Independent contractors have become an integral part of modern business operations, offering flexibility and specialized skills that can enhance a company’s capabilities. However, using independent contractors comes with its own set of challenges, and identifying potential issues early on is crucial to minimize legal exposure to the Company (from an employment law perspective). 

Mismanagement of independent contractors could result in misclassification of these contractors as employees. This attracts obligations and liabilities (eg: unfair dismissal risks, duty to make statutory contributions / deductions, etc).

In this article, we discuss red flags to look out for when using independent contractors.


Using standard employment documentation

Whilst it is tempting to adopt “standard” employment documents (eg: employment contract / claim forms) with minimal changes, companies should remember that this should go beyond merely tweaking the title of the document.  Companies should carefully vet through every clause (including boilerplate clauses) to ensure that it mirrors the intended independent contractor structure. 

Section 101C of the Employment Act 1955 (“EA 1955”) is also a risk factor. Where no written contract governs the relationship, section 101C creates a presumption that certain individuals are employees unless proven otherwise – for example where the individual is provided with tools, materials, or equipment to execute work or where the work constitutes an integral part of another person’s business. As these factors could also be present in an independent contractor arrangement, the lack of a written contract will create an unnecessary risk of misclassification.

Wrong labels

As independent contractors are not employees, companies should be mindful not to use the wrong labels when managing these contractors. For example, calling the service fee paid to the contractors as “basic salary” or giving contractors a “salary slip” is wrong.

Companies should ensure that they exercise diligence for all documentation pertaining to payments for independent contractors. In the event of a dispute, the Court may consider evidence beyond the contract, such as payment slips, receipts, claim forms, etc.

This can be seen in the recent Court of Appeal decision of Gopala Krishnan Chettiar Muthu v Sealand Marine Inspection and Testing (M) Sdn Bhd & Anor [2023] 5 CLJ 917. There, the issue was whether the claimant was an employee. In reaching its decision, one factor considered by the Court was that the claimant’s director slips had labelled the payments made to him as “basic pay” (which the claimant recognized as salary).  

Treating them like employees

Independent contractors should not be treated the same as employees in your organisation. For example – code of conduct and disciplinary procedures are only reserved for employees.  If these policies and procedures apply equally to independent contractors, it will increase the risk of misclassification, given that the company could be seen as having substantial control over the independent contractor as though they are an employee.

While service standards of independent contractors can be monitored, it should not be handled the same way as a poor performing employee or an employee who commits misconduct. If your organization’s method of quality control is through the issuance disciplinary documents (eg: warning letters, show cause letters or performance improvement plans) to contractors, it is advisable to reevaluate such practices.  

Erroneous statutory contributions and deductions

Logically, employment related statutory contributions and deductions (eg: EPF / SOCSO / EIS / PCB) only apply to employees.   Given that such statutory contributions / deductions may indicate an employment relationship, erroneous payments could be viewed as an admission that the independent contractor is an employee. 

For example, in Kalithas Sethabaram v YWF Enterprise [2022] 4 ILR 148, the main issue was whether the claimant a “workman” within the meaning of the Industrial Relations Act 1967. Although the company alleged that the claimant (a lorry driver) is an independent contractor, the Court did not accept this. In reaching its decision, the Court considered that statutory deductions (ie: EPF and SOCSO) were made for the claimant.  

Key Takeaways

The management of independent contractors does not end with signing a contract. Instead, the real work begins when the independent contractor commences their service with the company. Where there is a dispute, Courts are entitled to look beyond the written contract and consider of parties’ practices.

Companies looking to engage independent contractors would need to streamline their operations to ensure that the distinction between independent contractors and employees are clear. To achieve that, companies should undertake periodic audits or reviews in its management of independent contractors. 

***

This article was written by Leow Ho Eng (Associate) from Donovan & Ho’s employment law practice. 

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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