When hiring new employees, most business owners focus on speed and trust. But in the background, an unseen legal risk is quietly forming — one that can cost you your clients, your confidential information, and years of effort. The humble employment contract is not just a formality; it is a legal shield. And when it’s poorly drafted, the cost of that oversight often only surfaces when it’s too late.
3 Benefits of Getting It Right
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Protects your business from ex-employees who might steal clients, data, or business models
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Strengthens your legal footing in the event of dismissal, disputes, or Industrial Court claims
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Sets clear expectations and boundaries, reducing friction and misuse of your goodwill
3 Severe Consequences of Getting It Wrong
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Losing valuable clients or revenue to a staff-turned-competitor, with no recourse
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Leaking of confidential trade data, strategies, or intellectual property to outsiders
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Risk of being sued for wrongful dismissal or discrimination due to unclear terms
The good news is — getting it right doesn’t require extravagant spending. With a clear, strategic contract, you gain legal leverage and peace of mind at a cost that is low compared to the damage of a breach.
Let’s explore the 4 most common weaknesses in Malaysian employment contracts — and how they can quietly undermine your business.
1. No Confidentiality Clause
Employees gain access to sensitive business data — client databases, pricing structures, internal processes, marketing strategies. Without a clear and enforceable confidentiality clause, they can walk away with that knowledge, and you may have little recourse to stop them from sharing or exploiting it.
In Dynacast (Melaka) Sdn Bhd v Vision Cast Sdn Bhd & Ors [2016] MLJU 1420, the plaintiff sought an injunction after ex-employees allegedly misused confidential technical data. While the case turned on specific facts, the court noted the importance of written confidentiality terms as part of determining a breach.
Such obligations are enforceable under the general law of contract. Section 10(1) of the Contracts Act 1950 provides:
“All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object…”
Confidentiality clauses are lawful and enforceable if clear, specific, and reasonable in scope.
Legal Consequences For Not Having a Confidentiality Clause:
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You may not be able to get an injunction if no written clause exists
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It becomes harder to prove there was any expectation of confidentiality
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You may be limited to claiming general damages, with no leverage to stop further leaks
Myth: A lot of business owners think that a verbal instruction to “keep this private” is enough — but actually, courts won’t enforce confidentiality unless it’s clearly written and contractually agreed upon.
FAQ:
Can I still sue an ex-employee for leaking data if the contract had no confidentiality clause?
In many cases, no. Without a contractual obligation, you may need to rely on equitable doctrines like breach of confidence — which are much harder and costlier to prove.
2. No Non-Solicitation Clause
Employees who handle client accounts or business strategy may become powerful competitors if they resign and target your clients. Without a non-solicitation clause or reasonable restrictive covenant, there may be little you can do.
Case Insight:
In Ideal Packaging Industries Sdn Bhd v Ng Chong Keat & Anor [1995] 2 MLJ 113, the plaintiff (employer) sought to enforce a restraint of trade clause against a former employee who had joined a competing business.
It was argued that Section 28 of the Contracts Act 1950 makes restraint of trade clauses void, which states:
“Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.”
The court ultimately ruled that the clause was unenforceable but it also confirmed some level of restriction can be valid, if they are reasonable and serve to protect a legitimate business interest.
Myth: A lot of employers think Malaysian law completely prohibits non-compete clauses — but actually, narrowly drafted non-solicitation and non-dealing clauses may be upheld if they are reasonable and protect real business interests.
FAQ:
Can I stop an ex-staff from opening a similar business?
Not always — but you may be able to prevent them from soliciting your clients or using confidential know-how, if your contract includes enforceable restraints tailored to your business.
3. Vague Job Scope and Termination Terms
Disputes often arise when an employee claims they were wrongfully dismissed or treated unfairly. If the contract doesn’t clearly set out job scope, performance expectations, or grounds for termination, even a poorly performing employee may have a valid claim.
Case Insight:
In Goon Kwee Phoy v J & P Coats (M) Sdn Bhd [1981] 2 MLJ 129, the Federal Court held that where an employer dismisses a worker without proper grounds or fails to follow due process, the dismissal may be considered wrongful — even if the employer subjectively believes performance was poor.
While the Employment Act 1955 provides basic protections, employers must ensure that their contracts set out clear obligations and fair disciplinary or termination procedures. This will help the courts assess whether dismissals are substantively and procedurally just, in favour of the employers.
Myth: A lot of employers think they can terminate staff during probation without consequence — but actually, even probationers have the right to be informed of their shortcomings and given a fair opportunity to improve.
4. No Non-Disparagement Clause
When an employee leaves — especially under tense or emotional circumstances — there is always a risk they may speak negatively about your company, leadership, or clients. Even subtle remarks made to industry peers, suppliers, or on social media can damage your reputation or cost you business. Without a non-disparagement clause, there may be no legal recourse to stop it.
Illustration: A former marketing head left after a disagreement over bonuses. In the weeks following her exit, she told vendors and industry contacts that the company was “toxic” and “unethical.” Though much of what she said was vague or subjective, it damaged client confidence. The company’s contract had no clause preventing such conduct, making it hard to pursue legal action.
Under Section 3 of the Contracts Act 1950, parties are free to agree to terms that govern behaviour during and after employment — including restrictions against disparagement. While freedom of speech is protected, contractual obligations voluntarily undertaken are enforceable, provided they are not oppressive or unlawful.
A typical non-disparagement clause may state that the employee agrees not to make, publish, or communicate any false, defamatory, or damaging statements about the company, its employees, or its business practices — both during and after employment.
Myth: A lot of people think ex-employees can say anything once they leave — but actually, if a non-disparagement clause exists, and the remarks harm the company, legal action may be available for breach of contract or defamation.
FAQ:
Can I stop an ex-employee from posting negative things about the company on social media?
If your contract includes a well-drafted non-disparagement clause, and the post is false, malicious, or harmful, you may have legal grounds to demand removal or pursue damages. Without such a clause, it’s much harder to act.
Conclusion
Employment contracts are more than onboarding paperwork — they are strategic legal tools that protect your business when things go wrong. Whether it’s a leaking trade secret, a poached client, or a wrongful dismissal claim, the strength of your contract often determines the outcome.
As your team grows, don’t let outdated or borrowed templates expose your business to unnecessary risk. A well-drafted employment contract is not just a formality — it is a long-term investment in your company’s security, stability, and professionalism. It protects what you’ve built by setting clear expectations, preserving relationships, and enabling swift legal response when needed.
Every business operates differently, with unique internal structures and risks. Your employment contracts should reflect those realities — not rely on generic or recycled terms that fail under pressure.
Every situation is different, and proper legal advice should always be sought to ensure your contracts are fit for purpose and enforceable.
