When you sign an employment contract in Malaysia, you might notice clauses that restrict what you can do after leaving the company. These are called restraint of trade clauses, and understanding them is crucial for both employers and employees. But here's what many people don't realise: Malaysian law takes a very different approach to these clauses compared to other countries.
What Are Restraint of Trade Clauses?
Restraint of trade clauses are contractual provisions that limit an employee's ability to work for competitors, start a competing business, or use certain information after their employment ends. Common types include non-compete agreements, non-solicitation clauses, confidentiality agreements, and garden leave provisions.
Employers typically include these clauses to protect their business interests, client relationships, and proprietary information. However, Malaysian law places significant restrictions on how far employers can go.
The Malaysian Legal Framework: Section 28 of the Contracts Act 1950
The cornerstone of Malaysian law on restraint of trade is Section 28 of the Contracts Act 1950. This provision states that any agreement that restrains a person from exercising a lawful profession, trade, or business is void to that extent.
This is a powerful protection for employees. Unlike jurisdictions such as the United Kingdom or Singapore, where reasonable restraint of trade clauses can be enforceable, Malaysia takes a stricter approach. The general rule is that post-employment restraints are void and unenforceable.
However, this doesn't mean employers have no protections at all. The law recognises certain exceptions and alternative mechanisms that employers can use legitimately.
What Employers Cannot Do
Enforce Non-Compete Clauses Post-Employment
A clause that prevents you from working for a competitor after you leave is generally unenforceable in Malaysia. Even if you signed such a clause, courts will typically not enforce it because it violates Section 28. This applies regardless of how reasonable the restriction might seem or how much notice was given.
Restrict Your Right to Earn a Living
Employers cannot use contractual terms to effectively prevent you from practising your profession. If a clause has the practical effect of stopping you from using your skills and experience to earn a living, it will likely be struck down.
Impose Penalties for Joining Competitors
Some employers try to work around the law by including penalty clauses or requiring employees to pay damages if they join a competitor. Malaysian courts have generally viewed such provisions as indirect restraints of trade and refused to enforce them.
What Employers Can Do
Protect Confidential Information
Confidentiality clauses are treated differently from restraint of trade clauses. Employers have a legitimate interest in protecting trade secrets, proprietary methods, client lists, and other confidential business information. Courts recognise that employees owe a duty of good faith and confidentiality, both during and after employment.
A well-drafted confidentiality agreement that focuses on protecting genuinely confidential information, rather than restricting competition, stands a much better chance of being enforced.
Implement Garden Leave
Garden leave is a period during the notice period where an employee is asked to stay away from work while still receiving full pay and benefits. During this time, the employee remains bound by their employment contract, including confidentiality obligations and duties of fidelity.
Garden leave is generally enforceable in Malaysia because it operates during the employment relationship, not after it ends. It gives employers a buffer period to protect their interests while the employee transitions out.
Include Non-Solicitation Clauses During Employment
While post-employment non-solicitation clauses face the same challenges as non-compete clauses, restrictions during the employment period are generally valid. An employee who actively solicits clients or colleagues to leave while still employed may be in breach of their duty of fidelity.
Rely on Implied Duties
Even without express contractual terms, employees owe implied duties of good faith, fidelity, and confidentiality during employment. Employers can take action against employees who breach these duties, such as those who copy client databases before leaving or share trade secrets with competitors.
Practical Advice for Employers
Given the limitations of post-employment restraints in Malaysia, employers should focus on protective measures that are legally sound:
First, invest in robust confidentiality agreements that clearly define what information is confidential and the employee's ongoing obligations. Second, use garden leave provisions in employment contracts for key employees, ensuring notice periods are reasonable. Third, implement strong information security measures to limit access to sensitive data. Fourth, consider using retention incentives such as deferred bonuses or share options that encourage employees to stay rather than punishing them for leaving.
Practical Advice for Employees
If you're an employee facing a restrictive clause, remember that Section 28 provides significant protection. However, this doesn't mean you can act without consequence. You should still respect genuine confidentiality obligations and avoid taking proprietary information when you leave. If you're unsure about a clause in your contract, seek legal advice before signing or before acting in a way that might breach it.
The Exception: Sale of Goodwill
It's worth noting that Section 28 does contain an exception. When someone sells the goodwill of a business, they can validly agree not to carry on a similar business within specified local limits, as long as the buyer continues to carry on a similar business. This exception applies to business sales, not standard employment relationships.
Looking Ahead
Malaysian employment law continues to evolve, and there have been discussions about whether the strict approach to restraint of trade clauses should be modified. For now, however, Section 28 remains the law, and both employers and employees should structure their arrangements accordingly.
Understanding these rules helps employers design contracts that actually protect their interests, and helps employees know their rights when moving between jobs.
Disclaimer: This article provides general information about Malaysian employment law and restraint of trade clauses. It is intended for educational purposes only and does not constitute legal advice. The law may change, and its application depends on specific circumstances. For advice on your particular situation, please consult a qualified lawyer.