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DRAFTING EMPLOYMENT CONTRACTS

DRAFTING EMPLOYMENT CONTRACTS. BY LEE SWEE SENG LLB (HONS), LLM, MBA MANAGING PARTNER LEE SWEE SENG & CO ADVOCATES & SOLICITORS CERTIFIED MEDIATOR PATENT AGENT NOTARY PUBLIC Copyright www.leesweeseng.com sweeseng@tm.net.my. WHAT IS A CONTRACT OF EMPLOYMENT ?.

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DRAFTING EMPLOYMENT CONTRACTS

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  1. DRAFTING EMPLOYMENT CONTRACTS BY LEE SWEE SENG LLB (HONS), LLM, MBA MANAGING PARTNER LEE SWEE SENG & CO ADVOCATES & SOLICITORS CERTIFIED MEDIATOR PATENT AGENT NOTARY PUBLIC • Copyright • www.leesweeseng.com • sweeseng@tm.net.my

  2. WHAT IS A CONTRACT OF EMPLOYMENT ? • It is an agreement between employer and employees which governs the relationship between both parties. • It may be implied from the surrounding circumstances. • s2 Employment Act 1950 defines a contract of service as any agreement, oral or writing, implied or express, where a person is engaged as an employee and serves his employer.

  3. Employment Act 1955 • Contracts of Service;- • a) s6 EA 1950 • every agreement lawfully entered between and employer and employee shall be binding upon parties • b) s7 EA 1950 • any term of a contract or service, which is less favourable to an employee, shall be void and a more favorable provision of this Act shall be substituted therefor.

  4. c) s7A EA 1950 • Nothing in this provision shall prevent the employer or employee from agreeing to a more favourable term towards the employee. • d) s8 EA 1950 • No term in any contract of service may restrict any right of an employee to ;- • i) join a trade union • ii) participate in trade union activities • iii) to associate with any persons with regards to a trade union

  5. e) s10 EA 1950 • All contracts of service shall be in writing if specified period is more than a month. It shall also include a termination clause by either party. • f) s18 EA 1955 • A contract of service shall state the wage period and it shall be paid not later than the 7th day of the following month.

  6. g) s60E EA 1955 • Every employee is entitled to paid annual leave of ;- • i) 8 days for every 12 months of continuous service for a period of less than 2 years • ii) 12 days for every 12 months of continuous service for a period of 2 years but less than 5 years. • iii) 16 days for every 12 months of continuous service for a period of 5 years or more.

  7. h) s60J EA 1955 • The Minister may provide for the employees ;- • a) termination benefits • b) lay-off benefits • c) retirement benefits

  8. Termination or Lay-off Benefits • According to Reg.6 of the Employment (Termination and Lay-Off Benefits Regulations 1980, employees are entitled to the above benefits as stated below : • a) 10 days’ wages under a continuous contract of service and employed less than 2 years • b) 15 days’ wages under a continuous contract of service and employed for 2 years but less than 5 years • c) 20 days wages under a continuous contract of service and employed for 5 years or more

  9. Retrenchment & RedundancyDr HC Huang Consultancy Engineers S/B v Lim Choon Ntia [2000] 2 ILR 330 • The claimant was terminated without retrenchment benefits during the 1997 economic crisis. • The Company terminated his services due to the economic downturn and recession causing the company to cease. • In Kumpulan Akitek, Kumpulan Dua (M) S/B v Mustapha B Harun [1987] 2 ILR 80, the Industrial Court held that it is the right of the employer to reorganise his business for the purpose of the economy and convenience provided it acted bona fide, this the Arbitration Court will not interfere.

  10. Retrenchment & RedundancyDr HC Huang Consultancy Engineers S/B • Similiarly in William Jacks & Co. S/B v V.S Balasingam [1993] 2 ILR 527. The Court of Appeal held that, retrenchment exercise conducted in bona fide cause is a question of fact but as long done in bona fide, the decision is immune from examination by the Industrial Court.

  11. Retirement BenefitsThong Ah Teh v Eastern Garment Manufacturing Co. S/B [2002] 6 CLJ 133 • The claimant reached normal retiring age and was awarded RM37,765.16 as retirement benefit but he was dissatisfied with the payment. • He argued that he should be paid from 1st August 1966 onwards and not from 1st January 1980. • Retirement benefits are not compulsory benefit under law unless if it is provided in the employment contract,

  12. In Petaling Rubber Estate Ltd v Nadarajah [1988] 1 MLJ 22 SC, the Supreme Court held that wages under s2 Employment Act 1955 is defined as all remuneration for work done under contract of service. • Wan Hamzah SCJ, opined that ‘work done’ is with respect of the contract of service as any payment made by employer ex gratia, not for work done, is not part of the wages.

  13. However in this case, the claimant was provided with the benefit but due to company’s restructuring the scheme, his benefit does not act retrospectively. • The issue here is whether claimant entitled to benefit from 1966 onwards. • HELD, the claimant was entitled to the retirement benefits from 1966 onwards.

  14. Essential Terms & Conditions • Job description • Period • Wage • Leave • Termination • Probation period • non-competition clause

  15. Contract of Service & Contract for Services • A contract of service is different from a contract for services. • The Courts use several tests to determine which is which: • Control Test • Integration Test • Multiple Test • Economic Reality/Entrepreneur Test • Mutual Obligation Test

  16. Other considerations: • EPF contribution • SOCSO contribution • Income Tax Deduction • Termination without need to assign reason • Required to engage own workers • Required to take professional indemnity

  17. Control Test: • The Court of Appeal in EPF Board v BATA SHOE CO (M)LTD [1968] 1 MLJ 236, upheld the High Court’s decision that shop managers were employees of BATA due to the considerable control which the company had over the shop managers. • In this case, there was no relationship of employer and employee between the BATA and the salesman employed by the shop managers of the company.

  18. Control Test • As per the agreement between the company and the managers, the latter were given authority to employ assistants and it was stated that the managers would be responsible for payments under the EPF ordinance. • However a couple of cases considered the control test not conclusive (CASSIDY v MINISTRY OF HEALTH [1951] 2 KB 343 and MOREEN v SWINTON and PENDLEBURY BOROUGH COUNCIL [1965] 1 WLR 576)

  19. Intergration Test • Hence they turned to the integration tests. The integration test sees if the worker is ‘part and parcel’ of the business organization. • In STEVENSON, JORDAN and HARISSON LTD v MACDONALD and EVANS [1952] 1 TLR 101 , Dening LJ opined that under a contract of service, a man is employed as part of the business and his work is done as an integral part of the business, while under a contract for services, his work, although done for the business, is not integrated into it but only an accessory to it.

  20. Integration Test • Denning LJ gave an illustration concerning a captain of a ship (employee of the ship owners) and the pilot who boards the ship only to steer it safely to a harbour (an essential service but not one which makes the pilot an integral part of the ship owners business).

  21. Control & Integration Tests • Wan Suleiman FJ employed the above tests (both control and integration test) in EPF Board v MS Ally & CO. Ltd [1975] 2 MLJ 89. • The Federal Court held that the working assistants who managed the business of MS Ally & Co, was rewarded by a share of the profits, as they were employees of MS Ally since there was sufficient control over the working assistants.

  22. Multiple Test • Mckenna J in READY MIXED CONCRETE v MINISTER of PENSIONS [1968] 2 QB 497, derived another test known as multiple tests. • The Plaintiff was in the business of making and selling ready mixed concrete. The Company had engaged an independent contractor to deliver concrete to customers but that contract was terminated and the Plaintiff decided to introduce a scheme whereby the concrete was to be delivered by the owner-drivers working under writtencontracts.

  23. Multiple Test • The owner-drivers entered into a hire purchase agreement with the Plaintiff to purchase a lorry but the mixing equipment on the lorry is still owned by the Plaintiff • The Plaintiff later wish to know on what was the status of one of the owner, Mr Latimer. • The Minister replied that Latimer was employed under a contract of service but, on appeal to High Court, they held that Latimer was running a business of his own.

  24. Multiple Test • This case was later applied in CASIO (M) Sdn Bhd v Wahab Tuan Idris [2110] 2 ILR 117. • The elements are ;- • a) did the worker undertake to provide his/her own work and skill in return for remuneration? • b) was there a sufficient degree of control to enable the worker fairly to be called a servant? • c) were there any factors inconsistent with the existence of a contract of service? • d) which would definitely negate the existence of a master/servant relationship. If there are not, then there is a presumption that, because the worker could be a servant, he should be so considered

  25. Economic Reality Test • The recent test is known as the Economic Reality/Entrepreneur Test where it focuses on the inconsistency of seeking a profit from doing the work as an employee. • In Market Investigation Ltd v Minister of Social Security [1969] 2 WLR 1, Cooke LJ nearly made the economic reality test as the standing test today, however he still recognizes the previous test as relevant. • This test offers deeper advantages whereby the employer and worker have dressed up a master/servant relationship in the essence of a contract for service.

  26. Mutual Obligation test • Although the ‘economic reality test’ is widely accepted, a further test came about namely ‘mutual obligation test’ whereby; - • a) the relationship of employer and employee cannot exist unless the employer perceives and acts on an obligation to supply work • b) and the worker feels obliged to undertake any work offered

  27. Terms and Conditions in Contract of Service • A contract of service may be oral or in writing, but under Rule 5 (b) and 8 Employment Regulations 1957 the following terms must be given to an employee in writing on or before the commencement of his employment ; • i) name of employee/NRIC • ii) occupation or appointment • iii) wage rates (excluding allowances) • iv) allowances payable and rates • v) rates for overtime work

  28. Terms and Conditions of Contract of Service • vi) other benefits • vii) agreed normal hours of work per day • viii) agreed period of notice of termination of employment or wages lieu • ix) annual leave • x) wage period

  29. Other optional clauses;- • i) transferability • ii) restrain of trade • iii) IP rights • iv) Confidential Information & Trade Secrets

  30. Transferability Clause;-Ladang Holyrod v Ayasamy Manikam [2004] 2 CLJ 697 • The Respondents were told to transfer to a another division estate but they refused and told the Appellants to pay them termination and lay-off benefits pursuant to the Employment (Termination and Lay-Off Benefits) Regulations 1980. • Based on the facts, there was no written contract of service between the parties but there was a collective agreement.

  31. The Court refered to Soon Seng Cement Products S/B v Non-Metalic Mineral Products Manufacturing Employees Union [1996] 1 ILR 414, where its established law under s13 Industrial Relations Act 1967, whereby the company has the right to transfer its employees within the organisation as long it is not a detrimental change of the employee with regards to the terms of the employment

  32. The power to transfer, according to Ghaiye’s Misconduct in Employment at pg 238 ‘......the right to transfer is an implied right therefore no express term is required as it even exist in the absence of a contract. • This was found in various decisions: • Kesatuan Kebangsaan Pekerja-pekerja Ladang v Kesatuan Pekerja-pekerja di dalam Kesatuan Sekerja [1992] 2 ILR 326. • Georgetown Pharmacy (M) Sdn Bhd v NUCW [1992] 2 ILR 377.

  33. The transfer is subjected to the following restrictions;- • a) nothing contrary in the employment terms • b) management acted bona fide and in the interest of business • c) management is not influenced by an indirect motive • d) transfer is not made for the purpose of harassing and victimizing the workmen • c) transfer does not involve a change in the conditions of service

  34. In considering the facts and circumstances, the Respondents contended that it is another 5km and additional 15 mins travelling time from the main division estate. • The Court of Appeal HELD that, the Appellant has acted in accordance with the above principles hence payment of indemnity is set aside.

  35. Restrain of Trade WRIGGLESWORTH v WILSON ANTHONY [1964] MLJ 269. • The Plaintiff claimed an injunction to restrain the Defendant from practicing as an advocate and solicitor within a 5 mile radius from Kota Bharu for 2 years. • Clause 8 of the agreement between the parties stated that..... the Defendant shall not for a period of two(2) years after termination of his engagement by the Plaintiff practice as or carry on the business or profession of an advocate and solicitor within a radius of five(5) miles from Kota Bahru Town without first obtaining the written consent of the Plaintiff......

  36. Restrain of Trade Wrigglesworth • The Plaintiff argued that s28 Contracts Act 1950 provides that any clause who restraints anyone from exercising any trade, business or profession, is void. • The Court opined, based on s28 Contract Act 1950, with respect of the 3 exceptions, anyone restraint from exercising a lawful profession is void, hence the Defendant, as a barrister can practice his profession in Malaysia. • HELD, the Plaintiff action must fail as any desire to restraint the Defendant is illegal and void.

  37. Restrain of Trade STAMFORD COLLEGE GROUP v RAJA ABDULLAH RAJA OTHMAN [1991] 2 CLJ 167 • An agreement between the Defendant and the Plaintiff, contained a clause which prohibited the Defendant from working for 2 years in any other Company or Institutions as a lecturer or tutor without the consent of the Plaintiff. • The Defendant is also prohibited from utilizing any confidential information acquired during employment.

  38. Restrain of Trade STAMFORD COLLEGE GROUP • The Defendant argued that the restraint clause goes against s28 Contracts Act 1950. • The Court refered to cases such as Wrigglesworth and Pertama Cabaret Nite Club v Roman Tham and concluded that the injunction is not meant to restrict the method of practising but literally practising as an advocate and solicitor.

  39. Restrain of Trade ;-STAMFORD COLLEGE GROUP • HELD, the balance of convenience favors the Defendant and if the injunction continues, the Defendant will face a tough time making a living hence the injunction is set aside.

  40. Intellectual Property Rights • Protection of intellectual property rights and Confidential information: • By employee from employers in course of employment • By employee for employers in course of employment

  41. Intellectual Property Rights: Polygram Records Sdn Bhd v The Search [1994] 1 LNS 205 • The Second contract between the parties contained certain amendments made ie. • Clause 6(v) of the agreement states that the group cannot perform with anyone for 2 years without prior consent of the Polygram. • The restrain applies after expiration and also during the currency of the contract. • S28 Contracts Act 1950 deals with restrain of trade hence the covenant containing exclusive recording right during the contract, does form as a restraint as s28 only deals with post contract and not during the contract

  42. Intellectual Property Rights Polygram Records • The present action brought by Polygram is breach of contract and applying for an injunction to restrain the Group (D1-D5) and their Company(D6) from entering any contract with other recording labels, distribution of their songs and any recordings, sales, promotion, etc

  43. Intellectual Property Rights;- Polygram Records S/B • The Court HELD that, Clause 6(v) of the agreement acts during the currency of the contract and post contract as well, hence the clause is void.

  44. CONFIDENTIAL INFORMATION • Confidential information will be protected if:- • the information is not public property and has a confidential quality to it • the information is imparted in circumstances which give rise to an obligation by the recipient to respect the confidential status of the information. • the recipient uses the information in an unauthorized manner to the detriment of the party communicating it.

  45. CONFIDENTIAL INFORMATION • Confidential information includes ; • trade secrets (FACCENDA CHICKEN v FOWLER), • manufacturing processes, • secret formula (YEOHATA IND v COIL MASTER), • business strategies (CENDANA MAJU v APPAROO SINNIAH [2002] 3 ILR 507), • status of on-going negotiations with the customers (SCHMIDT SCIENTIFIC v ONG HAN SUAN)

  46. Employees duties in relation to confidential information • The duty of good faith or fidelity requires the employee not to disclose any confidential information gained in the course of his employment • An action by an employer to restrain a former employee from using confidential information belonging to the employer is not a restraint of trade as its based on the employee’s breach of duty of fidelity to his employer.

  47. Trade Secrets • Trade secret: • Implied obligation of confidentiality • Information acquired during course of employment • Inventions

  48. Trade Secrets:CENDANA MAJU SDN BHD v APPAROO SINNIAH [2002] 3 ILR 507 • The Defendant was accused of divulging the Plaintiff’s secrets to the competitor. • According to Faccenda Chicken v Fowler [1986] 1 ALL ER 617, an employee of the company, was bound by his implied good faith not to use or disclose for the duration of his employment, confidential information gained in the course of his employment

  49. Trade SecretsCENDANA MAJU SDN BHD • Thus applying the above principle, the claimant in this case, had no right to or disclose the Plaintiff’s confidential information on its pre-cast building system to ATUS, which was the Company’s competitor at the material time. • At the same time, the claimant had in his possession costings and documents of other projects, which he was not involved and had no authority to possess them. • HELD, the Defendant’s dismissal was proven as he was found divulging trade secrets to the competitor.

  50. Trade SecretsSCHMIDT SCIENTIFIC SDN BHD v ONG HAN SUAN & ORS [1998] 1 CLJ 685 • The contracts of employment between the Plaintiff and the 2nd to 4th Defendant contained a fidelity clause which imposed an obligation on the 2nd to 4th Defendant not to have any interest in any business similar to the Plaintiff’s business and to keep confidential all information about the Plaintiff’s dealings, transactions, and financial matters.

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