What are outsourced employees?

An outsourced employee or “leased employee” is an individual who receives a pay check from one entity (usually a staffing or outsourcing company) but is performing services for another entity, a recipient company.

The Industrial Court in the case of Wong Wai Che v Quest BPO Sdn Bhd (Award No. 201 of 2021) considered whether the Claimant was an employee of the local staffing firm, or if he was ultimately an employee of the recipient company. In determining which entity had an employment relationship with the Claimant, the Industrial Court looked into the terms of the contracts and the conduct of the parties.

Background Facts

  • A foreign entity (“Foreign Entity”) engaged the Quest BPO Sdn Bhd (“the Company”) as a payroll agent for professional employer/outsourcing services.
  • The Claimant had entered into 2 employment contracts, one with the Company and one with the Foreign Entity.
  • The functions of the Company was to administer monthly remuneration, make statutory contributions and deductions, secure insurance and pay approved claims for the Foreign Entity.
  • The Claimant was sourced, interviewed and selected by the Foreign Entity, and was “employed” under its direction and control.
  • The Claimant’s role was to source business for the Foreign Entity. In the discharge of his duties, he held himself out as an employee of the Foreign Entity.
  • The Foreign Entity’s director terminated the Claimant’s employment via email.
  • The Claimant contended that as he was hired by the Company as a “leased employee”, the Company was his legal employer. He therefore claimed unfair dismissal against the Company in Malaysia.

Court’s Findings

The Industrial Court concluded there was no employment relationship between the Claimant and the Company, and that the Claimant was ultimately an employee of the Foreign Entity. The factors considered by the Industrial Court in concluding this included:

  • The Claimant reported to the employees/director of the Foreign Entity but did not have to report to the Company for any work done.
  • Payment was paid to the Claimant by the Foreign Entity through the Company as the appointed payroll and hosting agent, which was its only function.
  • The Claimant’s monthly claims were made using staff reimbursement from the Foreign Entity, and not the Company.
  • The Claimant signed a contract of employment with the Foreign Entity first.
  • The Company and the Foreign Entity entered into a professional employer services agreement which stipulated that the Claimant was hired by the Company as a leased employee and the Company had responsibilities only regarding payroll and statutory deductions.
  • The Claimant confirmed that the person who dismissed him was a director of the Foreign Entity

As the Industrial Court found that the true employer was the Foreign Entity, the Industrial Court had no jurisdiction to determine the Claimant’s claim of unfair dismissal. The Claimant’s claim was therefore dismissed.

Key Takeaways

The Industrial Court is not limited to looking at the terms of the contract, and can often delve into the conduct of the parties to ascertain their true relationship.  Some questions the Industrial Court will ask to determine a person’s employer include:

  • Which entity had control over the employee?
  • Who has the power to dismiss?
  • Who or which entity did the employee take instructions or directions from?
  • Who was the employee’s superior or who did the employee report to?
  • How did the employee treat himself and each entity?
  • Which entity paid for the employee’s salary? (excluding intermediate holding of payments)
  • What are the functions and core business of each entity?

In a true outsourcing arrangement, parties should be mindful not to treat it as any other employment. For example, having the recipient company sign an “employment contract” with the outsourced employee could confuse the situation. Similarly, the recipient company should not have the power to “dismiss” the employee – they may terminate the contract with the outsourcing company, request that the employee be “rolled off”, or  even request a replacement outsourced employee instead. In those situations, the employee is not “dismissed”, as their employment with the outsourcing company remains intact and they can be reassigned to other clients if necessary.  A recipient company may also want to clearly demarcate outsourced employees from their own employees, and ensure the two are not treated as interchangeable.

How an outsourcing arrangement is managed will have significant impact on the legal liabilities of both the outsourcing company and the recipient company. For example, in Ong Yin Quan v AQM Marketing Sdn Bhd [2008] 2 LNS 1386, the outsourced employee failed to join the recipient company to the unfair dismissal claim. The Industrial Court noted there was no contract of employment with the Company. Even though the employee was placed physically in the recipient company’s premises and reported to a manager of the recipient company for her day-to-day work, she was ultimately still under the management and control of the outsourced company regarding her employment.  The true nature of her employment was that she was employed by the outsourcing company, but to be placed in the recipient company.

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This article was written by Donovan Cheah (Partner) and Adelyn Fang (Legal Manager). Donovan has been named as a recommended lawyer for Labour and Employment by the Legal 500 Asia Pacific 2017, 2018, 2019, 2020 and 2021, 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.

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