider? The Industrial Court award in Wan Nurfaizah Wan Md Nor v Cekap Technical Services Sdn Bhd [2022] 4 ILR 282 indicates that these employees may have very limited protection under the law.

Brief facts

In this case, Cekap Technical Services Sdn Bhd (“the Company”) was engaged by Petronas Technical Services Sdn Bhd (“PTSSB”) to supply manpower services to PTSSB. The claimant Wan Nurfaizah (“the Claimant”) entered into a contract of service with the Company to provide her services to PTSSB on behalf of the Company.

After the Claimant had served PTSSB for about a year, PTSSB instructed the Company to terminate her services immediately due to poor work performance. The Company issued a termination notice to the Claimant, and the Claimant contended that she was unfairly dismissed.

Court findings

In summary, the Industrial Court concluded the following:

  1. The Claimant’s contract of service with the Company stated that it was subject to PTSSB’s requirements, and it provided that the Company could terminate her employment without needing to provide a reason if PTSSB no longer required her services.
  2. The Company could not ignore PTSSB’s instructions, as that would be against the terms and conditions of the contract between the Company and PTSSB, which expressly provided that if PTSSB decided that her services were no longer required then the Company must terminate her employment.
  3. The Claimant could not be relocated to another position within the Company or for its other clients, as the Claimant was employed exclusively to provide services to PTSSB.

In view of the above, the Court dismissed the Claimant’s case.


The Industrial Court was very decisive in dismissing the Claimant’s claim, which on the face of it seems to be antithetical to the general position that employees have “security of tenure”. It also seems odd that the Company could simply rely on the contractual provisions to dismiss the Claimant without having to substantiate “just cause or excuse”.

However, while the decision in the Wan Nurfaizah case appears clearcut, we should be cautious as taking this as a blanket precedent that the court will always decide in this manner.

In particular, the provisions in the contract of service between the Claimant and the Company here appeared to be very clearly and comprehensively drafted, which probably proved decisive. Many of the contracts (either between the employee and the PEO, or between the PEO and the client) I have reviewed over the years have been very simplistic.

For example, a similar case could well be decided differently if the contract between the employee and the PEO does not clearly state that —

  • the employee is being employed to provide services for a specific client or project; or
  • the employee’s services could be terminated if the client instructs the PEO to do so.

The Court in this case also gave particular weight to the fact that the Company would have been in breach of its obligations under its contract with PTSSB if it did not dismiss the Claimant. For a previous decision on whether the client in a PEO arrangement could be deemed to be the employer, see the Industrial Court award in Sankerpillai Selvarajoo v Framco Sdn Bhd / DHL Global Forwarding (M) Sdn Bhd (Award No. 289 of 2016).

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