[Watch] Understanding Employment Exit Contracts: Legal Restrictions And Exceptions In Malaysia
An exit clause that says you’re not allowed to work in the same industry for a certain period upon resigning is not legally binding.
Subscribe to our FREE Newsletter, or Telegram and WhatsApp channels for the latest stories and updates.
It is a known fact that every employee needs to sign a contract when entering work, however, did you know that at times, an employee also needs to sign a contract when leaving the job?
This is also known as the non-compete clause. If you’re familiar with the television series Suits, you’ll know what this is.
This was explained by a human resources consultant known as Syakir, on his TikTok account.
He addressed this topic after a follower asked if an employer could require an employee to sign a contract upon resignation that prevents them from working in the same industry for two years.
@syakirhr Replying to @Amlyn.as terma terbatal kalau resign tak boleh kerja ngan industri yang sama #gaji #pontengkerja😜😜😜 #kerjalebihmasa #kerjaovertime #overtime #aktakerja1955 #aktakerja #undangundangmalaysia #undangundang #sumbermanusia #hakmajikan #kerja #bonustahunan #harikelepasanam #cutiraya #gajipekerja #cutibersalin #cutisakit #bonus #mengandung ♬ original sound – Syakir HR Consultancy
According to Syakir, while the Employment Act 1955 does not cover this matter, the Contract Act 1950 does.
Specifically, Section 28 of the Contract Act 1950 states that any agreement preventing a person from engaging in a lawful occupation, trade, or business is void.
Syakir further explained that even if such a contract is signed, it would automatically become void and not legally binding.
This means the individual is free to pursue any other legitimate business activities.
Exceptions to the Rule
There are three notable exceptions under Section 28 where such contracts may not be considered void:
First, in the sale of a company brand (goodwill). The seller of a company can agree with the buyer not to engage in the same trade within a certain period, as long as the duration is deemed reasonable by the court.
In addition, partners of a dissolving company can agree that some or all partners will refrain from conducting the same business for a specified period.
As for the partnership that is extended, some or all of the partners can agree not to carry out any business apart from the partnership.
Restrictions for Current Employees
Syakir also mentioned that while former employees cannot be restricted from joining the same industry, current employees can be restricted from engaging in other trades within the same industry.
According to Richard Wee Chambers’ website, this is explained in Halsbury’s Laws of Malaysia on Contract (Volume 4).
Although there is a restriction, it is not considered a trade restraint void under Section 28 of the Contract Act 1950.
Therefore, an agreement that an employee may not offer their services to a third party is not a voidable restriction.
If an employee violates such an agreement, it may be considered a breach of contract and a conflict of interest.
Share your thoughts with us via TRP’s Facebook, Twitter, Instagram, or Threads.
