Is Your 1-Year Contract Worker Agreement in Malaysia Actually Illegal? An SME Owner's Guide
As a Malaysian SME owner, you use contract worker agreements to stay flexible. But a common mistake can turn that “1-year contract” into a major legal risk.
This simple guide explains a key Industrial Court case and shows you how to draft a safe, compliant contract worker agreement Malaysia.
The Real-World Case: Binasat Communications Sdn Bhd
Let’s break down a real situation (Binasat Communications Sdn Bhd) that went to the Industrial Court.
- The Setup: An employee was hired on a 1-year contract worker agreement Malaysia for a client project.
- The "Red Flags" in the Contract: His contract included:
A 6-month probation period (usually for permanent staff).
Annual leave that increased with his years of service (a sign of permanent employment).
Annual performance bonuses and potential increments.
A clause allowing renewal "by mutual agreement."
- What Happened: After his 1-year contract ended, the company did not renew it. However, the client project was still ongoing, his colleagues were kept on, and the company hired a replacement for his role.
The Industrial Court's Decision
The Court ruled this was not a genuine fixed-term contract. The non-renewal was treated as a dismissal without just cause.
Why? The Court looked at the substance of the job, not just the “fixed-term” label. The work was part of the company’s normal, ongoing operations. The contract terms (probation, seniority leave) made it look like a permanent job disguised as a contract.
The employee was awarded over RM57,000 in back wages and compensation.
Key Lesson for Your SME
A contract worker agreement Malaysia is only a true “fixed-term contract” if the job itself is temporary.
If the work is part of your normal, everyday business (like a general clerk, customer service rep, or regular admin staff), the court will likely see that employee as permanent. Letting their contract expire without renewal is treated as a dismissal, and you must have a valid reason.
When is a Fixed-Term Contract the Right Choice?
YES – Use a Fixed-Term Contract For:
- Specific Projects: Hiring a software developer for a 6-month system rollout.
- Covering Temporary Absences: Maternity leave or long-term medical leave cover.
- Seasonal Work: Extra staff for year-end holiday sales.
- Grant-Funded Roles: A position that exists only as long as a specific government grant funds it.
NO – Do NOT Use a Fixed-Term Contract For:
- Core business roles that you need indefinitely (e.g., your main office clerk, accountant, or operations manager).
- A way to avoid giving permanent status by renewing year after year.
- Roles with contract terms that signal permanence (like probation and seniority-based benefits).
How to Draft a Safer Contract Worker Agreement in Malaysia
Use these practical tips to make your next contract worker agreement Malaysia compliant and low-risk.
- 1. State the Temporary Purpose Clearly
“This is a fixed-term contract for the specific purpose of the [Project Name]. Employment will automatically terminate upon the project’s completion on [End Date].”
- 2. Remove "Permanent" Clauses
Do NOT include: Probation periods, confirmation clauses, or annual leave that increases with service years. For a genuine
- 3. Link the End to a Specific Event
Connect the contract’s end to an objective event, like the expiry of a client agreement, completion of project milestones, or the end of a grant.
- 4. Be Consistent and Keep Records
If you have multiple staff on the same project, apply the same renewal/expiry rules to everyone. Keep copies of the client contract or grant letter that proves the temporary need.
A Simple Checklist for Your Team
Before you issue that contract worker agreement Malaysia, ask:
Is this role for a specific, temporary need with a clear end date?
Does the contract avoid probation and seniority-based benefits?
Do we have documentary proof (client PO, project plan) of the temporary need?
If the work is still needed after the contract ends, are we prepared to offer a new, separate contract or a permanent position?
If you answered “No” to any, you might be creating a permanent employee by accident.
Final Word for Busy Owners
Don’t let a “1-year contract” label create a hidden liability. Always ensure your contract worker agreement Malaysia matches the true nature of the job. Draft it correctly, keep your evidence, and protect your business from costly legal disputes.
Disclaimer:
The information provided in this article is for general informational purposes only and should not be construed as legal advice. Each contract worker agreement in Malaysia may be subject to different legal requirements based on the specific circumstances of the employment. SME owners are encouraged to consult with a qualified legal professional to ensure compliance with current labor laws and to tailor contracts to the needs of their business. The author and publisher disclaim any liability for any legal consequences that may arise from the use or misinterpretation of the information contained in this article.
Frequently Asked Questions
Can I put a probation clause in a 1-year contract just to be safe?
No. This was a major problem in the Binasat case. Probation is for permanent staff to assess their long-term fit. Including it strongly suggests the role is actually permanent.
What if I don't renew the contract but the job is still there?
This is very risky. If you need to hire someone else for the same role immediately after a “non-renewal,” the Industrial Court will likely see it as an unfair dismissal of the first employee.
How can I keep a good contract worker after their project ends?
The safest way is to issue a new offer letter for a new project or a permanent position. Keep the agreements separate and clear.
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