Employment agreements in Malaysia are fundamental documents that define the relationship between an employer and an employee. These contracts must comply with the Employment Act 1955 (EA 1955), which sets out minimum terms and conditions of employment for employees earning below a certain threshold or engaged in manual labor, as well as other relevant legislation like the Industrial Relations Act 1967. For employees not covered by the EA 1955, their terms and conditions are primarily governed by the employment contract itself and common law principles.
Ensuring your employment agreements are compliant and clearly drafted is crucial for both parties. A well-structured contract minimizes potential disputes and provides a clear framework for the employment relationship, covering everything from duties and remuneration to termination procedures. Understanding the different types of agreements and mandatory clauses is the first step in building a legally sound employment framework in Malaysia.
Types of Employment Agreements
Employment agreements in Malaysia primarily fall into two categories based on their duration: indefinite-term contracts and fixed-term contracts. The nature of the work and the employer's needs typically dictate which type of contract is appropriate.
| Contract Type | Description | Key Characteristics |
|---|---|---|
| Indefinite-Term | Also known as permanent contracts, these have no specified end date. | Continuous employment; termination requires just cause or notice as per contract/law. |
| Fixed-Term | Contracts for a specific period or for the completion of a specific project. | Must genuinely be for a fixed term or project; repeated renewals may imply permanency. |
Fixed-term contracts are generally suitable for temporary roles, project-based work, or seasonal employment. However, employers must be cautious about using fixed-term contracts for roles that are essentially permanent, as repeated renewals without a clear justification related to the temporary nature of the work can lead courts to deem the employment as permanent, granting the employee the rights associated with indefinite employment.
Essential Clauses
Malaysian law, particularly the Employment Act 1955 for covered employees, mandates the inclusion of certain terms and conditions in employment contracts. Even for employees not covered by the EA 1955, it is best practice to include comprehensive clauses to ensure clarity and avoid disputes.
Mandatory and essential clauses typically include:
- Names of the parties: Full legal names of the employer and employee.
- Date of commencement: The start date of employment.
- Job title and description: A clear outline of the employee's role, duties, and responsibilities.
- Place of work: The primary location where the employee will perform their duties.
- Remuneration: Details of salary, wages, payment frequency, and any allowances or benefits.
- Hours of work: Standard working hours per day and week, and provisions for overtime.
- Leave entitlements: Annual leave, sick leave, public holidays, and other types of leave as per law or company policy.
- Probationary period: If applicable, the duration and conditions of the probationary period.
- Termination clause: Conditions under which the contract can be terminated by either party, including required notice periods.
- Confidentiality: Obligations regarding the protection of company information.
- Company policies: Reference to company handbook or policies that the employee must adhere to.
For employees covered by the EA 1955, the contract must not provide terms and conditions less favorable than those stipulated in the Act.
Probationary Period
It is common practice in Malaysia to include a probationary period at the beginning of employment. This period allows both the employer to assess the employee's suitability for the role and the employee to evaluate the job and company.
- Duration: While the EA 1955 does not specify a maximum duration for probation, typical periods range from one to six months, with three months being common. The specific duration should be clearly stated in the employment contract.
- Rights: Probationary employees are generally entitled to the same statutory rights as permanent employees under the EA 1955, including minimum wages, leave entitlements, and protection against unfair dismissal.
- Termination during probation: Employment can be terminated during or at the end of the probationary period if the employee's performance or conduct is unsatisfactory, provided the termination is carried out fairly and in accordance with the contract and principles of natural justice. The contract should specify the notice period required during probation, which is often shorter than for confirmed employees.
Successful completion of the probationary period typically leads to confirmation of employment, which should ideally be communicated in writing.
Confidentiality and Non-Compete Clauses
Confidentiality and non-compete clauses are often included in employment contracts to protect the employer's business interests.
- Confidentiality: Clauses requiring employees to keep company information confidential are generally enforceable in Malaysia, provided they are reasonable in scope and duration. This obligation often continues even after the employment ends.
- Non-Compete: Clauses that restrict an employee from working for a competitor or starting a competing business after leaving the company are generally considered void under Section 28 of the Contracts Act 1950, which prohibits agreements that restrain trade. However, there are exceptions. A non-compete clause may be enforceable if it falls under one of the statutory exceptions (e.g., sale of goodwill of a business) or if it is narrowly drafted as a non-solicitation clause (preventing the employee from soliciting the employer's customers or employees) or a non-dealing clause (preventing the employee from dealing with the employer's customers), provided these are reasonable to protect legitimate business interests like trade secrets or confidential information. The enforceability heavily depends on the specific wording and the circumstances.
Employers should seek legal advice when drafting restrictive covenants to ensure they are as enforceable as possible under Malaysian law.
Contract Modification and Termination Requirements
Modifying or terminating an employment contract in Malaysia requires adherence to specific procedures to ensure legality and fairness.
- Modification: Any changes to the terms and conditions of employment must generally be agreed upon by both the employer and the employee. Significant changes made unilaterally by the employer may be considered a breach of contract or constructive dismissal. It is best practice to document any agreed modifications in writing, often through an addendum to the original contract.
- Termination: Employment contracts can be terminated by either party for various reasons, including:
- Mutual Agreement: Both parties agree to end the employment.
- Resignation: The employee gives notice as per the contract or law.
- Expiry of Fixed Term: For fixed-term contracts, termination occurs automatically upon the agreed end date.
- Termination by Employer with Notice: The employer terminates the contract by providing the required notice period as stipulated in the contract or the EA 1955 (whichever is more favorable to the employee), without needing to provide a specific reason, although this is subject to the employee's right to challenge unfair dismissal.
- Termination by Employer without Notice (Summary Dismissal): Permitted only for just cause or excuse, such as serious misconduct, after conducting a due inquiry.
- Termination due to Redundancy/Retrenchment: Requires a genuine redundancy situation and adherence to fair procedures, including notice and potentially severance payments as per the contract, collective agreement, or the Employment (Termination and Lay-Off Benefits) Regulations 1980.
- Termination due to Frustration of Contract: Where an unforeseen event makes it impossible to perform the contract (e.g., long-term illness).
The notice periods for termination are typically specified in the employment contract, subject to the minimum periods stipulated in the EA 1955 based on the length of service. Employees who believe they have been unfairly dismissed can file a claim with the Industrial Relations Department.
