Outsourcing Agents and their Practices: An ‘Illegality’ and Injustice That Must End

Outsourcing Agents and their Practices: An ‘Illegality’ and Injustice That Must End

-Employment Relationships Must Respects Worker Rights Guaranteed By Law -

A worker who works in a factory, under the supervision and control of the employer using the tools provided by the factory or workplace, just like every other worker in the factory, and is remunerated for the work he does at the factory, is alleged to be not employed by the owner of the factory or the workplace but by some third party.

In Malaysia, we have the outsourcing agent and/or outsourcing company (hereinafter referred to as ‘outsourcing agents’), and they supply workers to factories, plantation companies, construction companies and all sorts of different workplaces to people who own and control these workplaces (hereinafter referred to as ‘company’), and the workers supplied allegedly remain the workers of the outsourcing agents, and not become the workers of the company that they work at. This practice is odd, and differs from the practice employed by private employment agencies and/or ‘head hunters’.

For the work done, the factory pays this outsourcing agent party a sum of monies which is calculated based on the days/hours of work, overtime, work on rest day and/or public holidays and which shift the said individual worker worked. The outsourcing agent, after taking their share pays the worker their wages. As an example, for an 8 hour day the worker works, the company pays the outsourcing agent RM40, and he pays the worker the sum of RM20 only, whereby sometimes the outsourcing agent may be taking more than 50% of what the company pays for the work done by the worker. The more the worker works, the more the outsourcing agent gets.

In Malaysia, is that these practices that previously were used for migrant workers, is now also being used for local workers, including workers from Sarawak and Sabah. Many employers, rather that going for direct employment are starting to use workers supplied by these outsourcing agents, in order to avoid employment relationships with their workers, and thus also the duties and obligations imposed by law on employers, including ensuring that workers do enjoy minimum legally guaranteed rights as provided for in Employment Act 1955 and other laws in Malaysia. Outsourcing agents have been marketing this practice saying that in this way companies need focus only on their business, without having to worry about their workers.

In this article, we would be considering, amongst others, (a) whether the outsourcing agent is legal , (b) whether what is being practiced by these outsourcing agents, companies and workers is legal, and (c) proposals about how to bring about more just situation especially for all workers in Malaysia.

Dawn of the ‘outsourcing’ concept

On 5/7/2005, the Cabinet Committee on Migrant Workers decided to allow the employment of migrant workers using the outsourcing concept[i] . It was not just about the supply of migrant workers to company, but also the outsourcing of the management of certain matters related to the employment of migrant workers including accommodation, transportation, paying wages, medical examination and also the obligations to get the necessary insurance coverage for these workers. It was primarily intended for smaller companies who may lack the necessary resources to manage migrant workers full time, and also for bigger companies who may have a sudden need for extra workers by reason of peak seasonal harvest. There was no indication about any usurping of the role of employer from the companies these workers were supplied to, but it was more about outsourcing some of the obligations an employer of migrant workers had.

But alas, the practices of these outsourcing agents seems to have gone far beyond what was envisioned, and they started giving the false impression that companies that used these workers did in fact avoid employment relationships, and would not be compelled to adhere to any of the duties and obligations of employers as per law, including ensuring that all these workers enjoyed the full rights provided for workers in Malaysian law.

The intention of the government seem to have been not to make these outsourcing agents employers, but mere suppliers of workers, who may also possibly assist employers with some of their obligations to their migrant workers. The employer’s responsibility would still be with the company, and these outsourcing agents would be just agents of the employers taking care of, amongst others, accommodation, transportation, medical check-ups, getting the necessary insurances for workers and payment of wages. Our Deputy Prime Minister, after chairing the cabinet committee on foreign labour and illegal foreign workers, was reported in May 2010 as saying "We feel that employers are the people who should be responsible for their foreign workers. Outsourcing companies are only responsible for bringing them in. After that, employers must assume full responsibility."[ii]

The government of the day is also bound by existing law, and decisions that they do make that are contrary to existing law will still be null and void ab initio. Likewise, any actions that are done in reliance of such decisions are also null and void.

Legality of Outsourcing Agents

What outsourcing agents do is basically is find and supply workers to companies, who then work at the company, and that would make a outsourcing agent a ‘contractor for labour’. When we look at the Employment Act 1955, we find that there is no provision for ‘contractor for labour’, only ‘sub-contractors for labour’ which is defined as “… any person who contracts with a contractor or sub-contractor to supply the labour required for the execution of the whole or any part of any work which a contractor or sub-contractor has contracted to carry out for a principal or contractor, as the case may be”[iii] This does not assist in legalizing outsourcing agents as they supply workers to the company, the principal not a contractor or a sub-contractor.

The Malaysian government came to a realization that these outsourcing agents were illegal, and tried to introduce ‘contractors for labour’ into our employment laws, vide D.R.25/2010 Employment (Amendment) Bill 2010, that was tabled in Parliament in July 2010. But following protests from many quarters including the trade union movement [iv], the said Bill was withdrawn in October 2010[v]. In any event, even if that Bill had become law, it would not have had any retrospective effect and could not have legalized, what was now already admitted indirectly by the government as being illegal. Hence, outsourcing agents are still illegal today.

Another act of relevance would be the Private Employment Agencies Act 1981, and the definition section[vi] could have covered outsourcing agents. Migrant workers could also be covered as the definition of worker[vii] does not distinguish between local or foreign worker. What is good about this law is that the fees[viii] are fixed by law, and it is cannot be arbitrarily decided by Employment Agencies. Even if, these outsourcing agents came into being pursuant to this Act, then still what they are practicing in respect the monies that they are getting from workers and/or their employers would certainly be a breach of this law.

Legality of the Practices of Outsourcing Agents and Companies

With the advent of our Employment Act 1955, dawned a new era of a more just employment relationship and worker rights in Malaysia. Third parties and middle men involvement in employment relationships ended, and the only permitted relationship was a direct employer-worker employment relationship.

The Act also provided for a secure permanent employment relationship until retirement, which could be prematurely ended by very clear ways, being, the resignation of the worker, the closure of the company, the cessation or changes in the company’s operations that brought about redundancy and hence retrenchment and/or lay-offs, and by reason of a misconduct committed by the worker whereby termination would first require due process – a domestic inquiry. Even in cases of retrenchment not because of closure, there is an onus placed on the employer to find some other suitable alternative work in the company before ending the employment relationship. The law also provides for termination and lay-off benefits, whereby the quantum depends on the number of years of employment.

Employment Act 1955 also introduced minimum worker rights and employer obligations, and if an employment contract (contract of service) or an agreement provide for less favourable terms than what is provided by this law, then the more favourable terms in Employment Act prevails.[ix]

In the case of the practices employed by some outsourcing agents and companies, workers seem to be paid only for the day/hours that they work, but they do not get the other rights like paid one rest day per week, paid annual leave, paid public holidays, paid sick/hospitalization leave and maternity leave and benefits, and as such this is contrary to law.

These practices also often result in discrimination at the workplace, whereby workers supplied by these outsourcing agent are also treated differently and worse than other workers at the same company, and this, I believe, is also contrary to Article 8 of the Federal Constitution which guarantees equality to all persons.[x] This concern about non-discrimination at the workplace is something that Parliament felt important so much so to insert by amendment prohibition against discrimination on the basis of whether one is a local worker or migrant worker.[xi] Surely, this current discrimination against workers supplied by outsourcing agents, who are both local and migrant workers, is something that Malaysia will not be able to stomach.

As mentioned earlier, there can be no more middle-person in an employment relationship, and as such this also makes the practices of employment agents and companies also wrong in law.

Negative implication to workers and their unions

The practices employed by some outsourcing agents and companies is also detrimental to other workers and/or their unions, as this will certainly decrease the bargaining powers when it comes to disputes between employers and workers, and also when ironing out new collective agreements. For the company, outsourcing workers are taken as not being their workers, hence they would also most likely not be allowed to form and/or join unions, or participate in any negotiations and worker actions to get better terms and conditions for workers in the company.

Even when these workers supplied by outsourcing agents do complain and claim their rights, it so easy for the company to ‘terminate’ and get rid of them. No due process is needed, and all they need to do is get the outsourcing agent to take the worker away as the company no longer wants the said worker.

A strike and/or a protest also would also become less effective as more and more workers working at companies are getting supplied by outsourcing agents, and these workers are just too scared to stand up for rights for fear of losing their jobs at the company which can be done easily without any requirement of due process or domestic inquiries.

Attempts to evade employment relationship is not peculiar to Malaysia

The use of various arrangements and practices to evade or disguise employment relationship is something that is happening in many countries, and is a serious concern that has even led the International Labour Organisation (ILO) to respond by coming out with R198 Employment Relationship Recommendation, 2006.

ILO’s wants, amongst others, to “combat disguised employment relationships in the context of, for example, other relationships that may include the use of other forms of contractual arrangements that hide the true legal status, noting that a disguised employment relationship occurs when the employer treats an individual as other than an employee in a manner that hides his or her true legal status as an employee, and that situations can arise where contractual arrangements have the effect of depriving workers of the protection they are due… Where there has been an attempt to disguise the employment relationship, there is a particular danger that workers will be deprived of the protections due to them.[xii]

ILO also has labored to provide guidelines that could be used counter or unmask attempts to evade employment relationships so that worker rights can continue to be recognized and protected.

Unmasking The Disguises – Examples from other jurisdictions

In United Kingdom, in the Dacas case[xiii], which involved a worker, an employment agency [Brook Street] that supplied the worker, and the end user [Wandsworth Borough Council (the Council)], the Court of Appeal had this to say:-

The totality of the triangular arrangements may lead to the necessary inference of a contract between such parties, when they have not actually entered into an express contract, either written or oral, with one another. Although there was no express contract between the applicant [worker] and the end-user [the Council] in this case, that absence does not preclude the implication of a contract between them…. There may be an implied contract, which may be characterised as a contract of service or as a contract for services…. That control was exercised by the Council, which supplied her clothing and materials and for whom she did the work. The fact that Brook Street agreed to do some things that an employer would normally do (payment) does not make it the employer…

The Court of Appeal in the Cable & Wireless PLC case[xiv] confirming earlier case law in favour of implying a contract of employment as a matter of necessity (Dacas v. Brook Street Bureau (UK) Ltd. [2004] IRLR 359), the Court of Appeal enforced a mutuality test having two elements for deciding who is an employee in situations where there is a chain of relationships and triangular relationships. The two elements are, on the one hand, an obligation to provide work and, on the other hand, an obligation to perform it coupled with control; it does not matter whether the arrangements for paying are made directly or indirectly (as in the facts of this case, through an intermediary firm that paid invoices submitted to it). An implied contract did exist between the worker and the end user, because the Cable & Wireless company was obliged to provide Mr. Muscat with work and Mr. Muscat was obliged attend the premises and do the work subject to the control of the company’s management.[xv]

In Canada, perhaps the most frequently cited “test” of who is an “employee” in Canadian employment jurisprudence was first articulated by Lord Wright in a Privy Council decision in Montreal v. Montreal Locomotive Works Ltd. et al., [1937] 1 D.L.R. 161 at p. 169 (P.C.), where he stated: “In earlier cases, a single test, such as the presence or absence of control, was often relied on to determine whether the case was one of master and servant, mostly in order to decide issues of tortious liability on the part of the master or superior. In the more complex conditions of modern industry, more complicated tests have often to be applied. It has been suggested that a fourfold test would in some cases be more appropriate, a complex involving (1) control; (2) ownership of the tools; (3) chance of profit; (4) risk of loss. Control in itself is not always conclusive.... In many cases, the question can only be settled by examining the whole of the various elements which constitute the relationship between the parties.”[xvi]

The Japanese courts have judged that there exits an employment relationship when the actual work circumstance lends itself to an employment relationship regardless of the provisions of the contract (SAGA TV Case: Fukuoka High Court Judgment 7 July 1983, Hanrei Jiho No.1084, p.126; SEN-EI Case: Saga District Court Takeo Branch Judgment 28 March 1997, Rodo Hanrei No.719, p.38).[xvii]

Following these decisions, the courts in Malaysia, I believe, would most likely come to a similar conclusion that it is the company that is the employer, not the outsourcing agent.

When Immigration Department and official documents clouds the truth

In Malaysia, one other document that attempts to disguise employment relationship is the Multiple Entry Visa or Work Pass/Visa issued by the Immigration Department to the migrant worker which now states that the worker is employed as ‘Outsourced Worker’ in which sector with ‘[name of the outsourcing agent]’ at ‘[address of the outsourcing agent]’. It is also interesting that in the past, if migrant workers were found to be working at another company and address, they would most likely be arrested and action taken against them because they have violated the conditions of the work pass/visa.

Surely, this document issued by a Department under the Ministry of Home Affairs, not even the Human Resource Minister, can be relied on for the determination of who is the real employer of a particular worker.

‘Illegal’ Unjust Practices Must End

It is sad that this practice of outsourcing agents and companies, that have attempted to avoid employment relationships have been allowed to exist for so long without any legal challenge. This was most probably because earlier on most of these ‘outsourced workers’ had been migrant workers, and even if they tried to claim their rights, they would have most likely been terminated and sent back quickly to their home country. Sadly, there is still no clear provision in Malaysia’s Employment Act 1955, like the one found in the Industrial Relations Act 1967[xviii] , that prohibits employers from discriminating against and/or terminating workers that resort to claiming their rights, be it to the employer or by utilizing some other legal avenue of access to justice like the Labour Department. It is a good thing though that same Labour Departments, when they do receive complaints from even ‘outsourced workers’ do consider the company as employer, and the outsourcing agent as agent.

The lack of transparency in our government is also a problem, for even this decision to allow this ‘outsourcing’ concept by the Cabinet Committee in July 2005 comes to light in a report only in 2007. Malaysia should try emulating neighboring Thailand, where every Cabinet decisions are immediately published and made available to the public as Cabinet Resolutions.

Malaysian Trade Union Congress (MTUC)[xix], and other groups have been calling for an end to outsourcing agents and their practices for many years but to no avail. Workers and unions are losing out, as the Malaysian government becomes more pro-employer. The government do have meetings with employers and workers representatives, being the Malaysian Employers Federation (MEF) and MTUC[xx], but today whilst workers are still being represented by one organization, whilst employers are represented by many more organisations, and this certainly unjust to workers.

The outsourcing practices certainly benefits employers to the detriment of workers. Government’s statement about 10 months ago that employers should be fully responsible for their workers, not outsourcing agents have not been followed up with necessary actions and enforcement to end these continuing practices that attempt to avoid and/or disguise employment relationships.

The Way Forward

It is sad that there may be over 200 outsourcing agents in Malaysia, which as was pointed earlier are not only illegal in being, but also by reason of the practices they employ. Short of eliminating them completely, the only solution may be to bring them under the Private Employment Agencies Act, which would mean that their role is would be restricted to just supplying workers to companies, who would then enter into a transparent direct employment relationship with these workers.

Statements of intentions alone is insufficient. What we need is immediate action for the good of all workers in Malaysia, both local and migrant workers, to ensure that justice be done. As a caring nation that upholds the law, what is illegal and unjust must be reaped out and trashed.

Charles Hector

23 March 2011

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[i] Contracts of Employment in Malaysia and the role of Trade Unions by Bruno Periera, citing as source the Report of the Round Table Conference on Migrant Workers in Malaysia 5/4/2007 ISMK-KSM. The reference of the Minutes of the Cabinet Committee on Migrant Workers was 33^rd (JKK-PA) Bil. 2/2005.

[ii] New Straits Times, 21/5/2010, Higher levies for foreign workers

[iii] Section 2(1) Employment Act 1955

[iv] Labour law amendments by Syed Shahir Syed Mohamud (ALIRAN Monthly) Syed Shahir Syed Mohamud is president of the Malaysian Trades Union Congress. (MTUC) delivered this speech at a public forum ‘Labour Law Amendments? – What does it mean to you?’, organized by the Bar Council in Kuala Lumpur on 21 August 2010..

[v] Star,13/10/2010, Employment Bill withdrawn

[vi] Section 3 Private Employment Agencies Act 1981 , private employment agency" means - (a) an employment agency conducted with a view to profit, that is to say, any person, company, institution, agency or other organisation which acts as intermediary for the purpose of procuring employment for a worker or supplying a worker for an employer with a view to deriving either directly or indirectly any pecuniary or other material advantage from either employer or worker; the expression does not include newspapers or other publications unless they are published wholly or mainly for the purpose of acting as intermediaries between employers and workers; (b) an employment agency not conducted with a view to profit, that is to say, the placing services of any company, institution, agency or other organisation which, though not conducted with a view to derive any pecuniary or other material advantage, levies from either employer or worker from the above service an entrance fee, a periodical contribution or any other charge;

[vii] Section 3 Private Employment Agencies Act 1981, "worker" means any person who works for hire or reward, whether as apprentice or not, and includes any person seeking such work.

[viii] Section 14(1) Employment Agencies Act 1981, “No private employment agency shall charge for any service rendered a fee other than or in excess of that prescribed in the Schedule and for every fee received a receipt shall be issued.” And currently, it is (iv)Placement Fees (i) Fee charged for local placement Not more than 20% of initial month's pay (ii) Fee charged for overseas placement Not more than 25% of initial month's pay; Provided where employers have already paid the agency for the services rendered, the worker shall not be charged on placement.

[ix] Section 7 and 7A Employment Act 1955

[x] Art 8(1) Federal Constitution - All persons are equal before the law and entitled to the equal protection of the law.

[xi] Section 60L Employment Act 1955

[xii] see also The Employment Relationship: An annotated guide to ILO Recommendation No. 198.

[xiii] Dacas v. Brook Street Bureau (UK) Ltd. [2004] IRLR 359 (Court of Appeal)

[xiv] Cable & Wireless PLC v. Muscat [2006] IRLR 355

[xv] Paragraph copied almost in toto from The Employment Relationship: An annotated guide to ILO Recommendation No. 198

[xvi] Paragraph copied almost in toto from The Employment Relationship: An annotated guide to ILO Recommendation No. 198

[xvii] The Employment Relationship: An annotated guide to ILO Recommendation No. 198

[xviii] Industrial Relations Act 1967, Section 5(1) “…No employer or trade union of employers, and no person action on behalf of an employer or such trade union shall -… (c) discriminate against any person in regard to employment, promotion, any condition of employment or working conditions on the ground that he is or is not a member or officer of a trade union; (d) dismiss or threaten to dismiss a workman, injure or threaten to injure him in his employment or alter or threaten to alter his position to his prejudice by reason that the workman - (i) is or proposes to become, or seeks to persuade any other person to become, a member or officer of a trade union; or (ii) participates in the promotion, formation or activities of a trade union;..”

[xix] Malaysian Insider, 15/7/2008, MTUC wants licences of companies outsourcing foreign workers withdrawn, "MTUC has repeatedly called on the government to ban the foreign workers outsourcing system which has subjected workers brought into the country to extreme hardship.”

[xx] MTUC represents less than 8% of the total workforce, and only a few of the 1.9 million migrant workers are members of unions.

[An article from Malaysian Bar's Praxis April-June 2011 Issue]