Some employers in Malaysia hold the belief that putting employees on a “fixed term contract” is advantageous. They believe that it would make it easier to terminate problematic employees since they can opt not to renew the contract when the contract ends. What many employers do not realise is that this is not necessarily the case under Malaysian labour law, and a non-renewal of a fixed term contract can still lead to an unfair dismissal claim.
What is the law on fixed term employment contracts?
Malaysian law recognizes that employers have a right to hire employees on a fixed term basis when there is a genuine need to do so. In such cases, when a fixed term contract expires, it “terminates” itself and there is therefore no dismissal or resignation. As such, even if the workman feels aggrieved that his contract has not been renewed, he would not have a remedy since the employer does not have any obligation to grant him that renewal. The important condition here is that the fixed term contract has to be a “genuine” fixed term contract.
What is a “genuine” fixed term contract?
There is no statutory definition of a “genuine fixed term contract”. However, case law has interpreted a genuine fixed term contract to be one where “both parties recognize there is no understanding that the contract will be renewed on expiry”. Examples of genuine fixed term contracts would be contracts for temporary, one-off jobs that are seasonal in nature – ie jobs that fill the gaps caused by temporary absence of permanent staff. Genuine fixed term contracts could also arise for the performance of specific tasks or projects (eg: a specific research project; construction project, etc) Upon completion of those projects, there is no further need for the employee and so it is reasonable for the employee’s engagement to be on a fixed term.
The position is also different for expatriate employees, whose employment are conditional upon the issuance of a valid employment pass (which has a fixed validity period). In such cases, these expatriate employees will usually be placed on a fixed term contract which is tied to the validity of their employment pass.
What about fixed term contracts that are consistently renewed?
Some employers engage their employees on a fixed term basis, but consistently renew their contracts at the end of the contract term. Employers should be mindful that this conduct could be used as evidence that the employee’s functions are not temporary or seasonal in nature, and the contract is not a “genuine fixed term contract”.
The Courts have previously held that where an employee’s fixed term contract is renewed multiple times, there could be an implied term of the contract of employment that he is actually a permanent employee. The Court will then treat the contract as a permanent contract of employment that was merely “dressed up” in the form of a fixed term contract.
What happens if the Court treats a fixed term contract as a permanent contract of employment?
This means that the employee can only be terminated if there is “just cause and excuse”, failing which the employee can lodge a complaint for unfair dismissal under Section 20 of the Industrial Relations Act. A “non-renewal” may amount to a termination without just cause and excuse if the employer does not have valid grounds.
What should employers do, then?
As seen from the above, employees’ rights and status under their employment contract are not decided solely on the words of the contract alone. The Courts will interpret the employee’s rights based on fair labour practice, equity and good conscience to ensure that the principle of security of tenure is not undermined.
Before deciding whether to hire an employee on a fixed term basis, employers should carefully evaluate whether there is a genuine need to place them on a fixed term contract, or if the employer is merely doing it under the mistaken assumption that it removes or reduces the employer’s liability. If there is no real reason for a fixed term contract, a proper probationary period for the employee may be more suitable. Employers can then use the probationary period to assess whether the employee is suitable for the job.
Employers are also advised to ensure that their contracts are reviewed by a lawyer. Even though the Court’s analysis of the employment relationship is not confined to the four corners of the employment contract, express clauses which are consistent with a fixed-term contract could support the employer’s case. For example, fixed term contracts would usually have a clause stating that there is no representation by the employer that there will be an opportunity for further employer after the expiry of the fixed term.
Prior to engaging the employee, employers should also ensure that there is a mutual understanding that the arrangement is only for a fixed term. Some employees may misunderstand the fixed term arrangement and think that they would be offered a permanent position if they do a good job. If this is not the case, it should be made known to them from the start that a permanent position is not guaranteed, and is in fact based on other factors such as the needs and business requirements of the company.
Even if the employee is on a genuine fixed term contract, as good practice, employers should always apply the higher standard when dealing with termination or non-renewal. Employers should ensure that they have good reasons to terminate or not renew the contract, and inform the employees of these reasons. These reasons should be stated in the non-renewal letter and the employer should also ensure they have sufficient documentary evidence to support the same.
This article was written by Donovan Cheah. Donovan has been named as a recommended lawyer for labour and employment by the Legal 500 Asia Pacific 2017, 2018 and 2019, 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.