How do the courts determine whether someone is an “employee” or not?
We’ve seen this question asked numerous times, not just in Malaysia but across the world. With the rise of the “gig economy”, individuals are no longer tied down to traditional fixed employment and have many opportunities to take on temporary, short term and flexible working arrangements. For example, the issue of whether Uber drivers are Uber employees or just independent contractors has been considered in multiple jurisdictions, with no unanimous or definitive answer (eg: see here and here)
In Malaysia, being classified as an “employee” has significant implications; for example, an employee who is terminated will have a right to claim for unfair dismissal under the Industrial Relations Act 1967 (IRA). An independent contractor has no such rights and can only rely on contractual rights if his contract is terminated.
The recent Industrial Court case of Henry Eliathamby v Tootpay Sdn Bhd [Award No. 1459 of 2018, 28 June 2018] examines this issue of whether an individual is an employee or a contractor.
- Henry Eliathamby (“the Claimant”) was a director of Tootpay Sdn Bhd (“the Company”) and was given the title of Chief Operating Officer (COO). He was reporting to another director of the Company.
- The Claimant was informed by his supervisor that he was terminated as a director pursuant to a notice issued by the parent company, Tootpay Pte Ltd of Singapore.
- The Claimant filed an unfair dismissal claim against the Company.
The threshold issue that had to be first determined by the Industrial Court was whether the Claimant was even an “employee” of the Company. As mentioned, only “employees” are entitled to lodge complaints of unfair dismissal under the IRA.
The Company took the position that the Claimant was not an employee, but an “independent contractor”, and the COO title was just an empty title as no letter of appointment was ever given to the Claimant.
In order to determine whether the Claimant was an employee, the court took into account the following:
- The law defines an employee as someone who is engaged under a “contract of service”, while an independent contractor is one who is engaged under a “contract for services”. To determine whether a contract is one of service or for services, the degree of control which the company exercises over the individual is an important factor.
- Section 2 of the Employment Act 1955 defines “a contract of service” as:
“any agreement whether oral or in writing and whether express or implied, whereby one person agrees to employ another as an employee and that other agrees to serve his employer as an employee and includes an apprenticeship contract.”
- “Employees” are referred under the IRA as “workmen”. The IRA defines “workman” as:
“any person, including an apprentice, employed by an employer under a contract of employment to work for hire or reward and for the purposes of any proceedings in relation to a trade dispute includes such person who has been dismissed, discharged or retrenched in connection with or as a consequence of that dispute or whose dismissal, discharge or retrenchment has led to that dispute.”
Referring to the above, the Court held that the Claimant was an employee/workman reasoning that:
- The Claimant has been working with the Company for five years so his role could not be considered temporary
- He had to report for duty and had to report to the Managing Director, suggesting a degree of control by the Company
- There was an implied contract of service despite the lack of a letter of appointment as seen by the services he provided for the Company.
- The fact that he was a director does not automatically mean he cannot be an employee. He could be both director and employee of the company, as seen in American International Assurance Co Ltd v Dato’ Lam Peng Chong & Ors where court held that one may be employed in both capacities. (See our previous article about directors’ employment relationships, here)
Having found that the Claimant was an employee, the Industrial Court had to then determine whether the dismissal was fair. Unfortunately, the Company’s defence was totally premised on the hope that the Court would find that the Claimant was not a workman, so there was no evidence to show that the dismissal was just. Hence, the Industrial Court found in favour of the Claimant and ordered the Company to pay him 5 months’ of backwages in addition to compensation in lieu of reinstatement, to the total of RM180,000.00
- The line between “employee” and “independent contractor” is becoming increasingly blurred. More and more often, both employers and employees are seeking mutually beneficial flexible working arrangements as opposed to traditional employment relationships.
- There is no fixed legal test or formula that will conclusively determine whether an individual is an employee or an independent contractor. In the event of a dispute, the Industrial Court will examine all facts and circumstances, including but not limited to: (a) the nature of work performed by the individual; (b) the degree of control exercised by the employer over the individual; (c) the length of time / the period in which the individual performed the work; (d) contractual terms if any ; (e) whether the individual was treated the same as other permanent employees in the Company etc
- Putting individuals on “independent contractor contracts” are attractive to employers, especially new businesses, who many not be commercially ready to commit to full time employees. However, employers should be reminded to thoroughly examine their commercial needs and required job functions. An independent contractor arrangement may work well temporarily / ad-hoc and for the short term, but may unintentionally be “converted” to an employment relationship if the individual ends up working exclusively for the company for years, as seen in this case.
- Even if an individual is placed on an “independent contractor contract”, in the event of termination, it’s wise for employers to examine whether they have “good grounds to terminate” although this is not strictly necessary for genuine independent contractor contracts. This is because in the event the individual asserts they are really an “employee” and the Industrial Court agrees with that, the employer may still have a chance to defend an unfair dismissal claim on the basis that the dismissal was with just cause and excuse. In this case, the Company did not have a “Plan B” and therefore had no defence once the Industrial Court found that the Claimant was an employee and not a contractor.
This article was written by Donovan Cheah (Partner) with assistance from Denise Tia (Intern). Donovan leads the firm’s employment and dispute resolution practice, and has been named as a recommended lawyer for labour and employment by the Legal 500 Asia Pacific 2017 and 2018. He has written for publications such as the The Edge and the Star, as well as for the Malaysian-German Chamber of Commerce and Industry. Have a question? Please contact us.