As the job market continues to evolve, so do the ways in which companies choose to engage their workforce. A trend which has gained popularity in recent years is the use of temporary/contract staffing agencies.
These agencies provide a pool of workers who are employed by the agency and are then placed at a company (Recipient Company) on a temporary basis. Also common are agencies providing employer of record services (EOR) where the Recipient Company "outsources" certain responsibilities such as payroll, statutory contributions, employment pass, taxes and benefits to the agency who then becomes the EOR.
These arrangements are popular as companies can quickly and easily meet their staffing requirements without being saddled by the common obligations of an employer.
Whilst such arrangements may be beneficial, it begs the question: "Who is the actual employer – the agency or the Recipient Company?".
In Ong Yin Quan,1 the staff applied to join the Recipient Company as a party in an unjust dismissal proceeding. The Industrial Court dismissed the application and held that the agency was the actual employer. In doing so, the following factors were considered:
(a) The employment contract was signed between the agency and the staff. No employment contract was executed between the Recipient Company and the staff.
(b) The staff's salary and claims were paid by the agency.
(c) The staff's letter of termination was issued by the agency.
(d) The Employees' Provident Fund (EPF) and Social Security Organisation (SOCSO) contributions were paid by the agency.
Similarly, in another Industrial Court case,2 the staff had signed two employment contracts – one with Company A (a Malaysian incorporated company and the subsidiary of Company B) and another with Company C. Company C executed payroll on behalf of companies under Company B. The contract with Company A was executed as the staff was assigned to Malaysia. He signed the contract with Company C as part of Company B's policy for international assignees. The staff filed unjust dismissal proceedings against Company A. The Industrial Court held that Company C was the actual employer for the following reasons:
(a) The contract with Company A did not set out the usual terms and conditions of employment such as scope of work, benefits etc. On the other hand, the contract with Company C contained the usual terms of employment.
(b) The contract with Company C clearly stated that Company C was the employer.
(c) The staff had been assigned to Company A and had merely been the beneficiary of the staff's services under Company C's contract.
(d) The contract with Company A was executed merely to ensure compliance with local laws.
(e) The staff's salary had been borne by Company C and "backcharged" to Company A, rather than the other way around.
In contrast, in Wong Wai Che,3 the staff filed an unjust dismissal proceeding against the EOR instead of the Recipient Company for which he was performing services. The Industrial Court held that the Recipient Company was the actual employer for the following reasons:
(a) The staff reported to the director of the Recipient Company. He did not have to report to EOR for any work done.
(b) Payment of salaries were paid to the staff through EOR as the appointed payroll and hosting agent.
(c) EOR, as the appointed payroll and hosting agent, was only responsible for ensuring that all statutory submissions and returns were complied with and duly paid to Malaysian authorities.
(d) The staff's monthly claims were made using staff reimbursement from the Recipient Company.
(e) There was an employment contract which was signed by the staff with the Recipient Company before the staff signed the employment contract with the EOR.
(f) A professional employer services agreement was entered into between the Recipient Company and EOR which states that the staff was hired by EOR as a leased staff.
(g) EOR's responsibilities were limited to managing the payroll, statutory deductions and contributions of the staff.
Likewise, in Branded Media Holdings,4 the New South Wales Supreme Court held that the actual employer is the Recipient Company for the following reasons:
(a) The EOR did not conduct any business by which it generated income.
(b) The EOR was not the recipient of the services of the staff.
(c) Services were provided by the staff to the Recipient Company.
(d) The EOR did not operate any bank accounts.
(e) The EOR did not in fact pay the staff. The Recipient Company paid the salaries and wages of the staff.
(f) The Recipient Company had its logo on employment forms.
(g) Business cards used by the staff bore the logo of the Recipient Company.
(h) The sign-off section of emails sent by the staff referenced the Recipient Company.
(I) The website referencing the staff referenced the Recipient Company.
Dealing with the legal risk
There is a myriad of factors which the Courts will consider in determining as to who is the actual employer. Companies looking to engage workforce through the use of temporary staffing agencies or EOR may consider the following:
(a) The arrangement should be carefully structured to demonstrate the temporary staffing agencies or EOR's potential for profit through the business arrangement.
(b) Any agreement entered into between the temporary staffing agency or EOR and the Recipient Company unequivocally states that the temporary staffing agency or EOR is the employer and not the Recipient Company. Indices of employment or terminology indicative of employment relationship between the staff and the Recipient Company should be removed.
(c) Any agreement entered into between the temporary staffing agency or EOR and the Recipient Company contains indemnity provisions for claims brought by among others the staff and statutory bodies.
(d) The employment contract is executed between the temporary staffing agency or EOR and the staff. There should be no employment contract and/or direct correspondences from the Recipient Company to the staff.
(e) The assignment letter from the temporary staffing agency or EOR to the staff clearly specifies that the temporary staffing agency or EOR is the employer of the staff and not the Recipient Company.
Likewise, agencies or EOR should adequately take steps to protect themselves in the event that there are instructions from the Recipient Company to terminate the services of the staff. In Wan Nurfaizah,5 a company was awarded a contract by Petronas Technical Services Sdn Bhd (PTSSB) to supply manpower services to Petronas. The claimant consented to contract with the company to provide her services to PTSSB as one of manpower supplied. The claimant was subsequently removed from PTSSB's project on PTSSB's instructions and thereafter dismissed from employment by the company. The claimant then filed an unjust dismissal claim against the company. In dismissing her claim, the Industrial Court found that:
(a) The employment contract entered into between the claimant and the company was subject to the requirement of PTSSB. As PTSSB no longer required the claimant's services, the company must terminate the claimant's employment under the said contract.
(b) The company cannot ignore PTSSB's instruction as it will go against the terms of the contract between the company and PTSSB.
(c) The claimant cannot be relocated to any other position within the company or its client because the claimant was employed exclusively to provide services for PTSSB.
Conclusion
While temporary staffing agencies or EOR may appear to be a convenient and quick solution for companies to manage their workforce, a Recipient Company can be held responsible for employment-related claims made by the staff. As a result, it may face unjust dismissal claims and significant financial penalties, including clawbacks on statutory contributions and unpaid statutory benefits under the Employment Act 1955.
Footnotes
1. Ong Yin Quan v AQM Marketing Sdn Bhd [2008] 2 LNS 1386
2. Niall Atholl Murray v Baker Hughes (Malaysia) Sdn Bhd & Anor [2018] 3 ILR 126
3. Wong Wai Che v Quest BPO Sdn Bhd [2021] 2 LNS 0201
4. Branded Media Holdings Pty Limited (In Liq) [2020] NSWSC 557
5. Wan Nurfaizah Wan Md Nor v Cekap Technical Services Sdn Bhd [2022] 4 ILR 282
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
