Business Owners Beware: Parent Company can be sued by Employee of a Subsidiary- Industrial Dispute

Key Takeaways from the Ahmad Zahri Case: Piercing the Corporate Veil in Employment Disputes

Under typical circumstances, employees of a subsidiary cannot bring claims against a parent company for unfair dismissal, as each company is a distinct legal entity. However, in the Ahmad Zahri bin Mirza Abdul Hamid v Aims Cyberjaya Sdn. Bhd. [2020] MLJU 595 case, the Federal Court set significant precedents for addressing this principle in industrial disputes involving corporate groups.

Case Summary

The employee, a Singaporean consultant, worked under fixed-term contracts initially with AIMS Data Centre 2 Sdn. Bhd. (ADC), which were renewed multiple times from 2009 to 2012. In 2012, AIMS Cyberjaya Sdn. Bhd. became the new contracting party, following the consolidation of ADC. When AIMS Cyberjaya offered a less favorable contract in 2013, the employee objected and was subsequently dismissed early. This led to an unfair dismissal claim.

The Industrial Court ruled that the employee had been in continuous employment and that the contract was effectively permanent. This decision, upheld by the High Court, was overturned by the Court of Appeal, which saw ADC and AIMS Cyberjaya as separate entities. However, the Federal Court later reaffirmed the Industrial Court’s view, emphasizing that both companies were part of a unified group enterprise and could be treated as common employers.

Key Principles Established

1. Piercing the Corporate Veil: The Federal Court ruled that in cases involving a group of companies, the corporate veil can be pierced to identify the true employer, especially when the companies operate as a single entity.
2. Permanent Employment for Foreigners: The judgment clarified that foreign employees with work permits are not restricted to fixed-term contracts; the terms must reflect genuine employment conditions, regardless of citizenship.
3. Nature of Contracts: Continuous renewals without breaks and without employee initiation indicate a permanent employment relationship, regardless of how the contract is labeled.

Implications for Employers

Employers within corporate groups should be cautious when using fixed-term contracts and consider the potential for contracts to be viewed as permanent, especially with repeated renewals. Courts will look beyond the terms to assess the true nature of the employment relationship, and the corporate structure cannot be used to shield against liabilities in unfair dismissal cases.

Final Thoughts

This decision serves as a reminder that businesses should carefully review employment practices to ensure compliance with fair labor standards, and avoid over-reliance on corporate separation to limit liabilities.

Disclaimer: This summary is for informational purposes only and does not constitute legal advice. For specific inquiries, please contact a member of our firm.