The Malaysian employment contract, clause by clause

The contract is not the law. It is a document that operates inside the law, and section 7 of the Employment Act 1955 says so in one sentence: any term less favourable to an employee than the Act is void to that extent, and the statutory term is substituted for it. Not renegotiated. Not read down. Substituted.

That single provision decides most of the questions employers actually ask about Malaysian employment contracts, and it is why a template downloaded from a template farm is worse than useless — it gives you confidence in clauses that will not survive a labour officer reading them.

What does section 10 actually require in writing?

Most guides say “any employment lasting more than a month must be in writing”. That is not what the section says.

Section 10(1) requires writing for a contract of service for a specified period of time exceeding one month, and for a contract for the performance of a specified piece of work where the time reasonably required exceeds or may exceed one month. Both limbs are about contracts with a defined endpoint. An ordinary open-ended monthly appointment is not literally caught.

That does not make an oral appointment safe. Section 2 defines a contract of service as any agreement, whether oral or in writing and whether express or implied — so the employee has every statutory right regardless, and you have no document to prove terms you did rely on. And where you do issue a written contract, s.10(2) makes a termination clause mandatory, setting out the manner in which either party may terminate in accordance with Part II.

Which clauses are void no matter what?

Unequal notice periods. Section 12(2) is explicit that the length of notice shall be the same for both employer and employee. A contract giving the employer one month and the employee three is less favourable to the employee, so s.7 voids the excess. Where the contract is silent, s.12(2) supplies four weeks below two years of service, six weeks from two to under five years, and eight weeks at five years or more.

Free termination during probation. Nothing in the contract removes a probationer’s right to make representations under s.20 of the Industrial Relations Act 1967. The Act’s own Second Schedule contemplates the dismissal of a probationer without just cause, which settles the point.

Deduction and forfeiture clauses. Section 24(1) is a blanket prohibition — no deduction may be made otherwise than in accordance with the Act. Section 24(2) lists the four deductions an employer may make unilaterally: overpaid wages from the preceding three months paid by mistake, the s.13(1) indemnity where notice was not served, recovery of interest-free advances under s.22, and deductions authorised by other written law. Trade-union dues and share purchases need the employee’s written request under s.24(3). Insurance schemes, third-party payments, interest-bearing advances, purchases of the employer’s goods and accommodation charges need the written request plus the Director General’s prior written permission under s.24(4). Total deductions are capped at 50 per cent of that month’s wages.

A clause saying “the company may deduct any loss or damage caused by the employee” authorises nothing.

Cash wages. Section 25(1) requires the whole of the wages, less lawful deductions, to be paid into an account opened by a financial institution in the employee’s name, or jointly with others as the employee stipulates.

Post-termination non-compete. Section 28 of the Contracts Act 1950 voids every agreement restraining anyone from exercising a lawful profession, trade or business. The three exceptions cover the sale of goodwill and partnership arrangements — none of them covers an employee. This is the clause most Malaysian contracts get wrong.

Union restrictions. Section 8 of the Employment Act voids any contractual restriction on joining a registered trade union, participating in its activities, or associating with others to organise one.

Waiver of maternity rights. Section 43 makes void any condition by which a female employee relinquishes or is deemed to relinquish a right under Part IX, and substitutes the statutory right.

Contracting out of leave. Annual leave under s.60E, sick and hospitalisation leave under s.60F, paternity leave under s.60FA and paid holidays under s.60D all run through s.7. “Leave in this company is 8 days for all staff” is void against an employee with five years of service, who takes 16.

What can the contract legitimately decide?

Quite a lot, and this is where drafting effort belongs.

The contract may	Statutory hook
Set terms more favourable than the Act, including in a collective agreement or Industrial Court award	s.7A
Fix a notice length longer than the statutory minimum, provided it is equal both ways	s.12(2)
Define misconduct, and the disciplinary process that will be run before dismissal	s.14(1)
Set normal daily hours below the s.60A(1) limits, and agree a compressed week within 9 hours a day and 45 a week	s.60A(1) proviso (iii)
Specify the wage period, the pay date within the s.19 window, and the bank-crediting mechanics	ss.18–19, 25
Impose confidentiality and intellectual-property assignment, during and after employment	outside s.28
Substitute other days for the six non-compulsory gazetted holidays, by agreement	s.60D(1A)
Provide for a fixed term, where the fixed term reflects a genuine time-limited need	s.11(1)

Common mistakes

Treating the offer letter as the contract and never issuing terms. The s.61 register duty and the s.10(2) termination clause both assume a documented set of particulars.

Copying an English or Singaporean template. Restraint of trade is the obvious trap — England applies a reasonableness test, Malaysia does not, because s.28 is a statutory prohibition with three closed exceptions.

Writing a probation clause that promises what it cannot deliver. “Employment may be terminated during probation without reason” is a sentence that produces an award against you, not a defence.

Using a salary-deduction clause as a discipline tool. The lawful punishments under s.14(1) are dismissal, downgrading, and lesser punishments including suspension without wages for not more than two weeks. A pay cut imposed as a penalty is neither.

Assuming employees above RM4,000 have no statutory entitlements. First Schedule paragraph 1A disapplies exactly six provisions — ss.60(3), 60A(3), 60C(2A), 60D(3), 60D(4) and s.60J. Leave, holidays, maternity, paternity, hours limits, notice, deduction rules and payment rules all still apply.

Forgetting stamp duty. The instrument is chargeable, and unstamped documents have evidential consequences.

What’s next

Read your standard contract against the list above and strike the clauses that cannot work, rather than leaving them in as deterrents — an unenforceable clause is evidence of bad faith when the file reaches the Industrial Court. Then confirm which of your staff sit inside First Schedule coverage, and check the non-compete position before you promise a client that your people are locked in.