EMPLOYMENT AND INDUSTRIAL LAW
Legal Tests to Determine Employer-Employee Relationship:
Contract of Service Verses Contract for Services
Table of Contents
0.0
Disclaimer ................................................................................................................................... 2
1.0
Introduction ................................................................................................................................. 3
1.1
Employer ................................................................................................................................. 4
1.1.1
According to Employment Act 1955 ............................................................................... 4
1.1.2
According to Industrial Relations Act 1967 .................................................................... 4
1.1.3
Sabah/Sarawak Labour Ordinance .................................................................................. 4
1.2
Employee ................................................................................................................................. 5
1.2.1
According to Employment Act 1955 ............................................................................... 5
1.2.2
According to Industrial Relations Act 1967 .................................................................... 5
1.2.3
Sabah/Sarawak Labour Ordinance .................................................................................. 5
Contract OF Service verses Contract FOR Services ................................................................... 6
2.0
2.1
Contract of Service .................................................................................................................. 7
2.2
Contract for Services ............................................................................................................... 7
2.3
Difference between Contract OF Service and Contract FOR Services ................................... 8
3.0
Contract of Service Or Contract For Service: How to determine employer-employee
relationship? ............................................................................................................................... 9
3.1
Control Test ........................................................................................................................... 11
3.2
Independence Test ................................................................................................................. 12
3.3
Integration Test...................................................................................................................... 12
3.4
Multiple / Mixed Test ............................................................................................................ 13
3.5
Mutual Obligation Test ......................................................................................................... 14
3.6
Economic Reality Test .......................................................................................................... 14
Suggestion to Improve the System and Understanding ............................................................. 15
4.0
4.1
Trim Down The Acts (Law) .................................................................................................. 15
4.2
Education ............................................................................................................................... 15
4.2.1
Educate the Employee / Independent Contractor .......................................................... 16
4.2.2
Educate the Employer.................................................................................................... 16
4.3
Enforcement .......................................................................................................................... 17
5.0
Summary ................................................................................................................................... 18
6.0
Reference ................................................................................................................................... 20
1
0.0
Disclaimer
This essay is done to fulfill one of my semester requirements (assignment). The facts inside this
essay cannot be construed as all true or sound as I may have misinterpreted, misquote, or
mistook some or all of the facts. Furthermore, I (at the time of scripting this essay) am an
amateur and unschooled in law education. However, this essay is done by my own humble
effort. If you are going to quote or refer to my essay, please cite me. Thanks.
K Yati Chua
2
1.0
Introduction
On 23 October 2013, an armed security guard shot dead a bank officer in a robbery. On further
investigation, even though it can be said that the security guard was the bank employee too,
however, it was found that the security guard was actually not part of the bank employee but he
was a staff supplied by a security company.
In this sense, the traitorous guard was actually an employee to the security company but worked
as an independent (sub) contractor to the bank. In the event of getting compensation from the
former guard (if he ever get caught; and on the matter of monetary loss), the bank can only
claim it through the security company.
The deceased officer was the actual employee of the bank. So in the unfortunate event as this
the employer (the bank) is entitled to offer compensation to the deceased’s family according to
the (employment) law and other statutory responsibilities and also on moral or ethical ground.
Having to look at the above event, what actually was meant by employer and employee?
3
1.1
Employer
The definition of employer can be obtained from few sources namely:
1. Employment Act 1955;
2. Industrial Relations Act 1967;
3. Sabah Labour Ordinance 1950; and
4. Sarawak Labour Ordinance 1952.
1.1.1 According to Employment Act 1955:
Employer is “any person who has entered a contract of service to employ any other person as
an employee and this include the agent, manager or representative.”
1.1.2 According to Industrial Relations Act 1967:
Employer is “any person or body of persons, whether corporate or incorporate, who employs a
workman under contract of employment and includes the government and any statutory
authority unless otherwise stated expressly in this Act.”
1.1.3 Sabah/Sarawak Labour Ordinance:
Employer is “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, and
the word “employ”, with its grammatical variations and cognate expressions, shall be construed
accordingly”
4
1.2
Employee
The definition of employee can be obtained from few sources namely:
1. Employment Act 1955;
2. Industrial Relations Act 1967;
3. Sabah Labour Ordinance 1950; and
4. Sarawak Labour Ordinance 1952.
1.2.1 According to Employment Act 1955:
Employee is “any person or class of persons:

included in any category in the First Schedule; or

in respect of whom the Minister of Human Resources makes an order under subsection
(3) or section 2A.”
The First schedule, the subsection (3) and the section 2A refers to wages classification of the
workers/employees.
1.2.2 According to Industrial Relations Act 1967:
Employee (workman) is “any person including an apprentice, employed by an employee under
a contract of employment to work for hire or reward and for the purpose 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.”
1.2.3 Sabah/Sarawak Labour Ordinance:
Employee is “any person or class of persons—
1. included in any category in the Schedule to the extent specified therein; or
2. in respect of whom the Minister makes an order under subsection (7) of section 2A”
The schedule, subsection and section mentioned refer to wages classification as above.
5
2.0
Contract OF Service verses Contract FOR Services
There are two options that available for employers when they offer employment. They are
contract for service and contract of service. To some people, there is no difference between the
Contract of Service and Contract for services, as long as they are employed. However, in
essence, there are differences in both terms.
Butterworth Concise Legal Dictionary (Nygh & Butt, 1998) defines Contract of service as:
“a contract under which a person is engaged in the service of an employer to do such
work as is contracted for and where the employer directs what it is to be done.”
And contract for services is defined as:
“a contractual arrangement by which one person agrees to provide workplace services
to another. The contract is between two principals and neither is the employer or the
employee of the other. The person providing the services is an independent contractor.”
6
2.1
Contract of Service
In other word, a contract of service is:

an (or any) agreement;

whether in writing or oral;

expressed or implied, whereby:o one person agrees to employ another as an employee, and;
o The other person agrees to serve the employer as an employee.

essentially a relationship of employer/employee;

protected by Employment Act, Industrial Relations Act and other statutory
requirements.
2.2
Contract for Services
Meanwhile, a contract for services is:

an (or any) agreement;

whether in writing or oral;

expressed or implied, whereby:o one person agrees to employ another as an independent contractor, and in return;
o the other person will work for or on behalf of his/her “employer” on freelance
basis at a fee;

essentially a relationship of employer/sub-contractor or independent contractor;

protected by industrial and other civil laws.
7
2.3
Difference between Contract OF Service and Contract FOR Services
The difference between contract of service and contract for services can be summarized as
below:
Primary Law
Involved
Employee’s
Status
Contract of Service
Employment Act 1955 &
Industrial Relation Acts 1967
The status of the employee.
Wage / Fee
The payment of wages and
salaries.
Statutory
Requirements for
Income Tax,
EPF1 & SOCSO2
The employer and employee
relationship is regulated by the
employment legislations. E.g.:
the employer is responsible for
contributing a certain percentage
of the employee’s wages to the
EPF and SOCSO on behalf of the
employee and subjecting the
wages to deduction of income
tax.
Vicarious
Liability
[Present] The employer is liable
in tort for the wrong done by the
employee while at work.
Provision of Tools
& Facilities
The tools and facilities to
complete the work are provided
by the employer.
Termination of
Contract
The employee can make
representation through the
Industrial Court if he/she had
been (wrongly) dismissed.
Contract for Services
Industrial Relations Act 1967
The status as an independent
contractor, consultant, etc.
The payment of fees or retainer
and the need for the contractor to
submit payment invoices for each
piece of work completed.
There is no statutory requirement
to subject the payments of fees or
retainer to independent contractor
to the deduction of income tax or
contribution to the EPF or
SOCSO.
[Absent] Independent contractors
under a contract for services are
personally responsible for their
own torts.
The tools and facilities are
provided in the contractual terms,
but usually these are provided by
the contractor himself.
The independent contractor can
sue in the civil courts for breach
of contract.
There exist the rights and
responsibilities among the parties
concerned under general
contractual terms.
Table 1: Differences between contract of service & contract for services (Asmah et. al.,2013)
Rights &
Responsibilities
1
2
There exist the rights and
responsibilities of employers,
employees and vice- versa.
Employee’s Provident Fund
Social Security Organization (Malay: Pertubuhan Keselamatan Sosial or Perkeso)
8
3.0
Contract of Service Or Contract For Service: How to determine employeremployee relationship?
Even though there seem to be well-define definition between the two terms (of verses for), but
however, when dispute occurs between the employer and the employed (employee or subcontractor), the status of the employed must be determined before legal resolution of dispute
can be commence. This is because, both the “of” (employee) and “for” (sub-contractor)
employed are subjected to different set of laws, and “it determines the statutory protection that
applies” (Asmah Laili et al, 2013).
An example of why the determination of employee’s status must be determined can be seen in
the case of Dr A Dutt v Assunta Hospital (1981) [1981] 1 LNS 5. In one of the point in the case,
the council for the hospital argued that Dr. A. Dutt was actually an independent contractor (by
the implying the employment contract as “contract for services”), however, the Industrial Court
ruled that the applicant was actually an employee (contract of service). Thus, he was entitled to
the compensation due to his wrongful dismissal by the hospital. And it was further (finally)
supported by Court of Appeal (after 21 years of cross court battles!):
“1. The hospital argued that Industrial Relations was not meant for professionals. This was
rejected at all stages. Following that decisions employees employed in the capacity of
managers, executives, confidential and security come under as workman under the Act who
were engaged under a contract of service.” (Emphasis is ours)
9
There are quite a few legal tests used for determining the actual employer-employee
relationship:
Legal Test
Source
Court Case Example Usage of Test
1. Yewens v Noakes (1880)
2. Chye Hin Co (Perak) v PP (1960)
3. Bata Shoe Co (Malaysia) v EPF
Control Test
Asmah et al (2013)
Board (1967)
(Original Test)
4. Hoh Kiang Ngan v Industrial Court
[1996] 4 CLJ 687
5. EPF Board v M.S Ally & Co (1975)
Independence Test
(Essentially the opposite of control test)
1. Cassidy v Ministry of Health (1951)
2. EPF Board v M.S Ally & Co (1975)
Integration Test
Asmah et al (2013) 3. Stevenson, Jordan and Harisson Ltd v
(Organizational Test)
Macdonald and Evans (1952) 1 TLR
101
1. Morren v Swinton Pendlebury
Borough Council (1965)
2. Ready Mixed Concrete (South East)
Multiple/Mixed Test
Asmah et al (2013)
Ltd v Minister of Pensions (1968)
3. Casio (M) Sdn Bhd v Wahab Tuan
Idris (2110) 2 ILR 117
1. Market Investigation Ltd v Minister
of Social Security (1969) 2 WLR 1
Lee (2007)
Economic Reality Test
2. Lee v Chung & Shun Shing
Bell (2006)
Construction & Engineering Co Ltd
(1990) IRLR 236
1. Carmichael v National Power Plc
Mutual Obligation Test
Asmah et al (2013)
(1999) (2000) IRLR 43
Table 2: Legal Tests and Court Case Examples (Asmah et. al., 2013; Lee, 2007; Bell,2006)
10
3.1
Control Test
This is also called the Traditional Test, it determines how much control is being exercised over
the worker by the employer. The more control that is being exercised, it is more likely that the
worker is an employee regardless of what the contract says.
Traditionally ‘masters’ exercised actual control over their ‘servants.’ However, in more recent
days, as technology, education and even people become more advance or specialize, employees
will often know more about the subject area they are working in than their employers.
The control test does not therefore look at whether the employer is operating actual control, but
rather asks whether the employer could exercise control.
For example, a manager asks his IT executive to design and maintain company website in which
the manager has zero knowledge about web programming. The manager has the right to asks
what must be included in the website, he/she may even choose the colour and flovour of the
website theme (in control). However, he/she does not tell his/her IT executive how to do the
job (not in control or operating actual control). But, the manager does pay his/her employee’s
monthly wages, contributes in EPF and SOCSO, and exerts control over the working hour (in
control).
Essentially, the more control the employer has on the employed means the employed is more
likely to be employee. The less control the employer has on the employed means the employed
is less likely to be employee.
Nevertheless, the control test does not manifest a prima facie contract of service though the
element of control is fulfilled (or inversely, contract for service though the element of control
is not fulfilled).
In the case of Bata Shoe Co (Malaysia) v EPF Board (1967), the shop managers were employees
of BATA due to the considerable control which the company had over the shop managers.
However the salesman employed by the manager were not. They were instead the employees
of the manager!
11
3.2
Independence Test
It is actually the opposite of Control Test. It looks at how independent the employed is at doing
the given task/assignment. Does the employed have independence in deciding how the work is
to be done (procedurally different or different standard), can the employed adjusts or decides
his/her work hours (but still complete within dateline), can he/she subcontract out work, et
cetera.
This does not necessarily mean “working independently unsupervised” on a “routine” task; or
being “flexible” on doing tasks; or asked someone to help with an agreed fee. Control Test and
Independence Test must also look at other legal tests.
3.3
Integration Test
The Integration Test (or Organizational Test) refers to the fact that employees are an essential
group for an organization.
Is the job/work performed under the contract integral to the operation of the business structure
(as a whole), or is it only works on the side (accessory) of the main business? One feature which
seems to run through the instances is that:
1. under a contract of service, a person is employed as part of the business and his/her
work is done as an integral part of the business; whereas
2. under a contract for service, his/her work, although done for the business, is not
integrated into it but is only an accessory to it.
If the person is integrated in the “employer’s” organization structure, then most probably he is
an employee (even though the agreement says otherwise e.g. contract for services).
In the case of EPF Board v M.S Ally & Co (1975), the Federal Judge held that the working
assistants who managed the business of MS Ally & Co, was rewarded by a share of the profits,
as they were employees of MS Ally since there was sufficient control over the working
assistants.
12
In his word: “...the person rendering assistance forms a part of the organisation and the work
done is an integral part and not merely an addition to the business.”
3.4
Multiple / Mixed Test
The Multiple Test (or the Mixed Test) refers to the entire situation. In other words, all the
related and relevant factors are considered.
This is explained in Ready Mixed Concrete (South East) Ltd v Minister of Pensions (1968)
where the judge outlined several conditions for contract of service to exist:
1. The employee agrees that in consideration of wage or other remuneration, he will
provide his own work and skill in performing some service for the employer.
2. The employee agrees, expressly or impliedly, that in the performance of that service
he will be subject to the employer’s control to a sufficient degree. [Control Test]
3. The other provisions of the contract are consistent with it being a contract of service.
(Asmah et. al.,2013)
In that case, The company which was in the business of making and selling ready mixed
concrete (RMC) seem to have some measure of close control (which the workers must drive
ready mixed concrete lorries they were buying on hire purchase agreement from the appellant
company, which required in a detailed contract that they must among others use the lorry only
on company business, maintain it in accordance with the company’s instructions and obey all
reasonable orders).
However, there were no requirements about hours of work and the times at which the drivers
took holidays. Moreover, they could generally hire out the driving of their vehicle to another
and were paid. One Mr Latimer was under the impression of having contract of service instead
use the vehicle to do his own business!
The case was ruled in the favour of the company that the workers were not employee (but
independent contractor) and the company did not need to contribute in SOCSO.
13
3.5
Mutual Obligation Test
In Mutual Obligation Test, it requires that:
1. the employer feels obliged to offer work and;
2. the worker feels obliged to take it when offered.
In Carmichael v National Power Plc (1999) (2000) IRLR 43:
1. Guides who were employed as tour guides on a “casual as required” basis decided to
be self-employed; and
2. National Power had no obligation to offer them work; and
3. the guides were free to accept or decline any work that was offered to them.
(Asmah et. al., 2013)
There was no obligation on both side, thus, there was no contract of service.
In short, it is the intention of both parties that is important.
3.6
Economic Reality Test
Economic Reality Test (or Entrepreneur Test) has been used before as in Market Investigation
Ltd v Minister of Social Security (1969) 2 WLR 1. It offers deeper advantages whereby the
employer and worker have dressed up a master/servant relationship in the essence of a contract
for service. The basic question asked which makes it an economic reality test (after considering
the points in previous RMC case) is:
“Was the worker in business on their own account?”
However, the Court did not make this standing test as the previous tests are still relevant. An
application of this test can be seen in Lee v Chung & Shun Shing Construction & Engineering
Co Ltd (1990) IRLR 236.
In short, if such “employment” is an investment and entails financial risk, then it is contract for
services (instead of contract of service).
14
4.0
Suggestion to Improve the System and Understanding
It may seem a little too confusing considering the various legal tests adopted by the court to
classify worker whether they are employee or independent contractor. For example, you can
sign into a contract for services but you are actually an employee (e.g. MS Ally case), or, you
can agree to work as employee but after court consideration, you are actually just an
independent contractors (e.g. Bata case), or, you are actually an employee, but have to ask the
court to prove it to your employer because they do not want to compensate you for some reason
(e.g. after wrongful dismissal, e.g. as in Dr. A. Dutt case).
This is the author’s humble opinions to improve the system:
4.1
Trim Down The Acts (Law)
The other laws are seem to be complementing the employment laws. However, by another view,
is that they are “invading” the jurisprudence of each other. So, it is the opinion of the author
that those laws are trimmed down, or at least reorganized. For example, in Dr. A Dutt case, the
hospital argued that the Industrial Court exceed its jurisprudence several times while in the
same breath claimed that their former worker was not employee. Although in the end the Court
of Appeal did agree with Industrial Court’s judgments, however, it opens to arguments that the
said laws are seem contradictory and needed the court to verify or explain or even to vilify if
the upper Court disagree with lower Court judgment!
Another thing is that we have at least three (3) sets of employment “Acts” which are the
Employment Act 1955, and the Labour Ordinance of Sabah and Sarawak. In 1Malaysia spirit,
we should have just one (1) set of law.
4.2
Education
The sections regarding the enforcement and punishment is already in the law. The only thing is
to enforce the law. The author suggest before punishing the deservedly punish law breakers,
education is a must:
15
4.2.1 Educate the Employee / Independent Contractor
Union workers (e.g. bankers) are somehow protected because of their unions. The Union
becomes a “champion” on the rights of their fellow members such as they help to set things
right if the employer gets too big on their head (e.g. mistreating employees). Also, they provide
legal advice and other supports if there are breaches of employment contracts.
However, for those that are not protected by the Union, they needed to be educated on their
rights. This can be done through:
1. short documentaries on main stream medias;
2. pamphlets distributed during checking on workplace;
3. support of any association or society set up for specific or non-specific group that
especially highlight the right and plight of workers etc.
It is important that the employees are not only educated about their rights but also their
responsibilities toward the employers and their job.
It is also imperative to tell them that a simple “misclassification” of their own
employee’s/worker’s status can result in “misfortune” e.g. failure to get SOCSO compensation
(Bata case), income tax liability etc.
4.2.2 Educate the Employer
Employers need to know their responsibilities toward their employees/workers too. This can be
done through:
1. scheduled or unscheduled briefing/meeting/seminar with local labour or human
resources authorities (highlighting on “misclassification” on their employees’ status can
lead to dire consequences);
2. educating the employer on previous industrial or employment disputes (through
seminars, published reports, “on the spot” briefing during workplace checking etc.).
It is the opinion of the author that there should be provision into the law to punish the authority
that skips the education part (or the warning part) straight to punishment and enforcement.
16
4.3
Enforcement
After all the education or warning has been exhausted, then enforcement should be
administered. Perhaps a stricter punishment should be drafted (although the author thinks it is
already severe) into the current law.
However, enforcement must be done fairly, justified not selective. Political ambitious or greedy
and unethical authority enforcer may only act on certain parties/companies/businesses and turn
blind or deaf on another party.
Here, another enforcement group may come in handy, the anti-corruption authority (the ethical
ones) can jointly joins workplace checking with labour authorities to prevent “misdeed” and
ensure competency and accountancy, transparency in doing enforcement tasks.
17
5.0
Summary
Whatever test or mechanism used to determine the employer-employee relationship, the most
significant mechanism is determination based on the intention of the parties when signing the
contract.
In business, a task/job cannot be done by just a person/company. For this, employer employs
workers and workers can be employer or independent contractor. Employer is “any person who
has entered a contract of service to employ any other person as an employee and this include
the agent, manager or representative” (EA 1955).
Employee is defined as “any person including an apprentice, employed by an employer under
a contract of employment to work for hire or reward and for the purpose of any proceedings in
relation to a trade ...” (IRA 1967).
An employment contract is when there is an agreement whether in writing or oral, expressed or
implied, whereby: one person agrees to employ another as an employee; and the other person
agrees to serve the employer as an employee (or independent contractor).There are two (2)
options when employer offers employment to candidate employees which are: (1) contract of
service and (2) contract for services.
Contract of service is an employer-employee relationship while contract for services is
employer-independent contractor relationship. However, due to “almost” same meaning of the
two terms, and may be interchangeable with the term employment agreement. It always need
court intervention to “define” worker’s status.
The court determination of employer-employee relationship is based on 4 main legal tests which
are Control Test, Integration Test, Multiple Test and Mutuality Obligation Test (Asmah et. al.,
2013). Other legal tests include Economic Reality Test and Independent Test.
Control Test focus on how much control the employer exercises on employee. Factors
considered in control test are: work hour, task assignment, EPF and SOCSO contributions, term
of termination, wages etc. High level of control means it is likely employee is in contract of
service.
18
Integration Test looks at how important the employee in the employer’s organization. Is he/she
and integral or just an accessory to the employer’s structure? If the employee is a must have,
he/she is in contract of service.
Multiple Test considers all factors (control, integration, and other tests) and also term of
contracts. It is considered the BEST course of employer-employee relationship determination
in author’s opinion.
Mutual Obligation Test stresses on how much obligation both the employer (obliged to offer
job) and employee (obliged to accept job offer) toward each other’s. As long as both are obliged,
it is contract of service.
Even with all the legal tests available for employer-employee relationship determination, they
still need the court help because there are too much law/acts; employee and employer do not
know the law; employer may be compelled to avoid persecution by fighting back in court.
So, the suggestions given must include: (1) trimming down or reorganized the laws; (2) educate
the employee and employer both in their rights and responsibilities; and (3) enforcing the law
so that all employer will not take advantage on employee’s ignorance.
19
6.0
1.
Reference
Asmah Laili Yeon, Che Thalbi Md Ismail, Khadijah Mohamed, Asiah Bidin, Nazruzila
Razniza Mohd Nadzri (2013). BBUI 3103 Employment & Industrial Law. Accessed
from
http://lms.oum.edu.my/myvle/modules/c-
content/c_Plesson.php?cid=BBUI3103
2.
Attorney General’s Chamber of Malaysia Portal (no date). Contract “...” Service – “of”
or
“for”?
Accessed
from
http://www.agc.gov.my/index.php?option=com_content&view=article&id=711%3A
contract--service--of-or-for
3.
Labour
Ordinance
Sarawak
(Act
A1237)
(1952).
Accessed
from
http://www.omsandbox.com/minwages/wp-content/uploads/2013/07/Ordinan-BuruhSarawak1.pdf
4.
Law of Malaysia: Act 177 - Industrial Relations Act 1967. Accessed from
http://www.agc.gov.my/Akta/Vol.%204/Act%20177.pdf
5.
Law
of
Malaysia:
Act
265
-
Employment
Act
1955.
Accessed
from
http://jtksm.mohr.gov.my/images/pdf/akta/akta_kerja_1955_bi.pdf
6.
Lee, S. S. (2007). Do’s and Dont’s in Drafting Employment Contracts. [Slide] Accessed
from www.leesweeseng.com/upload/employmentLaw.ppt
7.
Nygh, P. E. & Butt, P. (1998). Butterworths Concise Australian Legal Dictionary. As
mentioned in Attorney General’s Chamber of Malaysia Portal (no date). Contract “...”
Service
–
“of”
or
“for”?
Accessed
from
AGC
Portal:
http://www.agc.gov.my/index.php?option=com_content&view=article&id=711%3Acontr
act--service--of-or-for
8.
Sabah
Labour
Ordinance
(1950).
Accessed
from
http://www.lawnet.sabah.gov.my/Lawnet/SabahLawsDeclaredFederal/LabourLawCap
67.pdf
20