5 Most Misunderstood Terms in an Employment Contract

Author: Donovan Cheah (Partner) (Donovan & Ho)

www.dnh.com.my

Whether you are an employee or an employer, it’s important to have a basic understanding about the terms of an employment contract, and what they really mean. In our practice, we have come across many situations where an employment contract is signed, locked away in a filing cabinet, and completely forgotten about until a problem arises. It is only then when parties realise that they did not fully understand their contractual obligations.

This article will highlight some of the commonly misunderstood terms in an employment contract.

PROBATION PERIOD

“Your employment is subject to a probationary period of 3 months.”

Common misunderstanding: After the probationary period, if the employer doesn’t say anything and continues to employ the employee, the employee is deemed confirmed.

Reality: Malaysian law does not recognise the concept of “automatic confirmation”. Notwithstanding that the contractual probationary period may have lapsed, the employee will continue to remain a probationer until he receives a confirmation letter from the employer. Some exceptions may apply — for example where there is sufficient evidence that the employer had treated the employee like a confirmed staff.

NOTICE PERIOD

“Either party may terminate this agreement by providing 1 month’s notice in writing, or payment of 1 month’s salary in lieu of notice.”

Common misunderstanding: I can terminate my employee for any reason so long as I provide them with notice, or make payment in lieu of notice.

Reality: Employers in Malaysia can only terminate employees for “just cause and excuse” — ie they need to provide a “good” reason for termination such as poor performance, misconduct or redundancy. If not, unfair dismissal claims could arise. Mere compliance with the notice period is insufficient. However, this obligation is only one way: employees do not need to provide any reasons for resigning.

Common misunderstanding: I can set any notice period that I like so long as I put it in writing. Therefore, I can require my employee to give me 3 month’s notice of resignation while I only need to give my employee 1 month’s notice of termination.

Reality: This may be true for some employees but not all. Employees whose monthly salary does not exceed RM2,000 and/or are involved in manual labour are subject to the Employment Act 1955 (“EA Employees”). For EA Employees, the length of notice shall be the same for both employer and employee. Further, termination of an employee on certain grounds (eg: closure of business) is subject to minimum notice requirements under the Employment Act, which is dependent on the EA Employee’s length of service.

NON-COMPETITION CLAUSE

“The Employee agrees that he shall not, for a period of 6 months after the cessation of his employment with the Company, be employed by, engaged, interested or associated with any trade or business which is wholly or partly in competition with the Company.”

Common misunderstanding: I invested a lot of time and money in my employee. He is also dealing with highly sensitive and confidential information. As such, I have a right to prevent him from joining a competitor after he resigns.

Reality: Non-compete clauses (which are intended to take effect after the end of employment) are clauses in restraint of trade, which are void pursuant to Section 28 of the Contracts Act 1950. Employers seeking to protect their confidential information, trade secrets, and employees, may consider other alternatives such as non-disclosure agreements, and anti-poaching/anti-solicitation clauses.

STATUTORY CONTRIBUTIONS

“The Company will contribute to EPF at the prevailing statutory rates.”

Common misunderstanding: I can make my employee’s salary package “inclusive” of all EPF contributions (including my employer’s contribution), as long as they agree to it. This way, the salary package looks bigger and more attractive to potential employees.

Reality: The Employees Provident Fund Act 1991 (“EPF Act”) prohibits employers from deducting or otherwise recovering the employer’s contribution from the employee, notwithstanding any contract to the contrary. Poorly drafted compensation packages could result in misunderstandings that are also potentially in violation of the EPF Act. For clarity, it may be better for compensation packages to be communicated exclusive of any employer contribution to statutory funds.

TRANSFER

“The Company has a right to transfer you to any department, station, office, branch, subsidiary or associate of the Company.”

Common misunderstanding: Employers can transfer employees anywhere and for any reason, so long as they have this clause in the contract.

Reality: While the law recognises the managerial prerogative of employers to reorganise and transfer their workforce in order to achieve business efficacy, transfers must be done in good faith and not to victimise an employee. Further, a transfer cannot involve a material change or detriment to the employee’s terms and conditions of employment. Otherwise, there is a risk that the employee could claim constructive dismissal.