Transfer Mechanism of Employees in the Case of Transfer of Business

In the business world, starting a business from scratch has its challenges and so does acquiring another business or expanding into another sector. One way of achieving the latter is by way of transfer of business, in which one company (“the Transferor”) sells and transfers the ownership of its business to another company/party (“the Transferee”) that purchases and takes over the business.

There are many aspects to consider in the case of a transfer of business, one of them being the proper arrangement for the existing employees of the Transferor. Is it possible to automatically transfer the employees upon the transfer of business? Or should there be a form of mechanism to transfer these employees from the Transferor to the Transferee?

The short answer to that is contracts of employment do not automatically transfer to a new employer when there is a transfer of business in which the employees serve but there must be a proper mechanism taking place in order to transfer these employees upon the transfer of business.

This article will guide you on the process of transferring the employees from the Transferor to the Transferee upon the transfer of business, but first, it is pertinent to understand the need for such proper mechanism.

The law of Malaysia is mainly based on the common law legal system and under the common law, the relationship between employer and employee has always been regarded as essentially personal.

As a free citizen, in the exercise of his freedom, the employee is entitled to choose the employer whom he promises to serve, so that the right to his services cannot be transferred from one employer to another without his assent.

The Federal Court in the case of Affin Bank Bhd v Mohd Kassim @ Kamal bin Ibrahim [2012] MLJU 1789 in adopting the position of the common law stated as follows:-

“The position at common law is well established. Upon transfer of a business, an employee cannot, against his will, be obliged to work for a new employer who equally cannot be obliged to take him. It is a repudiatory breach of contract to purport to change the identity of an employer without the consent of an employee.”

Accordingly, in the event of a transfer of business or a change in the ownership of business, it is the standard practice in Malaysia for the Transferor to issue a written notice of termination to the employees, followed by the Transferee’s offer to continue the employment of the employees on terms no less favourable than the existing employment contract.

Step 1: Termination by Transferor

The process of termination of employees by the Transferor in the event of a transfer of business, or for that matter in any event, depends on the category of employees.

There are two categories of employees, as follows:-

(i) EA Employees – Employees who fall under the definition of ‘employee’ provided under Section 2(1) of the Employment Act 1955 (“EA”):-

(a) Earning is less than RM2,000.00 per month;
(b) Involved in manual work, even if such employee is earning more than RM2,000.00 per month;
(c) Domestic servants; or
(d) Employees engaged in the operation or maintenance of mechanically propelled vehicle.

(ii) Non-EA Employees – Employees who do not fall under the definition above.

The EA sets out certain minimum benefits that are afforded to applicable employees. For EA employees, any clause in an employment contract that purports to offer less favourable benefits than those set out in the EA, shall be void and replaced with the minimum benefits in the EA.

For Non-EA employees, employers are mostly free to set any benefits under the employment contract to be accepted and signed by the employees, but generally, most employers still use the EA benefits as a guideline or “bare minimum”.

Specifically on termination of employees, an employer cannot terminate an employee just by giving them notice, or payment in lieu of notice, without just cause and excuse- even if this is what is stated in their employment contract.

This requirement applies to both EA employees and Non-EA employees.

In the event of a change in the ownership of business, the Transferor must comply with Section 12(3)(f) of the EA that requires the employer to issue a written notice of termination to the employees in accordance to the stipulated period of time under Section 12(2) of the EA, as follows:-

(a) Less than 2 years of employment – 4 weeks’ notice;
(b) Within 2 to 5 years of employment – 6 weeks’ notice;
(c) More than 5 years of employment –8 weeks’ notice.

The Transferor must issue a written notice of termination to the employees within the prescribed period under the employment contract or as prescribed under the EA, whichever is longer. Accordingly, in the written notice of termination, it is proper for the employees to be duly informed of the status of the Transferor’s business and the event that will take place i.e. the change of business and ownership of business.

Step 2: Offer by Transferee

The next step is for the Transferee, within 7 days of the change of ownership, to make an employment offer to the employees under the same employment terms or terms that are not less favourable than those previously entered by the Transferor and the employees. This is based on Regulation 8(1) of the Employment (Termination and Lay-Off Benefits) Regulations 1980 (“the Regulations”).

Pursuant to Regulation 8(2) of the Regulations, if the Transferee fails to make such offer within 7 days of the change of ownership, the employment contract of the employees with the Transferor will be deemed to have been terminated, and consequently, the Transferor will be liable for the payment of termination benefits to the employees.

Once the employment offer is made by the Transferee and accepted by the employees, the process of transfer of employees will be completed and the Transferor will be absolved from any liability against the employees, provided that all the requirements above, i.e. the offer is made within 7 days of the change of ownership and employment terms are not any less favourable, are fulfilled.

As stated under Regulation 8(3) of the Regulations, the change of employer from the Transferor to the Transferee will be deemed as a continuing employment and will not constitute a break in the continuity of the period of his employment.

On the other hand, the employees may also refuse the offer. If reasonable reason is given for the refusal, the Transferor will then be liable to pay the termination benefit i.e. severance payment to the employees, but if no reasonable reason is given for the refusal, no such liability will arise.

Based on the above, it is important for the Transferor to oversee the whole process of transfer of employees as the failure to fulfil any of the requirements will expose the Transferor to the risk of legal action taken by the affected employees or liability of paying severance payment to the affected employees.

To summarize, in the case of transfer of business, the Transferor should issue a written notice of termination to the employees within the prescribed period under the employment contract or as prescribed under the EA, whichever is longer, and within 7 days of the change of ownership, the Transferee should make an employment offer to re-engage the employees on terms that are not less favourable than those previously entered by the Transferor and the employees.

With this proper mechanism of transfer of employees taking place in the event of transfer of business, the overall transfer process can be carried out in a peaceful manner in which social justice for both employers and employees can be achieved, bringing about harmony and cordial relationship between the parties.

Written by:

Melinda Marie D’Angelus (Partner) melinda.dangelus@azmilaw.com

Dayang Roziekah Ussin (Senior Associate) dayang.roziekah@azmilaw.com