What is the Contract of Services in Malaysia? How does it works?
Another word for “Contract of Services” that we commonly naming it is the “Employment Contract”. What exactly is a contract of services? What should it included in the contract to make sure it is align with our Malaysia Labour law? The definition of contract of services under the employment Act 1955 is: any agreement, whether oral or in writing and whether express or implied, whereby one person agree to employ another as an employee and that the other agrees to serve his employer as his employee and includes an apprenticeship contract.
1. What is Contract of Services in Malaysia?
According to the Cambridge Dictionary, the contract of services is a written legal agreement between the employer and an employee, giving details about the employee’s job scope, wages, working hours and others. Contract of service: An agreement (oral or written) binding on between parties who are “employer” and “employee”. For example, a designer working for an agency or designing firm.
2. Types of employment contract in Malaysia
A. Written Contract
First of all, in Malaysia, any employment that lasts longer than one month ha to compulsory formalized through a written contract (Section 10(1) of the Employment Act). The contract needs to specify crucial terms of the employment relationship, which includes:
- Job scope
- Work location
- Rate of wages
- Wages period
- Employment benefits
- Holidays, annual and sick leave
- Matters related to preserving health and safety
Besides, the Employment Act 1955 administered labour contracts, and the employers must keep all labour contracts for a period of six years after the expiration of said contracts. The Act specifies that an employment contract cannot restrict an employee’s rights to participate or join trade unions.
B. Oral or Verbal Contract
The Contracts Act 1950 provides that verbal promise given by one party to another can form a valid contract as long as it is not needed to be written by law. According to Section 2(1) of Employment Act 1955, a verbal agreement between an employer and employee can be accepted and considered as a legally binding contract.
3. Contract of Services in Malaysia Law
A. The Rights of Employee
According to Section 7 of Employment Act 1955, if an employment contract’s terms and conditions do not meet the Employment Act’s provisions, then the contract is considered null and it could be void. The terms that do not meet the provisions shall be replaced by the ones prescribed under the Employment Act, even if both the employer and the employee both have agreed and signed the contract of services at their free will.
B. Working Hours
Based on Section 60A (1) of Employment Act 1955, an employee shall not be required under their contract of service to work:
- Over 5 consecutive hours without a break of not less than 30 minutes
- Over 8 hours in a day
- In excess of a spread over a period of 10 hours in a day
- Over 48 hours in a week
C. Duration of wages payment
According to Section 19(1) of the Employment Act 1955, all employers must pay every employees not later than the 7th day after the last day of any wage period, which shall be deemed to be 1 month if no wage period is defined in the contract (Section 18(2) of the Employment Act).
Section 19(2) explains that wages for work done on a rest day, gazetted public holiday and overtime shall be paid not later than the final day of the following month.
D. Termination Period/ Serving Notice Period
Furthermore, according to Section 12 of the Employment Act 1955, both the employer or the employee may provide to the other party notice of their intention to terminate the contract of service. The notice length shall be:
- 4 weeks of notice for Employed less than 2 years
- 6 weeks of notice for Employed between 2 to 5 years
- 8 weeks of notice for Employed longer than 5 years
In addition, the Employment Act also states that:
- a contract to be terminated without notice, or if notice has been given, without waiting for the expiry of such notice, “by paying to the other party an indemnity of a sum equal to the amount of wages which would have accrued to the employee during the term of such notice or during the unexpired term of such notice.” However, some of the companies designated the termination period based on their benefits which do not align with the Employment Act.
4. Contract of Services Clauses
A. Type of employment
There are multiple employment structures such as:
- Part-time Employment
- Fixed-term Employment
- Permanent employment
B. Job details during employment
The scope usually includes the job title, the reporting supervisor, job description as well as key performance indicators.
The compensation should includes salary, allowances such as mobile allowance, Internet allowance, petrol and parking allowance and others, employee share option schemes or equity grants, fringe benefits and many more.
D. Employee Benefits
Moreover, the benefits section covers annual leave, sick and hospitalization leave and maternity leave. For example, compassionate leave, dental and optical allowances and paternity leaves are not required to be included in the Employment Act 1955.
In addition, this clause is crucial if an employee requires access to confidential information. Hence, the confidentiality clause protects employers from the abuse of confidential information that can potentially damage the reputation and image of the organization.
F. Intellectual property
The intellectual property clause is needed especially if the employee is hired to create intellectual property for the business, such as a designer or an inventor. Thus, an intellectual property clause guaranteed the ownership of such rights vest in the employer’s business.
Termination clauses are necessary to oversee the obligations of each party when the agreement ends. An employer needs to show just cause and excuse before terminating any of the employee.
The employer should also specify the situation they deem as serious enough to warrant immediate dismissal without notice in the termination clause to the respective employee.
The retirement clause sets out the exact retirement age for an employee and how that age is calculated, for example, upon one’s birthday or the first day of the calendar year.
It is always a good idea or protection for an employer to provide or an employee to request a detailed contract of services or letter of appointment during the last stage of hiring process. In short, a contract of services should include the basic terms and conditions as below:
- Name of employee and NRIC No.
- Occupation or appointment;
- wage rates (excluding other allowances);
- Other allowances payable and rates;
- Rates for overtime work;
- Other benefits;
- Agreed normal hour of work per day;
- Agreed period of notice for termination of employment or wages in lieu;
- No. of days of holidays;
- Annual leave;
- Sick leave;
- Maternity benefits;
- EPF/SOCSO contributions;
- Retirement age;
- Period of probation;
- Company rules and regulations (give in separately)
As a conclusion, based on the above, it should give you a good idea of how the contract of services works in Malaysia. For any doubts and questions, you may contact to the Labor Offices of Malaysia or you may also look for a law advisor to advise you.
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