LIFTING THE CORPORATE VEIL IN INDUSTRIAL DISPUTES (NEW!14/8)

As a general rule, employees who are unfairly dismissed can only sue their direct employers, and not the parent company. This is because each Company is a separate legal identity, and a subsidiary is separated from its holding Company.

 

In the recent case of Ahmad Zahri bin Mirza Abdul Hamid v Aims Cyberjaya Sdn. Bhd. [2020] MLJU 595 (hereinafter referred to as the “Ahmad Zahri case“), the Federal Court laid down some essential rules regarding piercing the corporate veil in industrial dispute cases where the Company belongs to a group of Company.

 

In this article, we will summarize the necessary facts and principles of this case, and provide some suggestions on how this judgment affects the Employers in Malaysia.

 

 

BRIEF FACTS OF THE CASE

In Ahmad Zahri case, the employee, a Singaporean citizen, was employed as a Consultant in AIMS Data Centre 2 Sdn. Bhd. (hereinafter referred to as “ADC”) in the year 2009. The said employee signed a fixed-term employment contract of 12 months with ADC (hereinafter referred to as “Employment Contract“). The Employment Contract was renewed three times by ADC in the subsequent years (i.e 2010, 2011, and 2012) and all other terms remained the same.

 

In 2012, ADC renewed the employee’s Employment Contract for a further period of 12 months. This time, however, the employee was no longer employed by ADC but instead AIMS Cyberjaya Sdn. Bhd (hereinafter referred to as “the Company”) was the contracting party in the Employment Contract. ADC was subsequently consolidated into the Company.

 

In the following year, the Company offered the said employee an extension of employment for further 12 months, but on terms less favourable than his previous Employment Contract. The employee objected to the variation of his Employment Contract. As a result, the employee subsequently received a letter notifying him of an early release from his Employment Contract. As consequence, the employee brought a claim for unfair dismissal against the Company.

 

EMPLOYEE’S UNFAIR DISMISSAL CLAIM AGAINST GROUP OF COMPANIES

 

At the Industrial Court, the Chairman found that the said employee was in continuous employment from ADC to the Company. The Industrial Court further held that the Employment Contract was not a genuine Fixed-Term contract, and it was, in fact, a Permanent Contract. Hence, the Industrial Court held that there was unfair dismissal and awarded 24 months’ backwages and compensation to the employee. The High Court upheld this decision.

 

The Court of Appeal, however, allowed the Company’s appeal and took the view that the Employment Contract was a Fixed-Term contract. In this regard, the Court of Appeal opined that ADC and the Company were two separate entities, and the Industrial Court was wrong to pierce the corporate veil and treat the Employment Contract as a Permanent Contract. The Court of Appeal further took into consideration that an expatriate who requires a work permit to work in Malaysia can never be a permanent employee in Malaysia.

 

On appeal, the Federal Court disagreed with the interpretation given in the case by the Court of Appeal and proceed to affirm the Industrial Court’s decision. It was the Federal Court’s view that ADC and the Company were part and parcel of the same group. As such, ADC and the Company must be deemed an “essential unity of group enterprise” and common employers.

 

OTHER IMPORTANT PRINCIPLES LAID DOWN BY THE FEDERAL COURT

 

  • Foreigners can be permanent employees.

Previously, foreign employees with an employment pass can only be employed on a Fixed-Term basis. However, the Federal Court in Ahmad Zahri made clear that citizenship is not a relevant factor in determining whether an employment contract is Fixed-Term or Permanent. Our labour laws do not create a distinction between Malaysians and non-Malaysians. All workers should be treated with fairness, dignity and equality, whether they are locals or foreigners.

 

  • A Contract of Employment which is renewed successively without application by the employee, and without any intermittent breaks in between is, in reality, a permanent contract.

The mere description of an employment contract as ‘Fixed-Term’ is not conclusive of whether an employee was indeed employed as such. This is because in deciding whether there is a genuine fixed-term contract, the Court will examine three main factors:

 

  1. The intention of the parties;

  2. The employer’s subsequent conducts during employment; and

  3. The nature of the employer’s business and the nature of the employee’s work.

HOW WILL THIS DECISION AFFECT EMPLOYERS?

 

Following this Ahmad Zahri case, Employers in a group of companies can no longer rely on the doctrine of separate legal entity to avoid responsibility in industrial disputes. Where an employee is employed by a subsidiary company or a group of companies, the Court is allowed to pierce the corporate veil to see who is a genuine employer. If the companies are operating as one business enterprise, the Court may decide that they are joint employers whenever it is just to do so.

 

As such, we are of the view that Employers should be more mindful when employing someone on a Fixed-Term contract, as the Court may look beyond the wording of the employment contract to decide whether there is a genuine Fixed-Term contract, or not. It is also highly risky for an employer to repeatedly renew a Fixed-Term contract. The higher the number of renewals, the higher the possibility that the Court may decide that the Fixed-Term contract is just a sham and the employee should be treated as a permanent employee.

 

Disclaimer: This article is intended for general information and education purposes only and not to provide legal and professional advice. If you have any questions on employment law, please contact us today at info@chernco.com.my, or send us a direct message through the WhatsApp button on our website.

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