Deciphering the Law on Fixed-Term Contracts

Deciphering the Law on Fixed-Term Contracts

A Safety Net – Understanding the Fixed Term Contracts in Malaysia

fixed-term-short-term-contracts-MalaysiaAn employee in Malaysia has a ‘safety net’ where he cannot be terminated without just cause or excuse. Should he consider himself to have been dismissed, he has a statutory right to make representations in writing to the DGIR (Director General of Industrial Relations) to be reinstated.

The DGIR will then take such steps as he may consider necessary or expedient for an expeditious settlement. Where the DGIR is satisfied that there is no likelihood of the representations being settled, he will notify the Minister, who may, if he thinks fit, refer the representations to the Industrial Court for an award.

The employer may find himself liable to substantial monetary compensation should the Industrial Court find in favor of the employee. The principle of ‘safety net’ guarantees an employee’s legitimate expectation to continue in his employment and to earn his livelihood unless his employer has just cause or excuse to terminate his services. The right to be engaged in gainful employment is a proprietary right which may not be forfeited unless there is just cause or excuse.

Note: In short, this section says that once the boss hired you and the boss cannot simply terminate or fired you unless the boss has just cause and excuse to do so.

The only exception to the principle of ‘safety net’ is when an employee is engaged on a fixed-term contract basis.

Question: So why is there a differential treatment here? Doesn’t the law cover all employees regardless?

You see, an employee engaged on a fixed-term contract enjoys security of tenure only for the duration stipulated in his employment contract. A fixed-term contract of service, unless a termination occurs earlier, ceases upon the expiry of the agreed term. There is a possibility of an employer evading the statutory guarantee of ‘safety net’ by using a series of fixed-term contracts.

Note: So, in other words, if your Offer Letter is a fixed-term contract which spells out how long you will work for the company, then your ‘safety net’ is only within that period. Once expires, and if the boss does not wish to renew, then you are on your own. Then again, some bosses may see this as a loop hole by using the Fixed Term contract as their trump card to test you and then ‘dumped’ you, in the event that your boss finds you not suitable for the job.

An employer has the flexibility to arrange his contractual employment relationships in the best interests of his business including structuring contracts for the employment of their personnel on fixed terms where the need for an employee’s services is for a certain fixed duration. This, however, would need to be balanced against an employee’s right to security of tenure.

The task of the Industrial Court is, therefore:

“.. to determine whether the contract between the parties was intended to be only for a fixed duration which comes to an end when the purpose of the employment for a definite duration has ceased to exist or one, though specified to be for a fixed number of years, is an ordinary contract which was intended to continue unless some just cause or excuse arises for a termination or non-renewal”.

If necessary, the Industrial Court will go behind the text of the employment contract. Employees have to be protected against the deprivation of their rights through ordinary employments dressed up in the form of temporary fixed-term contracts.

When an employee on a fixed-term contract does not have, his contract renewed or extended, he may assert that the non-renewal is tantamount to a dismissal, thereby invoking the mechanism provided under s 20 of the Industrial Relations Act 1967 on unfair dismissals.

Fixed-term contract

For a fixed-term contract to be accepted as authentic, it must be based on a genuine operational requirement. The Industrial Court will undertake an inquiry into the question whether an employer had a genuine need for the services of an employee for a fixed duration:

“… it would be an obvious loophole if any employer could evade the statutory protection by making a series of contracts of finite duration with his workmen. “The Court, however, is aware that on the other hand there are genuine fixed term contracts, where both parties recognise there is no understanding that the contract will be renewed on expiry. The Court realises that such genuine fixed-term contracts for temporary, one-off jobs are an important part of the range of employment relationships. Some such jobs are found in seasonal work, work to fill gaps caused by temporary absence of permanent staff, training, and the performance of specific tasks such as research projects funded from outside the employer’s undertaking.”

Employer’s prerogative

An employer can also hire retired employees on a contractual basis in order to tap into their experience and cut back on training costs. The categories of work for which employees can be suitably engaged under fixed-term contracts are, of course, not closed.

Renewal of contract

In Sime UEP, a clerk was employed for four years on a contract that was renewed annually. During his four years, there, the employee was involved in various projects. The Industrial Court held that an employee cannot be considered to be employed for a temporary or one-off job if he was not employed for a particular project and he had been involved in various projects during his tenure.

In Malaysia Airlines, the employee was engaged on a fixed-term contract of two years as second officer in the Rural Air Service. He was confirmed in his position as second officer two months later. Eight months into his employment, he was promoted as a commander and was confirmed in that position after serving a probationary period of six months. His fixed-term contract was subsequently renewed twice, each time for three years. When the employee wrote to the company on the forthcoming expiry of his third fixed-term contract, he was given a three-month contract by the company. The Industrial Court, in finding that the employee’s employment had been permanent, considered that the Rural Air Service was not a temporary operation and that it did not have a definite duration beyond which the cessation of the business is inevitable.

Note: Basically, in a nutshell, if the company continues to renew your contract year by year for more than 3 consecutive years, the Court will view it as permanent basis. The nature of your employment contract is fixed-term but the intention of your boss is like on permanent basis where he rides on the opportunity of the fixed-term contract’s nature to let you go when he feels that you no longer serve the purpose in his organization by letting the contract expires by itself and not renewing or offering a permanent contract. You as an employee will be protected against the deprivation of your rights through ordinary employments dressed up in the form of temporary fixed-term contracts.

Purpose of engagement

Factors that determine the true character of a fixed-term contract include the nature of the employer’s business and the nature of the work which an employee is engaged to perform. For example, a mediator who carried out the company’s core functions and objectives, and who had been an integral part of the company’s main functions was held to be in permanent employment and not on a fixed-term contract. The case, however, may have been decided differently had the company remunerated the mediator on a case-to-case basis rather than a monthly salary to demonstrate her engagement on a limited basis.

Where it is plain that an employee’s services are required on an ongoing basis rather than for a definite term, he ought to be engaged in the ordinary way instead of a contract for a fixed term which automatically expires at the end of the term.

Terms of employment

The terms and conditions stipulated in a fixed-term contract must be consistent with the nature of the engagement. Additional care should also be taken by employers in drafting the fixed-term employment contract to mitigate the risk of the same being seen as a permanent contract. For example, clauses that are commonly seen in permanent employment contracts would be indicative that the fixed-term contract is in fact a permanent contract. These would include clauses subjecting an employee to a probationary period,14 providing for a yearly increment and bonus, retirement age, long service awards and benefits that are contingent on the years of service with the employer such as annual leave and medical leave. Employers should also ensure that the fixed-term contract does not provide entitlement to benefits that are only available to permanent employees. Fixed-term contracts should also not include automatic renewal provisions.

Conduct of parties

A genuine fixed-term contract may be construed as a permanent contract due to the conduct of the parties in the performance of the contract of employment. An employee who is retained on a series of fixed-term contracts may be considered by the Industrial Court to be a permanent employee. The total duration or length of service with an employer is also a factor that would be taken into account.

In Holiday Villages, a resort employed both seasonal and permanent employees. Seasonal employees had a fixed term in their contracts which would range from three to six months or for a season. The resort was not open for the whole year and would be closed during the monsoon season which falls between November and January of each year. The employee had begun employment on a fixed-term contract for one season. He was subsequently employed for six consecutive seasons. The Industrial Court acknowledged that the resort was only open for nine to ten months in a year and that there was a

genuine need for fixed-term contracts as it was inconceivable to expect the resort to pay salaries when it was closed. Notwithstanding the genuine need for fixed-term contracts, the Industrial Court found that the employee was, by the last fixed-term contract in the series of fixed term contracts, a permanent employee of the resort as:

(a) he was employed even during the off-season as a laundry supervisor;

(b) he was given a new contract without the need to reapply; and

(c) he was able to continue in employment even after the alleged expiry of his penultimate fixed-term contract without an extension.

In Han Chiang High School, the school had employed teachers on fixed-term contracts of two years. A number of teachers who had joined the Union of Teachers in Independent Schools were informed that their employment would cease upon expiry of the fixed-term contract. The union applied to the High Court for an interlocutory injunction restraining the school from terminating the services of the teachers. The High Court granted the injunction but the then Supreme Court subsequently set aside the injunction. After the injunction was set aside, the school proceeded to inform the teachers that their services were no longer required. The Industrial Court held that although there might have been a genuine need for fixed-term contracts when the school was first inaugurated, there did not appear to be such a need when it had been successfully established as some of the teachers had taught for more than 20 years and had their contracts renewed unfailingly during those years. In holding that the fixed term contracts were not genuine, the Industrial Court stated that the system of fixed-term contracts in the school was employed not out of genuine necessity, but as a means of control and subjugation of its teaching employees.

In Telekom Malaysia, five employees were migrated to fixed-term contracts in 2003 as part of a transformation plan to improve the performance of government-linked companies (“GLCs”). One such GLC, Telekom Malaysia Berhad, had offered all senior management officers the option of either remaining under current terms as permanent employment or to accept fixed-term contracts.

Employees would have to resign from their permanent employment before accepting the fixed-term contracts. In consideration, thereof, such employees would be paid higher salaries and receive increased benefits and allowances. The dispute arose when five of those officers did not have their fixed-term contracts renewed. They lodged a complaint under s 20 of the Industrial Relations Act 1967, but the Minister declined to refer the matter to the Industrial Court. The employees applied for judicial review of the Minister’s decision. At the High Court, the decision of the Minister was upheld. Three of the five employees appealed to the Court of Appeal, which allowed the appeal and referred the matter to the Industrial Court.

While holding that it is for the Industrial Court to deliberate on the genuineness of the fixed-term contract, the Court of Appeal stated that the GLC had genuine intentions when they offered the fixed term contracts to their senior management as their intention was to increase performance and productivity and, in return, the senior management would be able to earn higher incomes. The Court of Appeal went on to state that this was part of a business plan and there was no ulterior or sinister motive on the part of the GLC when they offered the fixed-term contracts and the fixed term was not a guise to shorten the employment of the employees previously on permanent contracts.

In allowing the appeal, the Court of Appeal was of the opinion that since an assessment of performance was a key ingredient for the renewal of the fixed term, a failure to hold or carry out an assessment is a question of law for the Industrial Court to decide. The Court of Appeal went on to state that the contract was termed in a manner to imply that the GLC was obliged to consider an extension based on the outcome of the assessment. Other considerations and factors that have been taken into account by the Industrial Court when finding that a fixed-term contract was, in fact, a permanent contract are:

(a) promoting an employee on a fixed-term contract during the fixed term;

(b) providing bonus to an employee on a fixed-term contract as enjoyed by every other employee of the company; and

(c) providing a pay increase each time the fixed-term contract is renewed.

To avoid providing permanency to the employee under a fixed-term contract, employers should ensure that employees are aware that any subsequent extension of the fixed-term contract or offer of a new fixed-term contract is subject to a review of the employer’s business and operational needs or other factors such as targets and performance reviews.


Employers with a genuine operational need to employ employees on fixed terms must ensure that the terms of the contract are consistent with the character of fixed-term contracts and are not that of permanent employment. Employers must also be aware that their subsequent conduct during the course of employment may be relevant in determining whether an employee will be held to be employed under a fixed-term or permanent contract of employment.