Seven specific contract clauses now expose Malaysian employers to Industrial Court claims, fines under the Employment Act 1955 (as amended by the Employment (Amendment) Act 2022), and regulatory action by the Director General of Labour. The 2022 amendments — which took effect on 1 January 2023 — removed the monthly wage threshold that previously excluded higher-paid workers from the Act's protection, meaning virtually every employee in Peninsular Malaysia and Labuan now falls within its scope.
Why the 2022 amendments changed everything
Before the amendments, the Act applied mainly to employees earning RM2,000 or below and to certain categories regardless of wage. That ceiling is gone. Section 2 of the Employment Act 1955 (as amended) defines "employee" without a salary cap, so a contract clause that was borderline but tolerable for a senior executive in 2021 can now attract a penalty under the Act in 2026.
Employers who recycled old contract templates without legal review are the most exposed. The following seven clauses appear repeatedly in disputes brought before the Industrial Court and the Labour Department.
1. Probation periods exceeding the implied reasonable limit
The Employment Act does not prescribe a maximum probation length in exact months, but the Industrial Court has consistently held that probation extending beyond six months without extension on documented performance grounds is unreasonable. Contracts that specify a 12-month probationary period as standard — without any performance review mechanism or extension criteria — risk being challenged as a device to deny employees their full statutory rights during that period.
Employees on probation remain covered by sections 60–60J of the Act from day one: rest days, public holidays, annual leave, and sick leave accrue from the start of employment, not from confirmation. A clause stating that annual leave "commences upon confirmation" directly conflicts with the Act.
2. Excluding employees from expanded sick leave entitlements
Section 60F of the Employment Act 1955 sets out sick leave on a sliding scale tied to years of service: 14 days per year in the first two years, 18 days in years three to five, and 22 days from year six onward. Hospitalisation entitlement is 60 days per year.
Contracts that cap sick leave at a flat 14 days regardless of service length, or that fold hospitalisation leave into the same 14-day pool, violate section 60F. This mistake is common in templates drafted before 2013 (when the hospitalisation entitlement was raised) that were never updated.
3. Requiring employees to work on rest days without the correct premium
Section 60 of the Employment Act 1955 entitles hourly-rated and piece-rated employees to double pay for work on a rest day, and at minimum a day's ordinary rate plus the actual hours worked for salaried employees. A contract clause that simply says employees may be "required to work additional days as needed, compensated at the normal rate" overrides this entitlement and is void to that extent under section 7 of the Act, which renders any term less favourable than the statutory minimum of no effect, substituting the Act's provision in its place.
The same principle applies to overtime. Section 60A limits total daily working hours (normal hours plus overtime) to 12 hours and caps overtime at 104 hours per month, with payment required at 1.5 times the hourly rate. A clause setting overtime at straight time — or imposing unpaid "compulsory overtime" — cannot be enforced.
4. Omitting a sexual harassment policy reference
The Employment (Amendment) Act 2022 strengthened the sexual harassment provisions in sections 81B to 81H. Sections 81B to 81E require employers to inquire into sexual harassment complaints and set out the Director General's powers where an employer refuses to do so. Section 81H separately requires every employer to display a notice on sexual harassment awareness at the workplace. The Act does not prescribe exact contract language, but employers who draft contracts with no reference to a sexual harassment policy — and who have no internal complaints procedure — face liability when harassment occurs and no inquiry process exists, with penalties for non-compliance raised to RM50,000.
Best practice, now widely adopted by Malaysian HR practitioners, is to include a clause in the employment contract referencing the company's Sexual Harassment Policy (or equivalent) and confirming the employee's right to lodge a complaint. Contracts silent on this point are not automatically illegal, but the absence of any internal mechanism is a statutory violation on the employer's part.
5. Ignoring the flexible work arrangement request process
Section 60P, inserted by the 2022 amendments, gives employees the right to request a flexible working arrangement covering hours, days, or place of work. Employers are not compelled to grant every request, but they must respond in writing within 60 days and — if refusing — provide reasons in writing.
A contract clause that simply states "place and hours of work are as directed by management and may not be varied" does not by itself violate the Act. However, an employer who includes such a clause and then uses it to refuse even to consider a written flexible work request — or who fails to provide written reasons within 60 days — breaches section 60P. The practical risk: employees who are dismissed after making a flexible work request are now bringing constructive dismissal claims before the Industrial Court on the ground that the dismissal was in retaliation for exercising a statutory right.
6. Restraint of trade clauses that effectively override statutory rights
Restraint of trade in Malaysian employment contracts operates under common law, not the Employment Act — section 28 of the Contracts Act 1950 renders agreements in restraint of trade void unless they fall within specific exceptions. Courts apply a reasonableness test covering geographic scope, duration, and the interest being protected.
The Employment Act angle is different: some employers draft post-employment restrictions framed as "liquidated damages" that are, in effect, penalties for resignation. If the liquidated damages sum exceeds the employer's genuine pre-estimate of loss and is structured to punish an employee who exercises the statutory right to resign on notice under section 12 of the Employment Act 1955, courts have treated them as unenforceable penalty clauses rather than genuine liquidated damages. Contracts drafted this way create disputes where the employer expected certainty.
7. Calculating overtime on basic salary while excluding commission and allowances from the rate
Section 60A of the Employment Act 1955 requires overtime to be calculated on the "ordinary rate of pay," which the Act defines in section 2 as the rate payable for the normal working hours per day, inclusive of allowances paid in connection with work that are paid in every pay period. Employers who calculate overtime on basic salary alone — deliberately or by oversight — while paying regular daily transport or attendance allowances are misapplying the statutory formula.
The Director General of Labour has power under section 69B to investigate and award back pay for overtime underpayment. Labour inspectors have cited this particular miscalculation in audit findings across manufacturing and logistics employers since 2023.
What a compliant contract looks like
A legally sound Malaysian employment contract in 2026 addresses all of the above: probation with documented review criteria, leave entitlements that track the statutory schedule, rest day and overtime rates aligned to sections 60 and 60A, a reference to the sexual harassment inquiry mechanism, an acknowledgment that flexible work arrangement requests will be handled under section 60P, and overtime calculations that include contractual allowances in the base rate.
The Malaysia Employment Contract template on forms-legal.com is structured around the Employment Act 1955 as amended — useful as a starting framework for employers who want to audit their existing contracts against the 2022 changes.
Industrial Court exposure if you get it wrong
Employment disputes in Malaysia that cannot be resolved at the Labour Department level proceed to the Industrial Court under the Industrial Relations Act 1967. The Industrial Court hears claims of unfair dismissal and has awarded back wages, compensation in lieu of reinstatement, and costs against employers. Since the 2023 application of the expanded EA coverage, the volume of claims from employees previously excluded from the Act has increased, particularly among managerial and executive grades.
The Labour Department (Jabatan Tenaga Kerja) also conducts random audits of employment contracts and payroll records. Non-compliant contracts can result in a fine not exceeding RM10,000 per offence under the penalty provisions of the Employment Act 1955, with each affected employee potentially constituting a separate offence.
A practical review checklist
Before signing or circulating any employment contract in Malaysia in 2026:
- Confirm probation duration is six months or less, with a clear extension clause tied to performance documentation.
- Verify leave entitlements track the statutory schedule under section 60F, not a flat number.
- Check that rest day and overtime rates match sections 60 and 60A.
- Confirm the ordinary rate of pay used for overtime calculations includes all regular allowances.
- Add a reference to the sexual harassment complaints procedure required under sections 81B–81E, and ensure a workplace notice is posted as required by section 81H.
- Include a clause acknowledging the employee's right to submit a flexible work arrangement request under section 60P.
- Review post-employment restrictions to ensure they are reasonable in scope and not structured as penalty clauses for resignation.
Getting this right is less about legal perfection and more about not having a document that fails on the basics — which is exactly where most Industrial Court claimants find their strongest ground.
Need the document itself? Download the free template →
This article is general information, not legal advice — see our accuracy & editorial policy. Confirm the cited law is current before relying on it.