Employee’s Provident Fund Act 1991: Points & Pitfalls

In the wake of the Covid-19 pandemic and economic downturn, the Employees’ Provident Fund (“EPF”) has been a recurrent subject in tabloids.  

In the name of boosting spending power, several changes have been announced including options for employees to reduce their monthly contributions to EPF as well as to withdraw RM 500 monthly starting from 1 April 2020. 

Given the defining nature of this social security mechanism in these economically turbulent times, it is perhaps timely to visit 3 interesting areas of this legislation where court tussles have been frequent. 

Who is an Employer/Employee under the EPF Act? 

EPF is governed by the Employees’ Provident Fund Act 1991 (“EPF Act”).  Section 2 of the EPF Act spells out the definition of an employer as follows: 

““employer” means the person with whom an employee has entered into a contract of service or apprenticeship and includes-

(a) a manager, agent or person responsible for the payment of salary or wages to an “employee”;

(b) any body of persons whether or not statutory or incorporated; and

(c) any Government, department of Government, statutory bodies, local authorities or other bodies specified in the Second Schedule and, where an employee is employed with any such Government, department, authority or body or with any officer on behalf of any such Government, department, authority or body, the officer under whom such employee is working shall be deemed to be an employer:

On the other hand, section 2 of the EPF Act explains that an “employee” means “any person, not being a person of the descriptions specified in the First Schedule, who is employed under a contract of service or apprenticeship, whether written or oral and whether expressed or implied, to work for an employer”. 

Now, to unpack the above definition of an employee, it is perhaps easier to understand who is NOT an employee.

In this regard, the First Schedule of the EPF Act lists individuals who do not count as employees. These include i) all domestic servants unless they fall within certain exceptions, ii) any person detained in prison, iii) Any person who is a Member of the Administration as defined under Article 160 of the Federal Constitution and iv) any person who has attained the age of seventy-five years old. 

Ultimately, whether individuals fall within the employer-employee category for the purposes of the EPF Act depends on whether a contract of service or contract for service has been entered into. An employer-employee relationship only arises where a contract of service has been entered into. See the Federal Court decision of Hoh Kiang Ngan v Mahkamah Perusahaan Malaysia & Anor [1996] 4 CLJ 687. 

Put simply, a contract of service is any agreement whether in writing or verbal, 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. Generally speaking, persons employed for long-term positions in companies or organisations usually have contracts of service. 

On the other hand, a contract for service is where the person providing services for a fee is ordinarily self-employed. Think: the independent contractors that you engage to renovate your residential property. 

Contracts of service or contracts for service? 

Case law has suggested several factors which are relevant to the process of identifying a contract of service, though the presence or absence of any one such factor is not conclusive, since the decision depends on the combined effect of all the relevant factors when those pointing towards ’employment’ are weighed up with those pointing against. The factors which lean towards the identification of a contract of service include the following: 

The degree of control exercised by the employer;

• Whether the worker’s interest in the relationship involved any prospect of profit or risk of loss;
• Whether the worker was properly regarded as part of the employer’s organisation;
• Whether the worker was carrying on business on his own account or carrying on the business of the employer;
• The provision of equipment;
• The incidence of tax and national insurance;
• The parties’ own view of their relationship;
• The structure of the trade or profession concerned and the arrangements within it.

In the case of Stevenson, Jordan & Harrison, Ltd v Macdonald & Evans [1952] 1 TLR 101, Lord Denning provided some useful observations of the distinction between a contract of service versus a contract for services. It would seem that the common thread underlying a contract of service is that a man is employed as part of the business and his work is done as an integral part of the business. For contracts for services, a man’s work, while done for the business, is not integrated into it but is only an accessory to it. 

It should also be noted that for the purposes of proving entitlement to EPF contributions, the burden rests on the applicant to prove that he is an employee under section 2 of the EPF Act. See the High Court decision of Goi Ah Soong v Kumpulan Wang Simpanan Pekerja & Anor [2013] 7 MLJ 777. 

Can directors of a company be made personally liable to pay outstanding EPF contributions? 

The answer is yes. 

This is expressly spelt out in section 46(1) of the EPF Act which provides that:

“Where any contributions remaining unpaid by a company, a firm or an association of persons, then, notwithstanding anything to the contrary in this Act or any other written law, the directors of such company including any persons who were directors of such company during such period in which contributions were liable to be paid…..be jointly and severally liable for the contributions due and payable to the Fund.”

Company directors ought to take note that section 46(1) regime under the EPF Act is stringent. In the Court of Appeal decision of Ong Kim Chuan & Chih Moy @ Chee Swee Mei v Lembaga Kumpulan Wang Simpanan Pekerja [2009] MLJU 522, the court held that the directors were jointly and severally liable for non-payment pursuant to this section, even though the Company was in the process of winding up as the non-payment period was before the winding up took place. 

In the same case, it was also held that the directors would be severally liable, ie separately liable even though the company was wound up. It was not a defence for the directors to state that they were not personally liable for the debt of the company under this section because the appellants who were directors had lost their status or locus as directors when the company had been wound up. 

Indeed, in the case of Lembaga Kumpulan Wang Simpanan Pekeja v Adorna RMIT [2003] 1 LNS 482,   The court held that the fact that a director did not play an active role in the running of the Company did not matter. 

What is clear then is that the existence of section 46(1) imposes an onerous duty on directors to make sure that the companies’ employees’ savings are well-protected. It would not be open to a director to escape culpability by pleading that he is a sleeping director, silent director or non-active director. 

Is there a limitation period for EPF to sue employers for unpaid EPF contributions? 

Interestingly and perhaps rather surprisingly, the answer is no.

The Court of Appeal in Sivamurthy s/o Muniandy & Ors v Lembaga Kumpulan Wang Simpanan Pekerja [2013] 5 MLJ 533 definitively settled the issue on this point when leave to appeal against the said decision in the Federal Court was dismissed. 

That case concerned among others, section 65 (1) of the EPF Act which provides that “Notwithstanding the provisions of any other written law all contributions payable under this Act may, without prejudice to any other remedy, be recoverable by the Board summarily as a civil debt.” 

The issue, in that case, was whether the non-obstante clause of “notwithstanding the provisions of any other written law” had the effect of ousting the applicability of the Limitation Act 1953. The court found that the EPF Act, being social legislation with an underlying purpose to promote the welfare of its members, ought to receive a broad, liberal and functional or purposive interpretation. In the upshot, it was held that there was no time bar for EPF to recover unpaid EPF contributions. 

The import of this decision is that sleeping directors of a company may well find themselves having to foot the bill for unpaid EPF contributions long after the said contributions are due. In light of the decision of Sivamurthy (supra), it may perhaps be up to EPF to make its own administrative decision whether to pursue stale claims decades after the same is actionable.