Piercing the Corporate Veil in Employment Disputes

The well-established principle of separate legal entity as decided by the House of Lords in Salomon v Salomon & Co [1987] AC 22 is that a company is treated as a separate legal entity from its directors and shareholders. However, like all general rule, there are always exceptions.

Such exceptions can be seen in the recent decision of the Federal Court in Ahmad Zahri Bin Mirza Abdul Hamid v Aims Cyberjaya Sdn Bhd [2020] MLJU 595 which discussed the general willingness to pierce the corporate veil in an employment dispute in Malaysia and other jurisdiction alike. The Federal Court also looked at whether a work permit is a material consideration in determining whether an employment contract is a permanent or fixed term.

In that case, the Appellant/Claimant, a Singaporean national, was invited to become a shareholder of AIMS Data Centre 2 Sdn Bhd (‘ADC’) and was also, offered a position as a consultant in ADC. His consultancy contract was renewed annually by ADC. Before the end of the term in the year 2012-2013, the Appellant/Claimant’s contract was renewed and placed under the Respondent instead as ADC was phasing out.

The terms and conditions of the contract remained the same from the original contract with ADC. At the end of one of the fixed terms, the Respondent sought to change the terms of the Appellant‘s employment which was not agreeable to. As a result, the Respondent renewed the contract for only 3 months and the Appellant was given a 2 months’ notice for early release.

The Appellant then brought the matter to the Industrial Court. The Industrial Court held that the Appellant was a permanent employee of the Respondent and not a contract staff. Therefore, the Appellant dismissal was without just cause or excuse. The Industrial court awarded back wages and compensation to the Appellant.

The Respondent then filed a judicial review to quash Industrial Court’s award. The said application was dismissed by the High Court. The Respondent then appealed and the Court of Appeal set aside the Industrial Court award.

The Appellant then successfully obtain leave to the Federal Court on the following questions of law:-

1. Whether the Appellant was employed on fixed term contract or was a permanent employee of the Respondent; and
2. Whether a work permit is a material consideration in determining whether an employment contract is a genuine fixed term contract.

Permanent or Fixed Term Employment

The main issue is whether the Appellant’s employment is a genuine fixed term contract or permanent employment dressed up as a fixed term contract.

As a general rule, in a fixed term contract, employers cannot terminate the contract of employment before its expiry unless by mutual agreement or due to gross misconduct. The Respondent’s claim that the Appellant’s employment was a fixed term contract. Therefore, the Respondent terminated the Appellant on the ground that his contract has expired. However, the Industrial Court found that the Appellant was a permanent employee and thus his termination was without just cause and excuse. Therefore, it is important to look at whether or not, the Appellant’s employment was a genuine fixed term contract or was he a permanent employee.

In holding that the Appellant was, in fact, a permanent employee, the Industrial Court pierced the corporate veil of the Respondent because there was continuity of employment from ADC before the Appellant joined the Respondent.

On the other hand, the Court of Appeal held that the corporate veil should not be pierced since there was no evidence of fraud or unconscionable conduct. The Court of Appeal also held that ADC and the Respondent are separate legal entities.

The Federal Court held that the Court of Appeal failed to appreciate that the Industrial Court would more readily pierce the corporate veil to reveal the true employer to prevent employers from disclaiming responsibility for an employee.

The Federal Court then listed a few categories where corporate veil can be lifted such as agency, fraud, sham or façade, group enterprise and unfairness/injustice. Although this list is not exhaustive, for the purposes of this appeal, group enterprise and unfairness are relevant for this case.

The ‘group enterprise’ exception is applicable where the relationship between the parent and subsidiary company is so intertwined and indistinguishable from one another that it is only proper to pierce the corporate veil to treat the parent company as liable for the acts of the subsidiary.

In the employment law perspective, the application of the “single economic unit” or “functional integrality” test is particularly significant in ascertaining the continuity of employment for the scope of dismissal protection. This approach is based on the notion of fairness, equality and proportionality in the treatment of vulnerable employees whilst it reflects the complexity of modern corporate structures.

One of the seminal cases of the lifting the corporate veil in employment disputes is the Supreme Court decision in Hotel Jaya Puri Bhd v National Union of Hotel Bar and Restaurant Workers [1980] 1 MLJ 109 (‘Hotel Jaya Puri’ case) where the Industrial Court ordered the Hotel (parent company) to pay compensation to the workers of the Restaurant (subsidiary). The Restaurant closed due to financial losses and the employees were subsequently entrenched. The reasoning behind the decision was that the Hotel and Restaurant were inter-dependent as the functionality and management can be constituted as a single unit.

Salleh Abas FJ (as he then was) upheld the decision of the Industrial Court and observed the following:-

“.. The court seems quite willing to lift the ‘veil of incorporation’ (so the expression goes) when the justice of the case so demands…

In my judgment, by giving recognition to this fact, the President did not cause any violence to the sanctity of the principle of a separate entity established in Salomon v Salomon… but rather gave effect to the reality of the Hotel and the Restaurant as being one enterprise.”

The Malaysian courts are willing to lift the corporate veil by adopting the principle enunciated in the Hotel Jaya Puri’s case particularly in industrial disputes. This is in line with Section 30(5) of the Industrial Relations Act 1967 which provides that the court shall act in accordance to “equity, good conscience and the substantial merits of the case without regard to technicalities and legal form.”

The Federal Court in our current case, embark on a voyage across other Commonwealth jurisdictions to look at persuasive authorities in relation to piercing the corporate veil in industrial and labour court matters.

South Africa

In South Africa, there has been a general willingness to pierce the corporate veil. Similar to Malaysia, the courts are more concerned about the manner in which companies operate and the individual behind these operations.

The court in the case of Footwear Trading CC v Mdlalose [2005] 5 BLLR452(LAC) described it as akin to a puppet master and his puppets. The court found that the separate legal personalities, in this case, was in fact controlled by the same individual and were inextricably interlinked. Nicholson JA held:-

“The lifting of the veil is normally reserved for instance where the shareholders or individuals hiding behind the corporate veil are sought to be responsible. I do not see why it should not also apply where companies and close corporations are juggled around like puppets to do the bidding of the puppet master.”

Canada

In Canada, there is the ‘common employer’ doctrine where 2 or more legal entities can be the employer of one person so long as there is sufficient degree of relationship between the 2 entities that act as common employers. What amounts to sufficient degree of relationship is to be determined on a case by case basis.

The test for common employer was explained in Sinclair v Dover Engineering Services Ltd (1988) 4 D.L.R (4^th) 297 where the plaintiff, an engineer, wanted to bring a wrongful dismissal claim against two companies. The Plaintiff’s employer was Dover Engineering Services Ltd (‘Dover’) however, Cyril Management Limited (‘Cyril’) was responsible for paying the Plaintiff. Thus, Cyril was effectively the management that paid everyone that worked for Dover.

The Canadian courts acknowledged the realities of modern corporate structures and held that both companies were actually common employers of the plaintiff. Wood J enunciated the following:-

“ .. The old-fashioned notion that no man serve two masters fails to recognize the realities of modern-day business, accounting and tax considerations.…

As long as there exists a sufficient degree of relationship between the different legal entities who apparently compete for the role of the employer, there is no reason in law or in equity why they ought not all to be regarded as one for the purpose of determining liability for obligations owed to those employees who, in effect, have served all without regard for any precise notion of to whom they were bound in contract.”

The United Kingdom

The well-known case of Chandler v Cape Plc [2012] EWCA Civ 525 appears to be the first which imposed a duty of care on the parent company for the health and safety of its subsidiary’s employees. The brief facts was the employees of the subsidiary suffered illness as a consequence of the asbestos in the subsidiary’s factory however, employees could claim damages against the parent company.

The reasoning was that the parent company had superior knowledge of the working conditions of the subsidiary employees and the risk arising from working with asbestos.

Although the principle of separate legal entity is well established in company law, in view of the above, there a number of circumstances that these legal entities are treated the same. The industrial jurisprudence from the various countries above takes the ‘common employer’ approach in order to achieve equity and social justice. This is identical to the purpose of our Industrial Relations Act 1967 in Malaysia.

Insofar as employment law is concerned, the following are some circumstances in which the courts generally as highlighted above are prepared to pierce the corporate veil and find a group of companies to be common employers:-

1. Where there is ‘functional integrality’ between entities;
2. Unity of establishment between the entities;
3. The existence of a fiduciary relationship between the members of the entities and/or extent of control;
4. There was essential unity of group enterprise; and
5. Whenever it is just and equitable to do so and/or when the justice of the case so demand.

Back to the Federal Court decision, the Court held that ADC and the Respondent are of the same group and there was “essential unity of group enterprise’. The Appellant’s original contract of employment with ADC and was renewed annually from 2009 to before it was renewed under the Respondent mid-way through 2012.

There were no material changes in the Appellant’s employment and both contract were signed by the same CEO. He also continued to report to the same CEO. The difference was that there was a new company structure and the Claimant was re-named to VP, Product and Solutions. In addition, the Appellant’s contract with ADC allowed him to be moved to any of its subsidiaries and/or associate companies.

Therefore, the Federal Court held that the Court of Appeal was wrong in treating ADC and the Respondent as separate legal entities. The Court of Appeal also should’ve treated the Appellant contract of employment with ADC and subsequently with the Respondent as one continuous contract. There was no error in the Industrial Court’s finding that ADC and the Respondent was the ‘common employer’.

The Federal Court held that Appellant’s employment was continuous employment without a break beginning from the original contract with ADC until the termination by the Respondent. Therefore, the Industrial Court was correct in awarding the Appellant compensation and back wages as that dismissal was without just cause or excuse since he was a permanent employee.

The Courts have recognised security of tenure in employment.  However, this must be balanced with the employer’s prerogative to make commercial decisions for the benefit of the company. Nowadays, it is common employers to use fixed term contracts for the employment of expatriates and in the construction industry. The main issue that presents itself is whether there is a genuine fixed term contract or there is employment on a permanent basis dressed up as several fixed term contracts. The latter is often used to bypass the general rule where an employer cannot terminate the contract before the expiration of a fixed term contract other than in limited circumstances as discussed above.

Whether a work permit is necessary to determine if employment contract is fixed or permanent in nature

The Federal Court also was of the view that the Court of Appeal was wrong in their finding that an expatriate who requires a work permit to work can never be a permanent employee in Malaysia. The Court of Appeal failed to refer to the decision of the Federal Court in Assunta Hospital v Dr. A. Dutt [1981] 1 MLJ 115 where citizenship has no bearing in deciding whether the applicant was in permanent employment or under a fixed term contract.

It is also important to note that Malaysia is a member country of International Labour Organisations (ILO) where the conventions state that countries should undertake to promote and guarantee equality of opportunity and treatment between migrant workers and nationals. A migrant worker shall nevertheless enjoy equality of treatment in respect of rights arising out of past employment as held in Nacap Asia Pacific Sdn Bhd v Jeffrey Ronal Pearce & Anor [2011] 5 CLJ 791.

The Federal Court held that the fact that the Appellant is a foreigner is irrelevant in determining whether the dismissal is with just cause or otherwise.

In conclusion, this decision by the Federal Court shows the 2 important principles to ensure justice to employees.

Firstly, companies are no longer able to hide or disguise behind the corporate veil to escape liability from employees’ right to compensation when they have been unfairly dismissed. In order to reflect today’s complex corporate structures, the courts are willing to lift the corporate veil to reveal the true employers and to ensure employees’ rights are protected.

Lastly, in light of increasing globalization, foreigners should not be discriminated with the use of citizenship and/or work permit in order to determine the permanency of their employment.