outsourcing

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

Marcus van GeyzelLeave a comment

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.

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Case Update: Potential pitfalls where an employee is engaged by a Malaysian service provider for a foreign employer

Marcus van GeyzelLeave a comment

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.

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