Key Features of a Solid Employment Contract

Employee management is the most critical and challenging aspect of running a business, as employees are a company’s most precious asset. Employment Act 1955 (“EA”) treats the employer-employee relationship as contractual in Malaysia. Therefore, at the beginning of the relationship, an employment contract will be signed to mark the start of the new relationship. These employment contracts must comply with existing labour laws, including the EA, passed to create certain rights and duties for employers and employees in Malaysia and offer some essential benefits to workers who fall under the act’s purview.

This post will summarise the key points of a solid employment contract based on the provisions of EA.

Form of contract; does an oral agreement form a valid employment contract?

Although oral contracts are generally valid, specifically for a contract of employment, they must be concluded in WRITING. This is provided under the Section 10 (1) of EA.

“A contract of service for a specified period exceeding one month or for the performance of a specified piece of work, where the time reasonably required for the completion of the work exceeds or may exceed one month, shall be in writing.”

Section 10 requires a written contract to be drawn instead of relying on an oral one if the duration of the offered position exceeds one month. In addition, a written contract serves as proof of the terms agreed upon before the commencement of employment and can be a valuable tool in the event of a disagreement.

Section 7 of EA; More favourable conditions of service to prevail if any terms in the employment contract are less favourable compared to the provision of the EA

“Subject to section 7A, any term or condition of a contract of service or of an agreement, whether such contract or agreement was entered into before or after the coming into force of this act, which provides a term or condition of service which is less favourable to an employee shall be void and of no effect to that extent………….”

 To put it another way, if a provision in an employment contract is less favourable to the employee than what is stated in the law or related regulations, then that provision must be considered null and void and cannot be enforced. Instead of the less favourable terms in the current employment contract, the more favourable terms given by the EA or any other applicable regulations will apply. This provision of the EA was written to guarantee that workers are afforded the basic and humane protections and working environment guaranteed by the EA.

Express Terms in a Contract of Employment

Since every employment situation is unique, the terms of employment contracts for employees in various professions and industries will also vary. Nevertheless, some of the standard terms and conditions that employers may wish to include in a contract of employment are as follows:

A. Terms of the employment

This is a crucial part of any employment contract and should be included. In today’s labour economy, not all roles necessitate a full-time employee; some may be performed adequately by freelancers. For instance, if an employer intends to hire an independent contractor, they should not have anything that resembles an employment contract in the slightest. The employer must specify whether the position is full-time, part-time, or temporary in the contract. An employment contract can be signed for a definite or an indefinite term.  Therefore, if the position is on a contract or temporary basis, the parties may wish to include a specific end date for the duration of employment.

This clause may also specify whether the employer intends to implement a probationary period and its duration. Although EA does not specify a maximum or minimum probationary period, they typically last up to three months, with employers having the right to extend the probationary period if the employee fails to meet the employer’s expectations.

B. Scope of employment

This section of the employment contract specifies the employee’s responsibilities and expectations for their position, allowing for a clearer understanding of their duties within the organisation. This section can list the various responsibilities and duties an employee must perform while employed by the organisation. In addition to the essentials, such as the employee’s job title and reporting structure, the employer can consider whether it would be advantageous to incorporate a job description or key performance indicators into the contract.

C. Confidentiality clause

If an employee is exposed to trade secrets, client databases, or other proprietary and confidential information, a non-disclosure clause prevents them from exposing that information because they may be subject to a lawsuit for breaching confidentiality. Confidential information and the period during which the employee is prohibited from releasing it should be detailed in this section.

D. Wages and Benefits

For every employee, compensation is a major concern. This section should also specify when wages are payable, including commission or any deductions, and whether the employee is eligible for incentives or allowances. As an employer must compensate their employee for their labour, the agreed-upon basic salary and a detailed description of the salary components can be specified in this section.

In addition, the employer may include pertinent benefits offered to the employees, such as medical and optical benefits, life and health insurance, gym membership, dental coverage, and paid vacations. This can be beneficial and informative to the employees so they can fully utilise those benefits that come with their employment.

E. Leave

Any leaves the employee is entitled to are stated clearly in the contract. The number of annual leaves the employee is entitled to must be indicated under this section, and the employer may wish to include the provision that allows the employer to carry forward the unused leave into the following year. There are five (5) types of statutory leaves available under the EA that every employee in Malaysia is entitled to.

F. Termination

This section specifies the terms under which employment can be terminated.  The terms of termination, including the required notice time and the grounds an employer can be terminated, must be spelt out.

Section 12(1) of EA states that the employee may at any time give the notice of resignation, and the length of such notice shall not be less than:

However, EA also specifies that the employer or the employee may terminate the employment without prior notice. To terminate the contract without notice or before the expiration of the notice period, the terminating party must pay the other party compensation. The compensation should be equivalent to the wages the employee would have earned had they continued to work for the entire notice period. This is stated expressly in Section 13(1) where:

“Either party to a contract of service may terminate such contract of service without notice or, if the notice has already been given following Section 12, without waiting for the expiry of that notice by paying to the other party an indemnify of a sum equal to the number of wages which would have accrued to the employer during the term of such notice or the unexpired term of such notice.”

Summary

Some of these clauses are implicit in all contracts. Nonetheless, it is a standard practice to include these provisions in the contract so that employees are aware of what they can and cannot do. Therefore, care must be taken to ensure that employment contracts are as transparent as possible.  Ambiguity only results in future misunderstandings and conflicts between the employer and employee, which can reduce productivity.  A well-written contract must comply with the law, be written in a language the employee can comprehend, and be in its entirety, i.e., contain all the essential terms and conditions. Employers and employees should also routinely review contracts to ensure they are up-to-date and comply with Malaysia’s constantly changing labour laws.