One of the matters that a company should consider, as part of its “housekeeping” exercise, is whether its employment documentation (eg: handbook, employment agreements, policies, procedures etc.) are still suitable and appropriate for use.
This is especially important for established companies where the existing documents would have been drafted a considerable period ago, or based on a template used in another jurisdiction. This gives rise to a risk that they may have since ceased to be suitable due to changes to the law, or were never suitable to begin with due to errors in drafting.
In this article, we will highlight 6 common mistakes found in employment handbooks and agreements to emphasise the importance of conducting a proper review of such documents.
- Non-compliance with the Employment Act 1955
The Employment Act 1955 (“Act”) is an act that governs employment matters, and only applies to certain classes of employees, for example those whose wages do not exceed RM2,000 or are engaged in manual labour (regardless of salary). The Act provides minimum protection and entitlements to employees, including the number of annual leave, the rate of payment if the employee is required to work overtime or work on a public holiday, etc.
Not understanding whether your employees fall within the Act is a significant problem that can have serious repercussions. For example, it is common to see employment contracts use the phrase “The provisions of the Employment Act 1955 will apply” – presumably because this sounds “legal”. However, if your employees do not fall under the Act, you may have unintentionally agreed to different entitlements or protections which could cause confusion in the long run.
- Retirement clause
Even though the law provides that the minimum retirement age is 60 years old, this does not mean that, in the absence of an express retirement clause in the employment agreement, companies will automatically have the right to retire an employee who has attained the age of 60.
A misconception amongst many employers is that the Minimum Retirement Age Act 2012 fixes the retirement age at 60. It does not. It only provides that you cannot unilaterally retire a person before 60.
Therefore, a failure to expressly provide for a retirement clause creates uncertainty for both parties. Due to the uncertainty, it is possible for employees to argue that they have the right to work as long as they are able to.
On the flip side, we have also seen clients inserting retirement clauses into the wrong types of contract. For example, it may not make sense to insert a retirement clause into a fixed term contract or into an independent contractor agreement.
- No transfer clauses
It is an implied right of an employer to transfer an employee to a different location, department or position in order to meet business requirements, so long as the transfer is not done in bad faith and/or does not involve a material change to the detriment of the employee. However, given that disputes may arise when an employee doesn’t agree to a transfer, it is still advisable for employers to insert a “transfer clause” into employment agreements.
- Mislabelling certain types of payments
Employers cannot assume that they can avoid certain statutory contributions by changing labels on payments to employees. In the event of a dispute, the Courts will look at the substance and nature of the payment, not just the labels that are attached to them.
For example, “travel allowance” is exempted from EPF contributions. However, it is not advisable for employers to assign a large proportion of an employee’s monthly wages as “travel allowance” to circumvent EPF contributions. It will be obvious that these payments were not meant as travel allowance but are in reality part of the employee’s wages.
If the payments which were mislabelled are found to be subject to EPF, an employer who had failed to make the required EPF contributions on those payments would be in violation of the EPF Act 1991, which is an offence punishable with imprisonment for a term not exceeding 3 years or to a fine not exceeding RM10,000 or to both.
- No Anti-Corruption policy
While the law does not mandate the inclusion of an anti-corruption policy in the employment handbook itself, it is important that companies have one in place, whether in the handbook or as a separate policy, in light of the amendments to the Malaysian Anti-Corruption Commission Act 2009 (“MACCA”).
Under the new amendments, a commercial organisation will be deemed to have committed an offence under the MACCA if a person associated with the commercial organisation (e.g. an employee) corruptly gives or agrees to give, promises or offers any gratification with an intention to obtain or retain business for the commercial organisation or to obtain or retain an advantage.
As it is a defence under the MACCA to such offence if the commercial organisation is able to show that it has “adequate procedures” to prevent corruption, it is crucial for companies to do all things necessary to demonstrate such “adequate procedures”, including by establishing and implementing an anti-corruption policy.
- Vague, uncertain, confusing clauses
This usually happens when an agreement is drafted by someone who is not legally trained, and is prepared by taking clauses found in different templates and putting them together. The result is an agreement which is vague, uncertain and confusing to all parties. Other forms of ambiguity can arise from simple things like using capitalised terms that are not defined.
Consider this clause which was the subject of an interpretation dispute in Canadian courts:
“The Executive will be eligible to receive a minimum of 20% and up to 60% of the base salary annually, as a performance bonus, less applicable tax withholdings required by law, based on the achievement of corporate objectives and personal objectives as mutually agreed to by the Company and the Executive.”
The employer argued that “eligible” isn’t the same as entitlement, and the bonus is not unconditionally guaranteed, since the employee would only be a paid a bonus if he achieves his objectives. The employee took a different view, interpreting the contract as a minimum/guaranteed contractual bonus of 20% (regardless of whether his objectives were achieved) and subject to a further bonus of up to 60% based on the achievement of his objectives. The Court ultimately decided in favour of the employee.
Contracts should be comprehensible and should clearly set out the obligations and rights of each party. Vagueness and uncertainties may prove to be fatal in the event of a dispute where a clause which turns out to be the key to resolving the dispute becomes challenging to enforce, or gets interpreted to your disadvantage.
Far from being an unnecessary expenditure, a review of the companies’ employment handbook, agreements, and policies is an important undertaking that should not be overlooked, especially considering the potential legal liability that companies may face due to the reasons mentioned above.
It is also an opportunity to reconsider some of the companies’ policies which may no longer be relevant or suitable, in light of the changes in societal values, or in the companies’ operational requirements.
This article was written by Donovan Cheah (Partner) and Adryenne Lim (Senior Legal Executive). Donovan has been named as a recommended lawyer for Labour and Employment by the Legal 500 Asia Pacific 2017, 2018, 2019 and 2020, and he has also been recognised by Chambers Asia Pacific and Asialaw Profiles for his employment law and industrial relations work.
Donovan & Ho is a law firm in Malaysia. Our practice areas include employment law, dispute resolution, tax advisory and corporate advisory. Have a question? Please contact us.