Malaysia: Limit of liability for fixed-term contracts

In the case of Malayan Banking Berhad v Mahkamah Perusahaan Malaysia & Anor [2016] MLRHU 1, the High Court in Malaysia ruled that, in an action for unfair dismissal, a fixed-term contract employee may only claim back wages in relation to the unexpired period of their contract.

Background

An employee was employed on a 12-month fixed-term contract that included a probationary period. At the end of her six-month probationary period, she was informed that her position with her employer would not be confirmed. At that time, her fixed-term contract had five months and 17 days left to run. The employee filed an unfair dismissal claim against her employer. The Industrial Court upheld her claim and awarded 12 months of back wages. The employer appealed to the High Court, arguing that the employee was only entitled to five and a half months' back wages, as the employee's contract would have expired on its own had the employer not terminated it early.

Decision

The High Court held that the probationary period in the employment contract did not alter the contract's nature as a fixed-term contract. Even if the employee had successfully completed her probationary period, her employment would still have come to an end when her contract expired. Awarding the employee 12 months' back wages despite the fact that the contract was due to expire in five and a half months would therefore have been inconsistent with the parties' intention to enter into an employment relationship for a fixed 12-month period only.

What this means for employers

Fixed-term contracts are often used by employers as a means of assessing the suitability of their employees to their positions before offering them permanent contracts. They are therefore often seen as an alternative to permanent contracts with probationary periods, and as a result, do not typically include probationary periods.

This decision is favourable to employers. It reassures employers that their liability for fixed-term contract employees will be limited to the unexpired term of their contracts where such employees bring unfair dismissal claims. Employers should consider incorporating probationary period provisions in fixed-term employment contracts to give themselves more flexibility to terminate employees whose performance is unsatisfactory to their organisations.

However, employers are reminded that unfair dismissal claims, even if limited in quantum in light of this decision, may still create significant reputational and financial risks. Employers are therefore advised not to treat this case as a licence to dismiss employees without cause and are advised to continue to exercise caution when making decisions as to whether or not to confirm the appointment of fixed-term contract employees.

By Fatim Jamubhoy, Tess Lumsdaine, Sarah Yazid and Barry Wang