Does Salary Payment Create Employment in Group Companies?

In the complex world of corporate groups, where inter-company arrangements are common, a pressing question arises for business leaders and HR professionals: If 'A' company paid salary to a person who was an employee of 'B' company, which is a group company, can it be said that the said person is an employee of 'A' company?

This scenario often emerges in cases of employee secondments, reimbursements, or shared services within corporate groups. While it might seem intuitive that the payer becomes the employer, judicial interpretations emphasize that employment relationships are not forged by financial transactions alone. This blog delves into the legal nuances, drawing from key court rulings and statutory principles to clarify when salary disbursement does not equate to employment.

Note: This article provides general information based on judicial precedents and is not legal advice. Consult a qualified lawyer for specific cases.

The Core Principle: Contract Over Cash

The employment relationship is fundamentally based on the nature of the contractual or statutory linkage, not solely on salary disbursement. Courts have consistently held that mere payment of salary by one company to an employee of another does not establish an employment tie with the paying entity. As outlined in key judicial findings, the relationship of employment is fundamentally based on the nature of the contractual or statutory linkage, not solely on salary disbursement C. C. , C. E. & S. T. – Bangalore (Adjudication) Etc. VS Northern Operating Systems Pvt Ltd. - 2022 0 Supreme(SC) 476.

Why Salary Payment Alone Falls Short

Payment of salary by Company A to a person employed by Group Company B does not, by itself, create employment with A. Judicial rulings stress that status hinges on the actual contractual or statutory relationship, and mere payment or reimbursement is insufficient C. C. , C. E. & S. T. – Bangalore (Adjudication) Etc. VS Northern Operating Systems Pvt Ltd. - 2022 0 Supreme(SC) 476. For instance, in arrangements where employees are seconded from group companies, they may remain on B's payroll, with A merely reimbursing expenses. The court's focus remains on the originating employment framework, not the funding source.

This principle aligns with broader employment law tenets. In scenarios involving directors or managers across group entities, courts examine the nature of control exercised by the company, rather than formal titles or payments. Employment is not determined by a formal appointment letter alone; instead, evidence of an employer-employee dynamic prevails CHANG CHUEN HWA vs SOUTH ISLAND PLASTIC SDN BHD.

Judicial Insights on Employment Status

Nature of Employment: Contract vs. Status

Legal documents distinguish between contractual employment and employment as a matter of status, particularly in public or statutory bodies. Under Article 12 of the Constitution, certain entities are deemed 'State,' where service conditions follow statutory rules rather than pure contracts T. G. SRINIVASA MURTHY, ETC. , ETC. VS BHARAT EARTH MOVERS LTD. ETC. , ETC. - 1981 0 Supreme(Kar) 362. However, in private group company contexts, the emphasis is on the engagement terms. If a person is 'engaged and employed under the contractual or statutory framework' of B, payments from A do not shift allegiance.

Group Companies and Shared Payrolls

In group structures, employees seconded or transferred continue as employees of the original entity unless explicitly re-contracted. The agreements describe that employees are seconded or transferred from group companies to the appellant (A). The employees continue to be on the payroll of B (a foreign entity) and are reimbursed by A for certain expenses C. C. , C. E. & S. T. – Bangalore (Adjudication) Etc. VS Northern Operating Systems Pvt Ltd. - 2022 0 Supreme(SC) 476. Courts clarify that such reimbursements do not alter status; the employment contract governs.

Related precedents reinforce this. Even directors receiving salaries may not qualify as employees if lacking a contract of service. Although COW-1 also paid a salary for his services in the board of the Company, he is certainly not an employee TAN WEE CHING vs DA TONG SHI JE SUPPLIES & SERVICES SDN BHD. Conversely, where functions mimic managerial roles with statutory deductions, employee status may apply, but only based on engagement nature, not payment source TAN WEE CHING vs DA TONG SHI JE SUPPLIES & SERVICES SDN BHD.

Lessons from Director-Employee Cases

Malaysian courts under the Industrial Relations Act 1967 (IRA) provide analogous guidance, often blurring lines between corporate roles and employment.

• Directors as Workmen: A director can be a 'workman' if evidence shows an employer-employee relationship, irrespective of titles or absent written contracts. In employment law, a director can also be classified as a workman if evidence shows an employer-employee relationship, regardless of formal titles and the absence of a written contract CHANG CHUEN HWA vs SOUTH ISLAND PLASTIC SDN BHD. The court assessed control, duties, and contributions, not just salary.

• Functional Test Over Form: The appellant maintained that although he was a shareholder and Director, he was carrying out functions and duties as an employee and paid a monthly 'salary' of RM20,000.00. ... An employee of a company can of course be appointed Director of that company. He remains an employee of the company as long as his contract of employment has not been terminated WOON KIM CHOY vs ACEXIDE TECHNOLOGY SDN BHD & ANOR AND ANOTHER APPEAL. Here, IRA protections applied due to employee-like functions.

• No Automatic Status: Removal from a board does not constitute dismissal absent an employment contract. The Claimant failed to prove employment status TAN WEE CHING vs DA TONG SHI JE SUPPLIES & SERVICES SDN BHD, underscoring that salary or directorship alone does not suffice.

These cases illustrate a universal test: substance over form. For group companies, this means dissecting secondment agreements, control, and instructions, beyond who cuts the check.

Exceptions and Practical Considerations

While salary payment rarely creates employment, exceptions may arise:- Explicit Transfer or Secondment with Control: If A issues instructions, supervises, and integrates the employee, a de facto relationship may form, supported by contract.- Piercing the Corporate Veil: In rare constructive dismissal claims, intertwined operations across group firms could link liabilities, but employment typically persists with the original employer ARUMUGAM KALIAPPAN vs SB GEOTECHNIC (M) SDN BHD.- Statutory Obligations: Payments with deductions (e.g., EPF, SOCSO in Malaysia) might imply employment, but courts probe deeper.

No legal fiction automatically deems a person A's employee based on salary alone. The documents do not indicate any legal fiction that automatically makes a person an employee of A solely because A pays the salary or reimburses expenses C. C. , C. E. & S. T. – Bangalore (Adjudication) Etc. VS Northern Operating Systems Pvt Ltd. - 2022 0 Supreme(SC) 476.

Key Takeaways for Businesses

• Prioritize Contracts: Document secondments clearly, specifying continued employment with B.
• Assess Control: Avoid exerting employer-like authority over seconded staff to prevent disputes.
• Payroll Clarity: Use reimbursements, not direct payroll, to reinforce separation.
• Seek Advice: In cross-border groups, align with local laws like India's Companies Act or Malaysia's IRA.

Conclusion

In summary, paying salary to a group company's employee does not make them yours unless backed by a direct contractual or statutory relationship. The employment status depends on the nature of the employment contract, statutory provisions, and the actual control and instructions, not merely on financial reimbursement C. C. , C. E. & S. T. – Bangalore (Adjudication) Etc. VS Northern Operating Systems Pvt Ltd. - 2022 0 Supreme(SC) 476. Businesses navigating group dynamics should focus on robust agreements to mitigate risks.

Stay informed on evolving precedents, and remember: while these insights guide generally, tailored legal counsel is essential.

References:- C. C. , C. E. & S. T. – Bangalore (Adjudication) Etc. VS Northern Operating Systems Pvt Ltd. - 2022 0 Supreme(SC) 476: Core on salary vs. contract.- T. G. SRINIVASA MURTHY, ETC. , ETC. VS BHARAT EARTH MOVERS LTD. ETC. , ETC. - 1981 0 Supreme(Kar) 362: Status in statutory employment.- CHANG CHUEN HWA vs SOUTH ISLAND PLASTIC SDN BHD, WOON KIM CHOY vs ACEXIDE TECHNOLOGY SDN BHD & ANOR AND ANOTHER APPEAL, TAN WEE CHING vs DA TONG SHI JE SUPPLIES & SERVICES SDN BHD: Director-employee analogies.