You have just resigned from your job, and your employer reminds you about the non-compete clause in your contract. They say you cannot work for any competitor for two years. Can they actually enforce this in Malaysia?

The answer may surprise you. Malaysian law takes a very different approach to restraint of trade clauses compared to many other countries, and understanding this can make all the difference in your career decisions.

The Legal Foundation: Section 28 of the Contracts Act 1950

In Malaysia, the starting point for any discussion about restraint of trade is Section 28 of the Contracts Act 1950. This provision is remarkably clear and employee-friendly:

"Every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, is to that extent void."

This means that, as a general rule, contractual clauses that prevent you from working in your field after leaving employment are unenforceable in Malaysia. Unlike jurisdictions such as Singapore, the United Kingdom, or Australia, where reasonable restraint of trade clauses can be enforced, Malaysia adopts a strict approach that favours freedom to work.

The Three Statutory Exceptions

Section 28 does provide three specific exceptions, but none of them apply to typical employment relationships:

Exception 1: When someone sells the goodwill of a business, they may agree not to carry on a similar business within reasonable local limits.

Exception 2: Partners may agree upon dissolution of a partnership not to compete within specified limits.

Exception 3: Partners may agree not to carry on any business other than the partnership business during the partnership.

Notice that all three exceptions relate to business sales or partnerships. There is no exception for employment contracts. This is a deliberate legislative choice that protects employees' right to earn a living.

What This Means for Non-Compete Clauses

If your employment contract contains a clause stating that you cannot work for competitors for a certain period after resignation, that clause is likely void and unenforceable under Section 28. Malaysian courts have consistently held this position across numerous cases.

Even if you signed the contract voluntarily and received consideration for it, the restraint of trade clause remains void. The law treats it as if that clause does not exist, though the rest of your employment contract remains valid.

Garden Leave: A Different Approach

Garden leave is a practice where an employee who has resigned or been given notice is asked to stay away from work during their notice period while still receiving full salary and benefits. During this time, the employee remains employed but does not perform duties.

Garden leave clauses may be enforceable in Malaysia because technically, the employee is still employed and receiving compensation. The restriction occurs during the employment relationship, not after it ends. This is an important distinction.

However, employers should ensure that garden leave provisions are clearly stated in the employment contract, the notice period is reasonable, and full remuneration continues during the garden leave period. Without these elements, attempting to enforce garden leave could be challenged.

Non-Solicitation Clauses: The Grey Area

Non-solicitation clauses come in two forms, and Malaysian courts treat them differently.

Non-solicitation of employees: Clauses preventing you from recruiting your former colleagues after leaving may be treated as restraint of trade and thus void, as they indirectly restrict how you conduct your new business or employment.

Non-solicitation of clients: This is where Malaysian law becomes more nuanced. Some courts have distinguished between preventing someone from working in a trade generally, which Section 28 prohibits, and preventing someone from soliciting specific clients whose relationships were developed using the former employer's resources. The latter may sometimes be enforceable, particularly when tied to confidential information protection.

However, this area remains contested, and outcomes can be unpredictable. Employers should not assume such clauses will be enforced.

Confidentiality Clauses: Generally Enforceable

Unlike non-compete clauses, confidentiality clauses are generally enforceable in Malaysia. The key distinction is that confidentiality clauses do not prevent you from working. They only prevent you from disclosing or using specific confidential information belonging to your former employer.

Enforceable confidentiality clauses typically cover trade secrets and proprietary information, client lists and pricing strategies developed by the employer, technical know-how and processes, and business strategies and financial information.

For a confidentiality clause to be enforceable, the information must genuinely be confidential, meaning it is not publicly available, it has commercial value, and the employer has taken steps to keep it confidential.

Your general skills, knowledge, and experience gained during employment are not confidential information and cannot be restricted.

Practical Advice for Employees

If you are subject to a non-compete clause and wish to join a competitor, understand that Section 28 likely makes the clause void. However, do not simply ignore threats from your former employer. Seek legal advice before making any moves, especially if significant amounts are claimed. Ensure you do not take any confidential documents or information, as this could expose you to legitimate claims. Be careful about soliciting former clients immediately, as this area is legally uncertain.

Practical Advice for Employers

If you are an employer seeking to protect your business interests, recognise that non-compete clauses are largely unenforceable in Malaysia. Instead, focus on robust confidentiality clauses that clearly define what information is confidential. Use garden leave provisions during notice periods. Protect trade secrets through proper information security rather than relying on contractual restrictions. Consider whether your key employees should be offered partnership arrangements, as these fall within the Section 28 exceptions.

The Bigger Picture

Malaysia's approach to restraint of trade reflects a policy decision to prioritise workers' freedom to earn a living over employers' commercial interests in restricting competition. While this may seem disadvantageous to employers, it creates a more dynamic labour market where skills and talent can flow freely.

For both employers and employees, understanding these rules is essential. Employers should not rely on clauses that are likely unenforceable, and employees should not be intimidated by clauses that the law does not support.

Conclusion

Restraint of trade clauses in Malaysian employment contracts operate very differently from many other jurisdictions. The general rule under Section 28 of the Contracts Act 1950 is that such restraints are void. While confidentiality obligations and garden leave arrangements may be enforceable, blanket non-compete clauses typically are not.

Whether you are an employer drafting contracts or an employee navigating a job change, understanding these principles will help you make informed decisions and avoid unnecessary disputes.

Disclaimer: This article provides general information about Malaysian employment law and restraint of trade clauses. It is not intended as legal advice for any specific situation. Laws and their interpretation may change, and individual circumstances vary. For advice on your particular situation, please consult a qualified legal practitioner.