The Covid-19 pandemic has thrown businesses into unchartered territories. The uncertainty is not only about when authorities would allow businesses to fully resume operations but rather when consumers will be comfortable enough to begin spending at pre-pandemic levels. After months of home quarantine, consumers have developed new habits and new spending behaviours. Many have acquired heightened awareness of the difference between needs and wants resulting in them being more discerning now than ever when making purchase decisions. The question which looms in every business owner’s mind is not when businesses will regain momentum but rather if situations will ever return to pre-pandemic levels.
In light of this uncertainty, business owners understand the need for their operations to remain as nimble and as flexible as possible and will naturally lean towards making fewer long term commitments. But does entering into more flexible contracts like hiring contractual workers as opposed to permanent employees afford them this flexibility and does it really free employers from obligations owed under permanent contracts?
Employers Obligations towards Permanent Employees
In general, under the Employment Act 1955 (“EA 1955“), an employee is defined under the First Schedule, Paragraph 1 of the EA 1955 as any person irrespective of his occupation, who has entered into a contract of service with an employer under which such person’s wages do not exceed RM2000 a month or irrespective of the amount of wages he earns in a month, has entered into a contract of service with an employer as the following:
- Manual labour (including as an artisan or an apprentice)
- Transport operator/maintenance provider for mechanically propelled vehicle operated for the transport of passengers or goods or for reward or for commercial purposes
- Supervisor of manual labours
- Person employed on vessels or
- Domestic servant
Employers will be bound to comply with all the statutory requirements and provide the employee benefits as stipulated under the EA 1955 which includes among others a minimum number of annual leave, sick leave, termination benefits, work hours, overtime pay and termination benefits.
For all other employees who receive wages exceeding RM2,000 or do not fall within the definition of an employee under the EA 1955, the obligations and rights of the employer and employee will typically be governed by the contract of service which had been entered into by the parties.
For both these categories of permanent employees, the employer is obligated to provide the statutory benefits such as the EPF, SOCSO, EIA and comply with withholding income tax requirements among others.
Employers Obligations towards Contractual Workers
Typically, permanent employees will be hired under Contract of Service while contractual workers are hired under Contract for Service. A person hired under a Contract for Service is generally not considered an employee under the EA 1955 or a workman under the Industrial Act 1967 and employers are not obligated to provide the worker with the statutory benefits.
However, businesses are reminded that simply terming a contract as a Contract of Service or a Contract for Service is not in itself definitive whether the employee is a permanent employee or a contractual employee. The determination of whether a person is an employee or a contractual worker will for all intent and purposes depend among others, on the following non-exhaustive list:
- the nature of work performed by the individual;
- the degree of control exercised by the employer over the individual;
- the length of time / the period in which the individual performed the work
- the contractual terms, if any; and
- whether the individual was treated the same as other permanent employees in the Company.
In some instances, if the Contract for Service has been repeatedly renewed by the employer, the employee would be considered to be under a Contract of Service. The employer would then be obligated to provide and pay all statutory benefits to the employee and would only be able to terminate the employee with just cause and excuse.
Careful Drafting of Employment Contract
It is therefore imperative that businesses when employing contractual workers obtain proper guidance from appropriate sources. It is not enough to simply change the term of Contract of Service into a Contract for Service or removing the provisions on statutory benefits from the contract.