Part I: Drafting Employment Contracts with Essential Terms
Employment contracts serve as fundamental legal documents that define the rights and obligations between employers and employees. In Malaysia, many employment-related disputes arise from inadequately drafted or incomplete contracts. Such shortcomings often lead to misunderstandings that escalate into costly litigation or complaints before bodies such as the Industrial Court or the Department of Labour. To mitigate these risks, employers must draft comprehensive contracts that comply with Malaysian labor laws, primarily the Employment Act 1955, the Industrial Relations Act 1967, and relevant statutes.
Job Title and Description
A critical foundation of any employment contract is the clear definition of the employee’s job title along with a detailed job description. The Employment Act 1955, particularly Section 10(1), mandates that employment contracts exceeding one month must be in writing and include essential terms such as the role and duties of the employee. A well-defined scope of work prevents disputes arising from allegations that the employee was assigned tasks beyond the contractual role, which sometimes form the basis of constructive dismissal claims under Section 20(1) of the Industrial Relations Act 1967. Courts generally require clarity to assess claims related to unfair treatment or scope of employment, emphasizing precise wording in contracts to avoid ambiguity.
Duration of Employment
The employment contract must clearly specify whether the employment relationship is for a fixed term or an indefinite period, as outlined in Section 10(2) of the Employment Act 1955. For fixed-term contracts, specifying the precise start and end dates is essential to avoid creating an implied permanent contract through repeated renewal—a situation that has been interpreted unfavorably against employers in cases such as Ganesan Chandran v. Telekom Malaysia Berhad where ongoing fixed-term renewals led to recognition of permanent employment status. Clarity about contract duration helps prevent claims of unfair dismissal or breaches of statutory rights triggered by automatic conversion to permanent employment.
Remuneration and Payment Terms
Contracts must articulate the employee’s salary, payment frequency, and any additional remunerations such as bonuses, commissions, or allowances. These details must align with the protections and responsibilities imposed by the Employment Act 1955 in Sections 18 through 25, which regulate wage definitions, permissible deductions (such as contributions to the Employees Provident Fund or SOCSO), and timely payment requirements per Section 19. Transparency in payment terms becomes especially critical for employees earning RM4,000 or less monthly, as they benefit from extended coverage under the latest amendments to the Act. Failure to clearly define remuneration often results in wage disputes or complaints lodged with government labor authorities.
Working Hours and Overtime
Working hours and overtime provisions have been expressly regulated under Sections 60A to 60D of the Employment Act 1955. With recent amendments lowering the maximum allowable working hours to 45 hours per week, employers must specify regular working schedules, breaks, and rest days within contracts. Overtime rates apply at not less than 1.5 times the normal hourly wage, particularly for hours worked beyond the standard schedule or on designated rest days and public holidays. Explicitly outlining these elements in the contract helps avoid confusion and potential claims for unpaid overtime, as seen in cases like Chew Lai Leng v. MISC Berhad where employee claims succeeded due to unclear contract terms.
Probationary Period
While the Employment Act does not explicitly govern probation periods, Malaysian common law and Industrial Court rulings stress the importance of clearly stating probation arrangements in employment contracts. Probation should include the period’s length, performance criteria, and conditions for passing or extension. Probationary employees maintain legal protections; thus, terminations during probation still require procedural fairness and documented assessments, aligning with precedents such as Hong Leong Equipment Sdn Bhd v. Liew Fook Chuan. Including detailed probation terms reduces the risk of wrongful dismissal claims within this vulnerable period.
Leave Entitlements
Under Sections 60E and 60F of the Employment Act 1955, leave entitlements must be stated clearly, including annual leave varying from eight to sixteen days depending on service duration, sick leave allowances including hospitalization days, and maternity leave as per Section 37. With recent legal developments, paternity leave entitlements have also been introduced (Section 60FA), entitling qualifying employees to seven days leave. Other leaves such as compassionate or emergency leave, if offered, should also be documented. Clear leave policies prevent disputes regarding alleged wrongful denial of statutory benefits.
Termination and Notice Periods
Terminating employment is a legally sensitive area that frequently triggers disputes. Contracts must include notice periods aligned to an employee’s length of service, as prescribed in Section 12 of the Employment Act, which sets minimum notice periods ranging from four days to twelve weeks. Employers should define both the processes for termination with notice and for summary dismissal consistent with Section 14, including grounds such as serious misconduct. The contract should also describe procedural safeguards like domestic inquiries to establish and verify misconduct prior to dismissal. Proper adherence to procedural fairness was underscored by the Federal Court in cases including Sime UEP Properties Bhd v. Chuah Guan Choon, ensuring that employers who neglect fair processes risk successful unfair dismissal claims.
Resignation and Retirement
Employment contracts should also set out clear resignation protocols, including requirements for written notice and the processes for final payments or settlements. In terms of retirement, the contract should state the employer’s retirement age policy, consistent with the Minimum Retirement Age Act 2012, which mandates a minimum retirement age of 60 years. Omitting clear retirement provisions may expose employers to claims of constructive dismissal or age discrimination, especially if retirement appears to be arbitrarily imposed or lacks procedural fairness.
Confidentiality and Post-Employment Obligations
To protect business interests, employment contracts typically include confidentiality provisions that prohibit unauthorized disclosure of sensitive company information both during and after employment. While Section 28 of the Contracts Act 1950 generally renders broad non-compete clauses unenforceable as restraint of trade, Malaysian courts permit narrowly tailored restrictive covenants—such as non-solicitation or limited-duration confidentiality obligations—if they are reasonable in scope and duration. Cases such as Wyeth v. Anwar Abdul Rahim illustrate that employers must carefully craft these clauses to ensure legal enforceability while safeguarding commercial interests.
Reference to Workplace Policies
The employment contract should expressly reference the applicable workplace policies, including codes of conduct, grievance procedures, and disciplinary processes, formalized through employee handbooks or internal regulations. The Employment Act 1955, through Section 81H, additionally mandates employers to display notices addressing sexual harassment and to implement preventive mechanisms consistent with the Sexual Harassment Act 2022. Incorporation of such policies by reference reinforces employee awareness, supports legal compliance, and limits employer liability arising from workplace misconduct or harassment claims.
Conclusion
An employment contract in Malaysia is much more than a mere formality; it functions as a vital legal safeguard for employers and employees alike. Given the evolving statutory framework and jurisprudence surrounding employment relations, failure to incorporate essential legally compliant terms can result in costly disputes, fines, or damage to reputation. By diligently drafting contracts that reflect the requirements of the Employment Act 1955, the Industrial Relations Act 1967, related statutes, and relevant case law, employers can foster transparent, fair, and stable employment relationships while significantly reducing the risk of litigation.
Disclaimer: This article is for educational purposes only and does not constitute legal advice. For specific employment law issues or contract drafting, please consult a qualified Malaysian lawyer.
Radhia is a contributor covering legal insights with the aim of keeping legal discourse relevant, accessible, and impactful in today’s changing world. More about Radhia.
This article was contributed and sponsored by Kevin Wu & Associates, a full-service law firm based in Kuala Lumpur with practice areas in corporate, dispute resolution, criminal, family office and company secretarial services. KWA offers preliminary consultation and legal advisory to all Temasek Post readers.
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