Fixed-term contracts and when they become permanent employment

The fixed-term contract is sold in the Malaysian market as a safety device: hire for a year, decide at the end, walk away with no dismissal and no benefits. That works exactly once. The device fails on repetition, and it fails retrospectively — the employee you thought was on a twelfth one-year contract turns out to have been a permanent employee since year two.

What the statute actually says

Section 11(1) of the Employment Act 1955 is short and favourable to employers:

A contract of service for a specified period of time or for the performance of a specified piece of work shall, unless otherwise terminated in accordance with this Part, terminate when the period of time for which such contract was made has expired or when the piece of work specified in such contract has been completed.

Expiry is not termination by the employer. Nothing is done, so there is nothing to justify. Section 10(2) of the Industrial Relations Act 1967 assumes the same thing when it treats expiry of a fixed term contract as a permitted termination even while a trade-union recognition claim is pending.

Note also s.10(1) of the Employment Act: a contract of service for a specified period exceeding one month must be in writing. Fixed-term hiring is the one case where the writing requirement is unambiguous.

Where it breaks

Section 20 of the Industrial Relations Act 1967 lets a workman who considers that he has been dismissed without just cause or excuse make representations. Whether a dismissal occurred is a question of fact, and the Industrial Court decides it on substance.

The test the Court applies is whether there was a genuine need for a fixed term — a real, identifiable, time-limited reason the engagement had to end when it did. That inquiry looks past the document to:

• whether the work is permanent in nature or genuinely finite
• whether the stated end date corresponds to anything real, such as a project completion, a grant period, a client contract, a seasonal peak or a maternity cover
• whether each renewal had its own rationale, or whether renewal was automatic
• whether the duties, reporting line and terms changed at all between contracts
• whether permanent staff do the same job alongside the fixed-term staff
• whether the employer had a settled practice of renewing, which built an expectation

When the Court finds a device, the consequence is not merely that this refusal to renew becomes a dismissal. The employee is treated as having been permanent throughout, and every entitlement keyed to continuous service reopens at once.

Why recharacterisation is expensive

Almost every material entitlement in the Employment Act is banded by length of service:

Entitlement	Provision	Bands by service
Annual leave	s.60E(1)	8 days under 2 years · 12 days 2 to under 5 · 16 days from 5
Sick leave, no hospitalisation	s.60F(1)(aa)	14 days under 2 years · 18 days 2 to under 5 · 22 days from 5
Notice of termination	s.12(2)	4 weeks under 2 years · 6 weeks 2 to under 5 · 8 weeks from 5
Paternity leave qualification	s.60FA(3)(a)	12 months with the same employer
Termination and lay-off benefits	s.60J and regulations	banded by completed years of service

An employee treated as permanent from the first contract has been under-leaved and under-noticed for the whole period, and the arithmetic runs across every renewal at once. Add backwages of up to 24 months under paragraph 1 of the Second Schedule to the Industrial Relations Act 1967, and a device adopted to save a termination benefit produces a liability an order of magnitude larger.

Fixed-term staff are employees for everything else

Nothing about a fixed term changes the statutory-contribution position. From the first day the employee is inside:

• EPF, at the Third Schedule rates for the wage band
• SOCSO and EIS, subject to the RM6,000 insured-wage ceiling
• PCB / MTD, remitted by the 15th of the following month
• HRD Corp headcount, where the employee is a Malaysian citizen under a contract of service and the employer falls in the First Schedule industries
• the register of employees under s.61, preserved for six years
• minimum wage under the Minimum Wages Order 2024

A CP22 notification to LHDN is due within 30 days of commencement for each new hire, fixed-term included.

Making a fixed term defensible

Write the reason into the contract, not just the date. A recital that names the project, the grant, the client engagement or the employee being covered gives the end date something to attach to. Where a second term is genuinely needed, state the new reason rather than reissuing the same document with new dates.

Where the work turns out to be permanent, confirm the employee and price the termination-benefit exposure honestly. That is cheaper than defending a device.

Common mistakes

Treating “fixed term” as a label rather than a fact. The document does not decide it; the reality of the engagement does.

Renewing without changing the rationale. Identical duties, identical terms and a new end date is the pattern the Court is looking for.

Inserting an artificial break between contracts. It reads as consciousness of the device.

Assuming fixed-term staff have no leave. First Schedule paragraph 1 covers any person under a contract of service, and s.60E(1) prorates rather than removes annual leave where twelve months is not completed.

Using a fixed term to avoid probation. Probation and fixed terms address different problems, and a probationer already has protection under s.20.

Thinking the RM4,000 threshold helps. Paragraph 1A disapplies exactly six provisions. Neither s.11 nor the Industrial Relations Act is among them, and a recharacterisation claim runs regardless of salary.

What’s next

Audit every employee currently on a second or later fixed term, and for each one write down the specific time-limited reason for the current term. Where you cannot state one, you are already carrying a permanent employee — confirm them and manage the termination benefit position deliberately rather than discovering it at the Industrial Court.