Professional employer organizations (PEOs) provide human resources solutions for businesses, and typically handle tasks like payroll, employee onboarding and benefits administration. One of the main services that PEOs offer is employee leasing or employee outsourcing. This is where the PEO employs workers and then “leases” (outsources) them to their client companies. This arrangement allows client companies to benefit from having a dedicated workforce without having to manage the administrative tasks associated with employment.

When a client no longer requires the services of the PEO, or where the client requests that the outsourced employee should be removed from the project – does this entitle the PEO to dismiss that employee? 

In Wan Nurfaizah Wan Md Nor v Cekap Technical Services Sdn Bhd (Award No. 1727 of 2022), the Industrial Court considered this issue.

 

Brief Facts

  • Petronas Technical Services Sdn Bhd (“PTSSB”) is a client of Cekap Technical Services Sdn Bhd (“Company”), whereby the Company supplies manpower to PTSSB for the completion of its Pipeline Replacement Project. 
  • Pursuant to the above, the Claimant was employed by the Company to provide her services to PTSSB as “Head of Facilities”.
  • The Claimant’s employment contract with the Company stated that her period of service will end either (i) upon expiry of the fixed term, ie on 30 April 2021; or (ii) where PTSSB no longer requires her services, whichever occurs first (“Terminating Events”). 
  • About a year later, PTSSB instructed the Company to terminate the Claimant on the grounds of poor performance.
  • The Company terminated the Claimant based on PTSSB’s instructions.
  • The Claimant filed a claim of unfair dismissal.


Court’s Findings 

The contract of service provided for the Terminating Events, which allows the Company to terminate the Claimant where PTSSB no longer required her services. This is notwithstanding that her contract was also a fixed term contract with an expiry date of 30 April 2021.

As the Company was bound by a contract with PTSSB, the Company cannot simply ignore PTSSB’s instructions, as it will be against the terms of the contract between the Company and PTSSB. 

The Court also considered that the Claimant cannot be relocated within the Company (or PTSSB) because she was exclusively employed to provide services for PTSSB in relation to the Pipeline Replacement Project only.

Therefore, the Court found the Company successfully proved its case on a balance of probabilities, and upheld the dismissal.

 

Key Takeaways 

Dismissal of an outsourced employee can be complex, and depends on the terms of two contracts: (a) the contract between the PEO and the client; and (b) the employment contract between the PEO and its employee.

Here, the employment contract between the PEO and the outsourced employee explicitly stated the Terminating Events, which allowed the PEO to terminate the employee’s employment if the client no longer required their services. PEOs should have clear and explicit contractual arrangements with both their clients and outsourced employees, to avoid disputes and ensure compliance with employment laws and regulations. This case could have had a different outcome if the Claimant’s contract of employment was drafted differently, or was silent on the Terminating Events.

PEOs should be mindful that while they may have hired employees to exclusively work for certain clients, these individuals are still employees of the PEO. PEOs should also know their obligations to their outsourced employees, including providing notice of termination, paying severance or compensation (where applicable), and complying with any relevant employment standards. By following these practices, PEOs can minimize the risks associated with termination of outsourced employees, protect their own interests, and maintain good relationships with their clients.

***

This article was written by Donovan Cheah (Partner) with assistance from Tiffany Chin (Pupil-in-Chambers). Donovan has been named as a recommended lawyer for labour and employment by the Legal 500 Asia Pacific for 2017-2022, 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, and our employment practice group has built a reputation for providing strategic employment advice to local and global organisations.  Our team of employment lawyers provide advice on employment law and industrial relations including review of employment contracts, policies and handbooks, advising on workforce reductions, and managing dismissals of employees for poor performance or misconduct. We also represent clients in unfair dismissal claims and employment-related litigation. Have a question? Please contact us.

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