Outsourcing Agents and their Practices: An ‘Illegality’ and Injustice that Must End
Employment relationships must respect worker rights guaranteed by law
by Charles Hector
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 outsourcing agents that supply workers to factories, plantation companies, construction companies and all sorts of different workplaces to people who own and control these workplaces (after this referred to as ‘company’). The workers supplied remain the workers of the outsourcing agents. They are not employees of the company that they work at. This practice is odd. It differs from the practice employed by private employment agencies and/or ‘head hunters’.
For the work done, the factory pays the outsourcing agent a fee that is calculated based on the days/hours of work, overtime,
work on rest day and/or public holidays and which shift the individual worker works. The outsourcing agent, after taking their share pays the worker their wages. For example, in an eight-hour day, the company pays the outsourcing agent RM40. He then pays the worker RM20 only. Sometimes the outsourcing agent may take more than 50%. The more the worker works, the more the outsourcing agent gets.
In Malaysia, these practices that were previously used for migrant workers are now being used for local workers, including workers from Sarawak and Sabah. Instead of employing the workers, many employers prefer to use workers supplied by outsourcing agents directly in order to avoid employment relationships.
This reduces the duties and obligations imposed by law on employers such as ensuring that workers enjoy minimum legally guaranteed rights as provided for in the Employment Act 1955 and other laws in Malaysia. Outsourcing agents market this employment set up by emphasizing that the companies need focus only on their business without having to worry about their workers.
In this article, we consider, amongst others:
(a) 1- whether the outsourcing agent is legal;
(b) 2- whether what is being practised by these outsourcing agents, companies and workers is legal; and
(c) 3- proposals about how to bring about more just situation especially for all workers in Malaysia.
Dawn of the ‘outsourcing’ concept
On 5 July 2005, the Cabinet Committee on Migrant Workers allowed the employment of migrant workers using the outsourcing concept.1
This did not simply mean the supply of migrant workers to a company but included 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. Its purpose was not to usurp the role of the employer from the companies these workers were supplied to. It was about outsourcing some of the obligations an employer of migrant workers had.
Alas, the practice of outsourcing agents has gone far beyond what the Cabinet Committee envisioned. They gave the false impression that companies that used these workers avoided employment relationships. More importantly, these employers did not have to adhere to any of the duties and obligations of employers under the law and ensuring that all these workers enjoyed the full rights provided for workers.
The intention of the government was not to make these outsourcing agents employers but mere suppliers of workers. These outsourcing agents may assist employers with some of their obligations to the migrant workers; however, the employers would still be directly responsible for the workers. The outsourcing agents would be merely agents of the employers taking care of, amongst others, accommodation, transportation, medical check-ups, getting the necessary insurances for workers and payment of wages.
The Deputy Prime Minister, after chairing the Cabinet Committee on Foreign Labour and Illegal Foreign Workers, wass
reported in May 2010 to have said, “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.”2
Existing law also binds the government of the day. Any decisions they do or make that are contrary to existing law will still be null and void ab initio. Likewise, any actions done pursuant to such decisions are also null and void.
Legality of outsourcing agents
What outsourcing agents do is basically find and supply workers to companies; they are a ‘contractor for labour’. The Employment Act 1955 has no provision for ‘contractor for labour’; only ‘subcontractors 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 subcontractor has contracted to carry out for a principal or contractor, as
the case may be.3
This does not assist in legalising outsourcing agents as they supply workers to the company as the principal, not a contractor or a sub-contractor.
The Malaysian Government came to realise that these outsourcing agents were illegal and tried to introduce ‘contractors for labour’ into our employment laws vide the Employment (Amendment) Bill 2010 that was tabled in Parliament in July 2010.
However, due to protests from many quarters including the trade union movement 4 the said Bill was withdrawn in October 2010 5. In any event, even if that Bill had become law, it would not have retrospective effect and could not have legalised these ‘contractors for labour’.
Outsourcing agents are therefore still illegal.
Another act of relevance would be the Private Employment Agencies Act 1981, and the definition section 6 could have covered outsourcing agents. Migrant workers could also be covered as the definition of worker7 does not distinguish between local or foreign worker. What is good about this law is that the fees 8 are fixed by law, and it cannot be arbitrarily decided by employment agencies.
Even if these outsourcing agents came into being pursuant to this Act, then still what they are practising, 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 introduction of the Employment Act 1955, a new era of a more just employment relationship and worker rights in Malaysia dawned. Third parties and middlemen involvement in employment relationships ended. The only permitted relationship was a direct employer-worker employment relationship.
The Act also provided for a secure permanent employment relationship until retirement. However, this could be earlier 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, or by reason of misconduct committed by the worker whose termination would require a domestic inquiry. Even in cases of retrenchment not because of closure, the onus is 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 though the quantum depends on the number of years of employment.
The Employment Act 1955 also introduced minimum worker rights and employer obligations, and if an employment contract (contract of service) or an agreement provided for less favourable terms than what is provided by this law, then the more favourable terms in the Act prevails.9
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/hospitalisation leave and maternity leave and benefits. This is contrary to law.
These practices often result in discrimination at the workplace.
Workers supplied by these outsourcing agent are treated differently and often worse
than other workers at the same company. This, I believe, is contrary to article 8 of the Federal Constitution which guarantees equality to all persons.10 This concern about non-discrimination at the workplace is something that Parliament felt important enough to insert by amendment a prohibition against discrimination on the basis of whether one is a local worker or migrant worker.11
As mentioned earlier, there can be no more middle-person in an employment relationship, and as such this also makes the practices of outsourcing agents and companies also wrong in law.
Negative implication to workers and their unions
The practices employed by some outsourcing agents and companies are detrimental to other workers and/or their unions. The influx of migrant workers weakens the bargaining powers of local unions when in disputes between employers and workers or when negotiating collective agreements. For the company, outsourced workers are not considered as their workers (employees) so they would 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 migrant workers complain and claim their rights, it is easy for the company to ‘terminate’ and dismiss them. No due process is needed. All they need to do is instruct the outsourcing agent to remove the worker. Strikes or protests would be less effective as more and more workers working at companies are supplied by outsourcing agents. These workers are often too fearful to stand up for rights for fear of losing their jobs at the company which can be done 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 becoming ubiquitous in many countries. So serious is the concern that it 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.”12
ILO provided guidelines that could be used to counter or unmask attempts to evade employment relationships so that worker rights can continue to be recognised and protected.
Unmasking the disguises – Examples from other jurisdictions
In United Kingdom, in the Dacas case,13 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 maybe 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 English Court of Appeal in the Cable & Wireless PLC case 14 confirmed an earlier case in favour of implying a contract of employment as a matter of necessity (Dacas v Brook Street Bureau (UK) Ltd  IRLR 359). There, the Court of Appeal enforced a mutuality test which contains two elements to consider in deciding who is an employee in situations where there is a chain of relationships and triangular relationships.
The two elements are, firstly, an obligation to provide work and, secondly, 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 Cable & Wireless were obliged to provide Mr Muscat with work and Mr Muscat was obliged to attend the premises and do the work subject to the control of the company’s management.15
In Canada, the most frequently cited ‘test’ of who is an ‘employee’ in Canadian employment jurisprudence was articulated by Lord Wright in a Privy Council decision in Montreal v Montreal Locomotive Works Ltd et al,  1 DLR 161 at p 169 (PC). His Lordship 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.16
The Japanese courts have judged that an employment relationship exists 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 Mar 1997, Rodo Hanrei No 719, p 38).17
Following these decisions, the courts in Malaysia, I believe, should come to a similar conclusion, i.e. it is the company that is the employer; not the outsourcing agent.
When immigration department and official documents cloud 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. This states the worker is employed as an ‘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 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 continue to avoid employment relationships are allowed to exist for so long without any legal challenge. This was probably because earlier on most of these ‘outsourced workers’ had been migrant workers. Even if they tried to claim their rights they would have likely been terminated and sent back quickly to their home country.
There are still no clear provisions in Malaysia’s Employment Act 1955, like the one found in the Industrial Relations Act 1967,18 that prohibit employers from discriminating against and/or terminating workers that resort to claiming their rights, be it to the employer or by utilising some other legal avenue of access to justice like the Labour Department. It is commendable though that some 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 government is another problem. Though the decision to allow this ‘outsourcing’ concept by the Cabinet Committee was formulated in July 2005, it only came to light in a report in 2007. Malaysia should emulate neighbouring Thailand where every Cabinet decision is immediately published and made available to the public as Cabinet Resolutions.
Malaysian Trade Union Congress (“MTUC”)19 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 have meetings with employers and workers representatives, being the Malaysian Employers Federation (“MEF”) and MTUC 20 but today whilst workers are still being represented by one organisation, the employers are represented by many more organisations. This is unjust to the workers.
Outsourcing practices benefit employers to the detriment of workers. The government’s statement about 10 months ago that employers should be fully responsible for their workers, not outsourcing agents has proven to be empty talk.
The way forward
It is sad that there may be over 200 outsourcing agents in Malaysia, which are not only illegal but also prejudicial in the practices they employ. Short of eliminating them completely, the only solution may be to bring them under the Private Employment Agencies Act 1981. This would restrict their role to just supplying workers to companies who would then enter into a transparent direct employment relationship with these workers.
Statements of intentions alone are insufficient. What is urgently needed 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 discarded but not forgotten.
23 Mar 2011
1 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 33rd (JKK-PA) Bil. 2/2005.
2 Higher levies for foreign workers, New Straits Times, 21 May 2010.
3 Section 2(1) of the Employment Act 1955.
4 Labour law amendments by Syed Shahir Syed Mohamud (ALIRAN Monthly). Syed Shahir Syed Mohamud, president of the Malaysian Trades Union Congress (“MTUC”), delivered this speech at a public forum ‘Labour Law Amendments? — What does it mean to you?’, organised by Bar Council in Kuala Lumpur on 21 Aug 2010.
5 Employment Bill withdrawn, the Star,13 Oct 2010.
6 Section 3 of the 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.
7 Section 3 of the 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.
8 Section 14(1) of the Private 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, item (iv) of the Schedule read as follows:
(iv) Placement Fee
(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.
9 Sections 7 and 7A of the Employment Act 1955
10 Article 8(1) of the Federal Constitution —
“All persons are equal before the law and entitled to the equal protection of the law.”
11 Section 60L of the Employment Act 1955.
12 See also The Employment Relationship: An annotated guide to ILO Recommendation No 198.
13 Dacas v Brook Street Bureau (UK) Ltd  IRLR 359 (Court of Appeal).
14 Cable & Wireless PLC v Muscat  IRLR 355.
15 Paragraph copied almost in toto from The Employment Relationship: An annotated guide to ILO Recommendation No 198.
16 Paragraph copied almost in toto from The Employment Relationship: An annotated guide to ILO Recommendation No 198.
17 The Employment Relationship: An annotated guide to ILO Recommendation No 198.
18 Section 5(1) of the Industrial Relations Act 1967 “…
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; ...”
19 Malaysian Insider, 15 July 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.”
20 MTUC represents less than 8% of the total workforce, and only a few of the 1.9 million migrant workers are members of unions.
Source: Malaysian Bar’s Praxis Apr–June 2011, pages 25 – 28
1. 1. Malaysian worker, led by the MTUC, organized public protests on 3/10/2011, 3/11/2011 and also 3/12/2011. Protest have been ongoing against these proposed amendments since 2010, and they were successful in getting the government to withdraw the 2010 Bill, which was re-tabled again with almost no significant changes in 2011.
2. 2. 115 civil society groups and trade unions from all over the world, which included the MTUC and various international unions, including the International Trade Union Confederation[ITUC who represents 175 million workers in 151 countries and territories and has 305 national affiliates) who issued a joint media statement entitled “Malaysia Must Protect Worker and Union Rights, and withdraw proposed unjust amendments to Employment Act - Labour Suppliers Should Not Be Employers” dated 28/10/2011, and letters and statement were sent to Malaysian Prime Minister, Minister of Human Resources and others, and as of 2/3/2012 there has no response whatsoever.
3. 3. Employment (Amendment) Bill 2011 was passed by the Dewan Rakyat (the lower house of Parliament) on 6/10/2011, and by the Senate on 22/12/2012. To become law, it needs the assent of the King, and to become effective it must but into force by the government of the day. Media coverage of the protests and the reasons for the objections have been most disappointing.
4. 4. Minor typo errors in the article published have been corrected by the author