On 28 May 2020, the Federal Court made an important ruling that foreign employees can be considered permanent employees, effectively changing the earlier legal position that foreign employees on an employment pass can only be “fixed term” employees.
The Federal Court’s decision in Ahmad Zahri Bin Mirza Abdul Hamid v AIMS Cyberjaya Sdn Bhd  1 LNS 494 now makes it clear that the fact that the employee is a foreigner is irrelevant in determining whether the employee was in permanent employment or under a fixed term contract.
- Around end of 2008, the Employee, a Singaporean citizen, invested in and became a shareholder of AIMS Data Centre 2 Sdn Bhd (“ADC”).
- In May 2009, the Employee received a letter of appointment from ADC for the position of Consultant.
- In August 2009, the Employee received a contract for consultancy services from ADC for a fixed term from October 2009 to September 2010. On the same day, he also received a letter of appointment as Vice President Product Development of ADC.
- His contract with ADC was renewed 3 times in 2010, 2011 and 2012, with all terms and conditions unchanged.
- In October 2012, the Employee received a renewal contract for a further period of 12 months from October 2012 to September 2013 as a Consultant of AIMS Cyberjaya Sdn Bhd (“Company”), instead of ADC. All terms and conditions remained the same as per the original contract in 2009.
- In January 2013, ADC was consolidated into the Company and the Employee received a letter that he was re-designated to assume the position of Vice President, Product & Solutions of the Company. Again, all terms and conditions remained the same as per the original contract in 2009.
- In September 2013, the Company offered further employment from October 2013 to September 2014. However, this time the Company sought to change the terms of employment to exclude the performance bonus scheme.
- The Employee was not agreeable to the removal of the performance bonus scheme. As a result, his contract was only renewed for a period of 3 months from October 2013 to December 2013 with all original terms intact, including the performance bonus scheme.
- In mid-October 2013, the Employee received a letter from the Company notifying him of the expiry of his 3-month contract and of an early release from employment effective the very next day, effectively dismissing the Employee.
- The Employee claimed unfair dismissal.
Decision of the Industrial Court, High Court and Court of Appeal
The Industrial Court found that the Employee’s contract of employment was permanent in nature and not a genuine fixed term contract. As such, his dismissal from employment was without just cause or excuse. This decision was upheld by the High Court on a judicial review application.
The Court of Appeal however set aside the decision of the High Court (and Industrial Court). In determining that the Employee’s employment was on a fixed term basis, the Court of Appeal found, amongst others, that:
- the Industrial Court was wrong in lifting the corporate veil when it found that there was continuous employment from the time the Employee was employed in 2009 by ADC until his termination in October 2013 by the Company (as ADC and the Company are two separate entities); and
- an expatriate who requires a work permit to work in Malaysia can never be a permanent employee in Malaysia. This is because an expatriate’s employment contract is subject to obtaining a work permit, which is for a fixed duration only and can be cancelled.
Decision of the Federal Court
The Federal Court overturned the decision of the Court of Appeal and upheld the decision of the High Court that the Employee was a permanent employee on the following grounds:
- Insofar as employment law is concerned, the court may pierce the corporate veil and find a group of companies to be common employers “whenever it is just and equitable to do so and/or when the justice of the case so demands”. This is keeping with the spirit of the Industrial Relations Act 1967 that the court shall act according to “equity, good conscience and the substantial merits of the case without regard to technicalities and legal form”.
- Regarding whether a contract is a genuine fixed term contract, the Court will have to examine the intention of the parties, the employer’s subsequent conduct during the course of employment, and the nature of the employer’s business and the nature of work which an employee is engaged to perform.
- The citizenship of an employee has no bearing in deciding whether the employee was in permanent employment or under a fixed term contract. The Industrial Relations Act 1967 does not make any distinction between the citizens of Malaysia and non-citizens.
- Malaysia is a member country of International Labour Organisation (ILO). The ILO convention to which Malaysia is a party, expressly provides that states should undertake to promote and guarantee equality of opportunity and treatment between migrant workers and nationals. All workers should be treated with fairness, dignity and equality without distinction whether they are local or foreigners. This is consonant with Article 8(1) of the Federal Constitution which provides that all persons are equal before the law and entitled to equal protection of the law.
Whether an employee is a fixed term employee or a permanent employee is important because it directly impacts an employee’s remedies if they claim unfair dismissal. In an unfair dismissal claim, a fixed term employee is only entitled to the balance of the unexpired term of his contract. However, a permanent employee is entitled to a maximum of 24 months of back wages, and 1 month of salary for every year of service.
The relevance of an employee’s citizenship in determining whether he is a permanent employee, is not exactly a novel issue. In fact, the Federal Court made reference to a 1981 decision – the case of Assunta Hospital v Dr A. Dutt  2 MLJ 115 – wherein the Federal Court had earlier decided that the citizenship was not a material consideration in determining whether the employee was a permanent employee (This case of Assunta Hospital was not referred to by the Court of Appeal when it decided that an expatriate can never be a permanent employee.)
The Federal Court’s decision in Assunta Hospital appeared to be underscored by the rationale that in determining whether an employment is permanent or is a genuine fixed term employee, whether the employee is able to obtain the working pass is simply not the concern of the Court in determining the representation of unfair dismissal.
That said, the Federal Court’s latest decision in Ahmad Zahri sets the record straight. Employers will have to be more mindful in deciding whether to employ someone on a fixed term contract, and should be mindful that in an employment context, the Courts can and will look beyond the words of a contract in order to achieve justice and equity.
Aside from the issue of nationality, the Federal Court also held that a contract of employment which is renewed successively without application by the employee and without any intermittent breaks in between, is in reality a permanent employment. As such, employers should also carefully assess all decisions to renew (or not renew) such fixed term contracts, particularly in these times of economic downturn.
This article was written by Donovan Cheah and Yan Nie Th’ng. Donovan has been named as a recommended lawyer for labour and employment by the Legal 500 Asia Pacific 2017, 2018, 2019 and 2020, and he has also been recognised by Chambers Asia Pacific and Asialaw Profiles for his employment law and industrial relations work.
Donovan & Ho is a law firm in Malaysia. Our practice areas include employment law, dispute resolution, tax advisory and corporate advisory. Have a question? Please contact us.