If you have ever signed an employment contract in Malaysia, chances are you have encountered clauses restricting what you can do after leaving your job. These restraint of trade clauses often include non-compete agreements, garden leave provisions, and non-solicitation terms. But how enforceable are they under Malaysian law?
This comprehensive guide explains what employers can and cannot do when it comes to restraint of trade clauses in Malaysia, helping both employers draft enforceable agreements and employees understand their rights.
The Legal Foundation: Section 28 of the Contracts Act 1950
Malaysian law takes a strong position on restraint of trade. Section 28 of the Contracts Act 1950 states clearly that every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind is void to that extent.
This is significantly different from common law jurisdictions like the United Kingdom or Singapore, where courts may enforce reasonable restraint clauses. In Malaysia, the general rule is that such clauses are void and unenforceable.
However, Section 28 does provide three important exceptions where restraint may be valid. Exception 1 allows restrictions when selling the goodwill of a business. Exception 2 permits partners to agree not to compete upon or in anticipation of partnership dissolution. Exception 3 allows partners to agree not to carry on competing businesses during the partnership.
Notice that none of these exceptions apply to standard employment relationships. This is the crucial point that many employers overlook.
Non-Compete Clauses: Generally Unenforceable
A non-compete clause that prevents an employee from working for a competitor or starting a competing business after leaving employment is generally unenforceable in Malaysia. The courts have consistently held that such clauses violate Section 28 of the Contracts Act 1950.
In the landmark case of Polygram Records Sdn Bhd v The Search and Another, the Federal Court confirmed that restraint of trade clauses in employment contracts are void under Section 28. The court rejected the argument that reasonable restraints should be allowed, emphasising that Malaysian law differs from English common law on this point.
This means that even if you signed a contract promising not to work for competitors for two years after leaving, that clause is likely unenforceable. Your former employer cannot successfully sue you for breach of contract merely for joining a competitor.
Garden Leave: A More Nuanced Position
Garden leave refers to a period during which an employee who has resigned or been given notice remains employed but is not required to attend work. The employee continues to receive salary and benefits but must not work for any other employer during this period.
Garden leave occupies a different legal position from post-employment restraints. Since the restriction applies during the employment relationship when the employee is still being paid, it is generally considered enforceable. The employee remains bound by their employment contract obligations, including duties of fidelity and confidentiality.
Employers often use garden leave strategically to keep employees away from sensitive information and clients during the notice period. This allows time for the employer to transition client relationships and for any confidential information the employee possesses to become less commercially sensitive.
However, employers must ensure that garden leave provisions are clearly stated in the employment contract. They should also continue paying the employee in full during the garden leave period, failing which the arrangement may be challenged.
Non-Solicitation Clauses: The Grey Area
Non-solicitation clauses, which restrict former employees from soliciting clients or other employees, present a more complex picture. While they are also caught by Section 28, there may be circumstances where such clauses are viewed more favourably by the courts.
The key distinction is between actively soliciting clients versus merely accepting business from clients who approach the former employee independently. Courts may be more willing to find liability where there is evidence of deliberate targeting and solicitation, particularly if it involves misuse of confidential information.
From a practical standpoint, employers concerned about protecting client relationships should focus on building genuine client loyalty and ensuring smooth transitions when employees leave. Relying solely on contractual restrictions is unlikely to be effective in Malaysia.
Confidentiality Clauses: The Strongest Protection
Unlike non-compete and non-solicitation clauses, confidentiality clauses are generally enforceable in Malaysia. The duty to protect trade secrets and confidential information survives the termination of employment, both as a matter of contract and under general principles of equity.
Confidential information may include customer lists and pricing information, technical know-how and proprietary processes, business strategies and financial data, as well as any information marked or treated as confidential by the employer.
Employers should clearly identify what constitutes confidential information in the employment contract. They should implement practical measures to protect confidential information during employment and ensure departing employees return all confidential materials.
Employees should be aware that even without an express confidentiality clause, they may be liable for misusing genuine trade secrets. The common law duty of confidence applies regardless of contractual provisions.
Practical Advice for Employers
Given the legal landscape in Malaysia, employers should consider several strategies. First, rely on garden leave provisions rather than post-employment restraints. A well-drafted garden leave clause can effectively keep employees away from competitors for a reasonable period while remaining enforceable.
Second, strengthen confidentiality protections by clearly defining what information is confidential, implementing access controls, and requiring return of all materials upon termination.
Third, build relationships with clients at the institutional level rather than allowing individual employees to become the sole point of contact. This reduces the risk of clients following departing employees.
Fourth, consider including retention incentives such as deferred bonuses or equity that vest over time, giving employees financial reasons to stay rather than relying on unenforceable restraints.
Practical Advice for Employees
Employees should understand that non-compete clauses in their contracts are likely unenforceable. However, this does not mean they can act without any restrictions. Duties of confidentiality continue after employment ends, and misappropriating trade secrets can result in legal liability.
Before joining a competitor, employees should review their contracts carefully, return all company property and confidential materials, avoid taking customer lists or proprietary information, and refrain from actively soliciting former colleagues to join them.
If faced with legal threats from a former employer, seek legal advice promptly. While non-compete clauses are generally void, defending against litigation is still costly and time-consuming.
Conclusion
Malaysian law provides significant protection for employees against restraint of trade clauses. Section 28 of the Contracts Act 1950 renders most non-compete agreements void. However, employers can still protect their legitimate interests through enforceable mechanisms such as garden leave provisions and confidentiality clauses.
Understanding these distinctions is crucial for both employers drafting employment contracts and employees navigating post-employment restrictions. The key is to focus on what is legally enforceable rather than what might seem commercially desirable.
Disclaimer: This article provides general information about restraint of trade clauses in Malaysia and does not constitute legal advice. Employment law matters are highly fact-specific, and the enforceability of any particular clause depends on its precise wording and the circumstances of each case. Readers should consult a qualified lawyer for advice on their specific situation.