Lee Swee Seng - Newsletter

Key Issues in Employment Law

By Lee Swee Seng LLB, LLM, MBA, Certified Mediator
sweeseng@tm.net.my
©Copyright Lee Swee Seng

Ivy Hoo Yoong Wei
LLB,CLP

Introduction

Industrial law has been the subject of as rapid a transformation as can have happened to any legal subject in recent times, and is certainly one of the most difficult areas of law in which to keep up to date.
(IT Smith, GH Thomas in Smith & Wood’s Industrial Law)

Who is an employer?

S.2 Employment Act 1955 (EA) defines as “ any person who has entered into a contract of service to employ any other person as an employee and includes the agent, manager or factor of such first mentioned person”
S. 2 Industrial Relations Act 1967 defines as “any person or body of persons, whether corporate or unincorporate, who employs a workman under a contract of employment, and includes the government and any statutory authority”
In Lone Pine (PG) Sdn. Bhd.(Lone Pine Hotel) v National Union of Hotel, Bar and Restaurant Workers [1992]1 ILR 157B, The claimant F joined the hotel as a cook in 1972 and continued to be employed by the hotel when it was incorporated as a company. F subsequently resigned from the hotel in 1991. The issue in the court was whether F was entitled to retirement benefits from date of commencement of employment or the date of incorporation of the hotel as a company. The court held that the hotel remained her employer irrespective of whether or not it is " a person or body of persons, whether corporate or unincorporate".

Who is an employee?

The EA provides 4 classes of employees:
S.2 EA defines them as “any person or class of persons:-
Included in any category in the First Schedule …or
In respect of whom the Minister makes an order under subsection (3) or section 2A

The First Schedule provides for 2 classes of persons who can be described as employees:

1.1 Any person, irrespective of his occupation, who has entered into a contract of service with an employer and whose wages do not exceed RM1,500.00 per month.

1.2 Any person, irrespective of his monthly wages, who has entered into a contract of service with an employer and who is engaged:

In manual labour; or
In the operation or maintenance of duty mechanically propelled vehicle operated for the transportation of passengers or goods for reward or for commercial purposes; or
In supervising or overseeing other employees engaged in manual labour; or
In any capacity in any vessel registered in Malaysia and is not a certified officer; or
As a domestic servant
S. 2(3) defines them as “any person or class of persons employed, engaged or contracted with to carry out work in any occupation in any agricultural or industrial undertaking, constructional work, statutory body, local government authority, trade, business or place of work in respect of whom the Minister by order declares the provisions of the Employment Act to be applicable”
S.2A defines them as “ any person or class of persons employed, engaged or contracted with to carry out work in any occupation in any agricultural or industrial undertaking, contractual work, statutory body, local government authority, trade, business or place of work whom the Minister by way of order prohibit the employment, engagement or contracting other than under the contract of service.”
The IRA refers the term employee as “workman” which refers to “ 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 any 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” (S.2 IRA)

Types of Employment Contract

Temporary/ Casual/ Part-Time
Term/ Fixed-term
Task
Apprenticeship/ Probations

Statistics from European industrial relations observatory on-line

Temporary and fixed-term employment now makes up some 12% of EU employment, with figures steadily rising during the 1990s. This form of employment is particularly prevalent in Spain, Portugal and Finland, and affects women more than men (12.5% and 11% respectively in 1996).
These forms of employment were now coming to be perceived as opportunities for the creation of new employment opportunities. They were seen to respond both to the need of employers for greater flexibility, and the desire of employees to reconcile work and family life while retaining employment security at the same time.
S. 60B EA allows an employer to pay the employee at an agreed rate in accordance with the task, that is, the specific amount of work to be performed, and not by the day or by the piece.
According to KN Segara J in Ahmani S.B. v Abu Karim Baharom & Ors [2000] 2 CLJ 625, there are certain types of work description which may well fall into the frame envisaged by s. 60B of the Employment Act 1955, for example, a driver employed by a family. The job entails the driving of the employer to and from the residence and the place of work and, the driver is bound to carry out the orders and directives of his employer.

There may well be long hours of inactivity or standby. However, this does not mean that the employer is exempt from paying overtime, rest day and public holiday wages and such other benefits that may be provided in the Employment Act 1955. There is no magic in the term “task work”.

even if the employer has agreed to pay at an agreed rate in accordance with the task as envisaged in s. 60B, the Act does not exempt the employer from giving the employee all the benefits provided under Part XII of the Employment Act 1955, if the circumstances of the case so warrants.
S.2 EA gives an interpretation of an apprenticeship contract: it is a written contract entered into by a person with an employer who undertakes to employ the person and train or have him trained systematically for a trade for a specified period which shall not be less than two years in the course of which the apprentice is bound to work in the employer's service
According to Pembangunan Sumber Manusia Berhad Act 2001, s. 2, an apprenticeship contract is also included as one of contracts of service.
A probationer, or a probationary contract, though not defined in S.2 EA, the word 'apprentice' was mentioned in the section and it was decided that “an apprentice would normally be a probationer” (per Faiza Tamby Chik J in Robert John Reeves v Menteri Sumber Manusia Malaysia & Anor [2000] 1 CLJ 180)
The extensive use of part-time workers has also marked a significant workforce trend.
The trend has been caused by a number of factors, including corporate downsizing, dual-income households, and a culture and environment that no longer views a job as a life-long proposition.
Hiring a person part-time first can be a good strategy to ensure that the worker can do the job and is a good fit with the company. If this works out, the person can then be converted to a full-time employee
Many employers also provide fixed-term employment for workers.
A ‘fixed-term employee' is a person with a contract of employment which is due to end when a specified date is reached, a specified event does or does not happen or a specified task has been completed.
However there are cases whereby the employers have entered a fixed term contract with the employees but was not out of a genuine necessity (Han Chiang High School Pulau Pinang v The National Union of Teachers in Independent Schools [1992] 2 ILR 121).
In the case, the fixed term contract entered with a group of teachers were found to be a means to control the teachers concerned. The intention of the school was to rid itself of the union, which was why the school relied on the fixed term contracts to flush out the teachers who were members of the union.

Implications

With the increase of the number in non-permanent workers, it generally implies:
- Lower wages and fewer benefits.
- Reduction of full time employment.
- Decrease in Union membership.
- Little or no employee loyalty to company.
When certain organisations converted its full-time tellers to part-time so it could avoid paying them benefits a few years back, that was a decision that may have made sense from a financial standpoint, but probably hurt them immeasurably through poor employee morale, increased turnover, increased absenteeism, and lower productivity.
Since “flexibility” is the key concern amongst the employers, flexibility in sourcing has thus became a commercial reality, moving relentlessly up the value chain.
Outsourcing is the transfer or delegation to an external service provider the operation and day-to-day management of a business process. The customer receives a service that performs a distinct business function that fits into the customer's overall business operations. (http://www.outsourcing-law.com)
It helps to reduce operating costs too.
There has been growing concern that technological developments mean large numbers of service sector jobs will be 'offshored' to low wage economies such as India as part of the 'globalisation' of services.
The terms outsourcing and offshoring are often confused and used interchangeably, but they are describing different processes (http://www.tuc.org.uk/economy):
Offshoring is the use of new technology to transfer service jobs to low wage economies such as India - examples include call-centres and data processing; this is relatively new and so far small scale;
Outsourcing is when firms buy in from specialist providers services ranging from security, cleaning and catering to IT support, consultancy, and business services such as design, advertising, and accountancy; this has been happening for decades (if not centuries) and is very widespread.
Though there may be controversial issues involved (for eg. cultural differences and communication problems halfway around the world could cost more money), there is no doubt that it has become a trend now.
With the move away from permanent employment contract, and a move to outsourcing, there evolves another phenomenon in the working landscape – SoHo.
The term ‘SoHo’ means ‘Small Office/Home Office’ and is a concept that is much less well researched and recognised in Malaysia than it is in the US.
The SoHo market has grown in importance over the last few years as computer and telecommunications technologies have developed very rapidly and made it more feasible for office-standard equipment and materials to be used in the small/home office.
The meteoric rise of the Internet has also led to renewed activity in terms of the setting up of new small businesses, or ‘dot.com’ start-ups as they are often termed.
The methods of Internet access most likely to be used by small businesses are desktop or laptop computers or WAP mobile phones.
The growth in the popularity of e-mail for business and personal use has helped small businesses, in that it is now easier for them to keep track of information and communicate with colleagues and customers.

Contract of Service and Contract for Services

When a problem in a work relationship results in court action, the courts will establish the existence of a contract of service/ employment before they consider the specifics of a case. They do this by applying common-law 'employment' tests.

In investigating the legal relationship, the courts are looking to define whether one of two types of employment contracts exists: either a 'contract of service' or a 'contract for service'. A 'contract of service' is taken to denote employment. A 'contract for service' does not involve employment.

Control Test

In the first instance, the courts investigate if the user of labour has the 'right to control' the worker. They will look at the work relationship for indicators of control.

It was held in Hillyer v Governors of St Bartholomew’s Hospital [1909] 2 KB 820 that nurses working in the operation theatre were not employees of the hospital because they took their orders from the operating surgeon and not the hospital authorities, although they were employees of the hospital for general purposes.

In Employees Provident Fund Board v Bata Shoe Company (Malaya) Ltd [1968] 1 MLJ 236, the Court of Appeal upheld the decision of the High Court that shop managers were employees of Bata due to the considerable control which the company had over the shop managers.
However there was no relationship of employer and employee between the Bata Shoe Co. (M) Ltd and the salesmen employed by the shop managers of the company. Under the agreement between the company and the managers, the managers were given power to employ persons to assist them and it was stated that the managers would be responsible for payments under the Employment Provident Fund Ordinance.

If the 'control test' is not conclusive, which may frequently be the case (eg. Cassidy v Ministry of Health [1951] 2 KB 343 and Moreen v Swinton and Pendlebury Borough Council [1965] 1 WLR 576), the courts may resort to what they call the 'integration test'.

Integration Test

The ‘integration test’ seeks to test if the worker is 'part and parcel' of the business organization, and also involves study of each and every specific situation.

In Stevenson, Jordan and Harrison Limited v MacDonald and Evans [1952] 1 TLR 101, a case on copyright, Denning LJ said that:

"[This case] raises the troublesome question of the distinction between a contract of service and a contract for services. The test usually applied is whether the employer has the right to control the manner of doing the work . . .

It is often easy to recognise a contract of service when you see it, but difficult to say wherein the distinction lies... One feature which seems to run through the instances is that, under a contract of service, a man is employed as part of the business, and his work is done as an integral part of the business; whereas, under a contract for services, his work, although done for the business, is not integrated into it but is only accessory to it"’

Lord Denning gave the illustrative comparison between the captain of a ship (an employee of the shipowners) and the pilot who boards the ship only to take it safely into harbour (an essential service but not one which makes the pilot an integral part of the shipowners’ business).

Unfortunately most situations where the status of the worker is an issue do not provide such clear cut differences. As a result the ‘integration test’ has not played a large part in the evolution of the law on this matter.

The test was employed by Wan Suleiman FJ in Employees Provident Fund Board v MS Ally & Co Ltd [1975] 2 MLJ 89. In this case, the Federal Court found that working assistants who conducted and managed the business of M S Ally &Co Ltd and were rewarded by a share of the profits were employees of M S Ally as, inter alia, there was a sufficiency of control over the working assistants.

Multiple Test

McKenna J in Ready Mixed Concrete (South East) Ltd. v Minister of Pensions and National Insurance [1968] 2 QB 497, had derived another test known as ‘multiple test’.

Facts

Ready Mixed Concrete (South East) Ltd (“RMC”) was in the business of making and selling ready mixed concrete. The company had engaged an independent haulage contractor to deliver the concrete to customers but that contract was terminated and RMC decided to introduce a scheme whereby concrete was delivered by owner-drivers working under written contracts.

The owner-drivers entered into a hire purchase agreement with Ready Mix Finance Ltd to purchase a lorry but the mixing equipment on the lorry was the company’s property. In 1965 the company asked the Minister of Social Security for a determination of the employment status of one of the owner- drivers, Mr Latimer.

Decision

The Minister decided that Mr Latimer was employed under a contract of service but, on appeal to the High Court, MacKenna J held that he was running a business of his own. In summing up MacKenna J said that Mr Latimer was a “small business man” and not a servant. He concluded that the contract was not one of service but of carriage.

It is perhaps the most widely applied of the tests. It essentially conflates the control test into a more general survey of the circumstances of the relationship.

The test was applied in our local case in Casio (Malaysia) Sdn. Bhd. v. Wahab Tuan Idris [2001] 2 ILR 117. The central elements of the multiple test are:

Did the worker undertake to provide his/her own work and skill in return for remuneration?
Was there a sufficient degree of control to enable the worker fairly to be called a servant? The first of the tests to evolve was called the control test. The basic question was whether the employer told the worker what job to do, when it was to be done and how it was to be done. (cf. Whittaker v. Ministry of Pensions [1967] 1 QB 156)
Were there any factors inconsistent with the existence of a contract of service?
Which would definitely negate the existence of a master/servant relationship. If there are not, then there is a presumption that, because the worker could be a servant, he should be so considered.

It is only in more recent times that Justice McKenna’s ‘multiple test’ has been equalled in influence by the test known as the ‘economic reality test’. Justice McKenna emphasised that there should be nothing in the contract or circumstances in which the work is done which is inconsistent with a contract of service.

Economic Reality/ Entrepeneur Test

The ‘economic reality test’ focuses on the inconsistency of seeking a profit from doing the work with doing the work as an employee.

The idea underpinning the development of this "test" was that it was not enough to establish the degree of control exercised by the employer over the worker.

What really distinguishes employees from independent contractors, it was said in a number of cases, is that the independent contractor is working in the hope of making a profit rather than merely for a wage or salary.

In Market Investigations Ltd. v Minister of Social Security [1969]2WLR1 Cooke LJ came close to assigning primacy to the economic reality test. But he did recognise that other tests might be more relevant or decisive in particular circumstances.

This test offers real advantages where the employer and worker have dressed up a master/servant relationship in the garb of a contract for services (usually to secure the tax advantages which accrue to self-employed persons).

The usefulness of the "working for profit?" test became most apparent in dealing with cases which involved the ‘lump’. The ‘lump’ was the term used to characterise the common practice in the construction industry of hiring workers as ‘labour-only sub-contractors’.

In other words, the only thing the worker brought to the performance of the job was his own skill and effort.

Although it is now widely accepted that the first test to apply is the economic reality test, it may be that the circumstances of the worker whose case is at hand also require the application of a further test, namely the ‘mutual obligation test’.

Mutual Obligation Test

It is said that the relationship of employer and employee cannot exist unless the employer perceives and acts on an obligation to supply work; and the worker feels obliged to undertake any work offered.

Mutuality of obligation – whether the employer feels obliged to offer work and the worker feels obliged to take it when offered - can be an important question where casual working is involved.

Two questions arise about casual workers:

Are they working in a contract for services or a contract of service?

Does each period of work stand separate from all the others - i.e. is each spell of work performed under a new contract? Or can all the periods of work be said to have been performed under one global contract? The answer to this question can be important in determining continuity of service.

Terms and Conditions in Contract of Service

A contract of service may be oral or in writing, but under Rule 5(b) and 8 Employment Regulations 1957 the following terms must be given to an employee in writing on or before the commencement of his employment:

Name of employee and National Registration Identification Card No;
Occupation or appointment;
Wage rates (excluding other allowances);
Other allowances payable and rates;
Rates for overtime work;
0ther benefits (including approved amenities and services);
Agreed normal hours of work per day;
Agreed period of notice of termination of employment or wages in lieu;.
Number of days of entitlement to holidays and annual leave with pay; and
Duration of wage period

Other optional clauses:

Transferability
Retrenchment benefit
Confidentiality clause
Restraint of trade clause

Prohibitions in the terms:

Term in the contract of service cannot be less favorable than those prescribed under the provisions of the Employment Act.[s. 7EA]
A contract of service must not restrict the rights of an employee to join, participate in the activities or in the organizing of a trade union. [s. 8EA]

Terms and Conditions in Contract for Services

The following are some of the terms and conditions in contracts for services (source from Her Majesty Treasury) (http://www.hm-treasury.gov.uk/About/about_procurement/
about_procurement_service.cfm)
Contractor’s Status (Principal)
Manner of carrying out the Services
Standard of Work
Remedies in the event of inadequate performance
Variation of the Service
Contractor’s Personnel
Purchases on behalf of the Client
Access to Client’s Premises
Licence to occupy Client’s Premises
Offers of Employment
Conflict of Interest
Programme of Work and co-ordination
Security of Confidential Information
Professional Indemnity

Service-Level agreement

The following terms are particular in a Service-Level agreement:

Confidentiality
Termination clause
Types of service provided
Turnaround time
Fees

Termination of Contract

There are four ways in which a contract of employment may come to an end:

Resignation - termination with/without notice on the part of the employee, due to the cause that the employer by his or her conduct, in breach of the contract, has shown an intention not to be bound by the contract ;
Dismissal – termination with/without notice by the employer
Expiry of fixed term employment - A limited-term contract is a contract for a fixed term or the performance of a specific task, or one which ends when a specified event does or does not occur.
Mutual agreement to terminate employment

Dismissal of Misconduct

The legal position is well-stated as per Halsbury's Laws of Malaysia, vol. 7 at pp. 120.090-120.0921, as follows:

“The burden of proving that the dismissal of a workman is with just cause or excuse is on the employer. The standard of proof is on the balance of probabilities. The employer must convince the Court that the punishment was proportionate to the nature and quality of the alleged wrongdoing ... .

The following reasons can constitute just cause or excuse for dismissal:

(1)
(2)
(3) misconduct by the employee;
(4)…”

'misconduct' connotes to conduct that is inconsistent with the fulfillment of the express or implied conditions of service.

Generally, there are two broad categories of misconduct:

Minor Misconduct; and
Gross Misconduct

Some examples of minor misconduct are:

Being late
Using a company vehicle for unauthorised personal uses
Not performing to adequate/satisfactory standards

Some examples of Gross Misconduct:

Abusive Behaviour or violence
Theft or fraud
Alcohol or drug abuse
Discrimination or harassment
Deliberately damaging company equipment/property
Seriously breaking health and safety regulations
Serious Negligence
Serious insubordination
Misuse of an organisations property or name
Serious breach of confidence

"Misconduct" refers to conduct so seriously in breach of the accepted practice that, by standards of fairness and justice, the employer should not be bound to continue the employment (see Syarikat Kenderaan Melayu Kelantan Sdn. Bhd. v. Transport Workers Union [1990] 1 MLJ 5).

"Misconduct" connotes an act of non-disciplinary behaviour (see Sulnayah Hj. Mohd. Isa v. Sekolah Kanak-kanak Pekak Selangor & Anor [1999] 6 CLJ 234).

Section 14(1) of the Employment Act 1955 provides as follows:

An employer may, on the grounds of misconduct inconsistent with the fulfilment of the express or implied conditions of his service, after due inquiry:

(a) dismiss without notice the employee;
(b) downgrade the employee; or
(c) impose any other lesser punishment as he deems just and fit, ... .

In the case of Taylor v. Parsons Peebles Ne I Bruce Peebles Ltd. [1981] 1 IRLR 119 the Employment Appeal Tribunal had held as follows:

“ The Industrial Tribunal had erred in holding that the respondents had acted reasonably in dismissing the appellant in accordance with their policy of dismissing any employee who struck another.

In determining the reasonableness of an employer's decision to dismiss, the proper test is not what the policy of the employer was but what the reaction of a reasonable employer would be in the circumstances.

That the employer's code of disciplinary conduct may or may not contain a provision to the effect that anyone striking a blow would be instantly dismissed therefore is not to the point.

That provision must always be considered in the light of how it would be applied by a reasonable employer having regard to equity and the substantial merits of the case. That includes taking account of the employee's length of service and previous record.

(the principle has been employed in a local case of Jye Tai Precision Industrial (M) Sdn. Bhd. V. Victoria Arulsamy [2001] 2 ILR 445)

Constructive Dismissal

The doctrine of constructive dismissal in Malaysia has been expounded in the Supreme Court decision in Wong Chee Hong v. Cathay Organization (M) Sdn Bhd [1988] 1 CLJ 45; ([1988] 1 CLJ (Rep) 298)

The Supreme Court explained that when an Industrial Court is dealing with a reference under s.20 of the Industrial Relations Act 1967, the test for ‘constructive dismissal’ is what is referred to as the ‘contract test’ and not the nebulous test of ‘unreasonableness’

For an employee to claim constructive dismissal , the following four conditions must be met (see Bryn Perrins' Industrial Relations and Employment Law)

There must be a breach of contract by the employer. This may be an actual breach or any anticipatory breach;
That breach must be sufficiently important to justify the resignation of the employee, or else it must be the last in a series of incidents, albeit erroneous interpretation of the contract by the employer, will not be capable of constituting a repudiation in law;
he must leave in response to the breach and not for some other, unconnected reason; and
he must not delay too long in terminating the contract in response to the employer's breach, otherwise he may be deemed to have waived the breach and agreed to vary the contract ...

If the employee leaves in circumstances where these conditions are not met, he will be held to have resigned and there will be no dismissal.

The principle has been quoted in numerous reported decisions on constructive dismissal such as in Eng Lian Enterprise Sdn Bhd v. Stephenie Liew Foong Ming [1999] 1 ILR 573).

Example instances of Constructive Dismissal:
Humiliation
Demotion
Transfer
Reduction in benefits
Change in terms of service

Remedies for Dismissal Without Just Cause

Reinstatement

This is the primary relief conferred on the Industrial Court by the Industrial relations act 1967 (IRA).

The Industrial Court is to inquire into an employee’s representation to be reinstated on the basis that he considers himself to have been dismissed without just cause or excuse.

The Industrial Court has no jurisdiction to inquire into the reference or to award any form of relief if the employee does not wish to be reinstated to his former job (Holiday Inn, Kuching v Lee Chai Siok Elizabeth [1992] 1MLJ 230)

When the trust of the employer/employee relationship has broken down, reinstatement would not be proper a remedy by the Court (Kulim Club v Gobinath Vassu [2003] 1 ILR 207)

Monetary Compensation + Reinstatement

The Federal Court in Dr. A Dutt v Assunta hospital [1981] 1 MLJ referred to and agreed with the decision of the High Court in Penang in Goon Kwee phoy v J&P Coats (M) Bhd [1981] 2 MLJ129, expressly held that:

Compensation could be awarded to a workman who had been dismissed without jut cause or excuse.

This saying, reinstatement is thus not the only remedy granted by the court.

As per s. 30(6) of the Industrial Relation Act 1967 that “in making its award, the Court shall not be restricted to the specific relief claimed by the parties…”

Monetary Compensation only

The Court may also award back wages with compensation in lieu of reinstatement, even though they are poor substitute compared to reinstatement (Sama Subur S.B. v Kandasamy a/l Athiappan @ Kelvin [1991] 2 ILR 734a)

In the assessment of compensation in lieu of reinstatement, the court takes into account the following:

One months’ wages for each completed year of service (International Planned Parenthood Federation v Tuan Syed adam al-Jafri [1982] 2 ILR 116b) .
Back pay to be from the date of dismissal to the date of conclusion of hearing, subject to a maximum of 24 months (Practice Note No. 1 of 1987 issued by the President of the Industrial Court).
Discounts, such as contractual increments that an employee is entitled to