What do courts generally consider when determining if someone is an independent contractor or an employee?

Despite the labels and titles stated on the contract, courts have chosen to scrutinise the parties’ intentions by considering various factors to determine whether a person is an independent contractor or employee. For example, courts have considered the contractual terms of the agreement, whether statutory contributions have been paid, and the degree of control exercised by the employer over the employee.

A recent judicial review before the High Court in the case of KOOL FM Radio Sdn. Bhd v Mahkamah Perusahaan and Anor highlights a situation where a fixed-term employee went on to execute an independent contractor agreement, but argued later that the independent contractor agreement was merely a continuation of her previous employment. 

Brief Facts

  • The Claimant was employed on a fixed term basis as a radio announcer for Hot FM from April 2014 until March 2016 (“1st employment”). She was subsequently employed at Synchrosound Studio for 3 years for KOOL FM (“2nd employment”).
  • Sometime in 2017, the Company informed the Claimant its radio announcers are only intended to be engaged as independent contractors. As such, the Claimant was required to register her own business and execute an independent contractor agreement with the Company.
  • Following the new requirement, the Claimant registered a business called LKD Empire Sdn Bhd (“LKD Empire”) and executed the independent contractor agreement, where it was agreed that LKD Empire shall provide the service of a radio announcer to the Company for 3 years.
  • Some time later, the Company terminated the independent contractor agreement. 
  • The Claimant alleged that this was an unfair dismissal, and her complaint was referred to the Industrial Court.
  • At the Industrial Court, it was held that the Claimant was dismissed without just cause and excuse and the Company was ordered to pay compensation of RM133,000.00.
  • Aggrieved by the Industrial Court’s decision, the Company filed a judicial review application at the High Court, primarily on the grounds that the Claimant was not an employee but an independent contractor, and therefore the Claimant had no right to file a representation for unfair dismissal.

High Court’s Findings

Setting aside the Industrial Court’s decision, the High Court held that the Industrial Court failed to take into account that the independent contractor agreement was not a continuation of the Claimant’s services with Synchrosound Studio.  The independent contractor agreement was a new contract executed with the Company. 

The High Court also found that by taking the active step of incorporating a new company as per the Company’s requirement for independent contractors, there was unambiguous and clear acceptance by the Claimant of the terms and conditions of the independent contractor agreement. 

The High Court was of the view that it was bound to construe the contract in line with the mutual intention of the parties. The parties clearly intended that the Claimant was an independent contractor because the clause on “Independent Contractors” stated, amongst others, that “it is expressly understood that the parties will act as independent contractors under the Agreement”.

Apart from the above, the court took into consideration of other ancillary circumstances, such as:

  • The Claimant’s invoice issued to the Company was also for her services as an independent contractor; 
  • There was no obligation for the Company to pay statutory contributions or deductions under the agreement; 
  • The Claimant did not raise any objections upon being issued termination letter; 
  • Although the Claimant alleged ‘control’ by the Company at the Industrial Court, the High Court viewed that the degree of control exercised by the Company’s were aligned with its contractual rights spelled out in the independent contractor agreement, which did not exceed the independent contractor–company relationship. This degree of control did not transcend into an employer–employee relationship. 

Key Takeaways

Depending on the operational needs of the Company, the arrangement of independent contractor – company relationship can be useful at times. It is however important for parties to examine their conduct and check whether it reflects the mutual intention of both parties. Fortunately for the Company in this case, it consistently treated its independent contractors differently from its employees (eg: requiring independent contractors to set up a new company, issue invoices, etc)

The degree of control exercised by the employer is an important factor to consider when a dispute arises as to whether someone is an independent contractor. However, where the contract allows an employer to exercise a certain degree of control over the independent contractor under specified circumstances, the employer is entitled to exercise its contractual rights. It is possible for a person to still be an independent contractor even if the other party is exercising some control over them, provided that this is expressly stated and allowed in the contract.

A clearly worded clause greatly assists in setting out the position of an independent contractor, as seen in this case where the court held there was no ambiguity. Having a properly drafted clause helps the court in determining the arrangement envisioned by parties.

***

This article was written by Tiffany Chin (Associate) from Donovan & Ho’s dispute resolution practice. 

Donovan & Ho is a law firm in Malaysia. Our dispute resolution provides advice and legal representation in the civil and industrial courts. We also represent clients in both domestic and international arbitration, as well as other forms of alternative dispute resolution. Our experienced lawyers are also able to assist in commercial and civil disputes (such as debt recovery, shareholders’ or directors’ disputes, breach of contract and claims for injunctive relief), constructive disputes (arbitration and/or adjudication proceedings, disputes relating to delays, liquidated damages, defects and rectification work) and employment disputes (unfair dismissal claims, judicial review proceedings, and employment-related civil claims). Have a question? Please contact us.

 

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