Navigating the Challenging Legal Landscape of Startup Employment in Malaysia

by Khaw Veon Szu

Khaw is a trusted startup, business, and intellectual property lawyer with over 20 years of track record helping his clients succeed.
He understands that the modern business world needs practical, common sense and value-for-money solutions. That is why he initiated an innovative legal service brand —- Veon Szu® Law.
Riding on the digital revolution, he built his firm’s own App — Veon Szu® Law App, to serve his valued clients better
Many would think innovative technology is at the heart of everything in the fast and furious startup world. But as the old saying goes, your people are your business’s most precious assets. And that is true for startups as well. After all, isn’t there another old saying, “If you want to go fast, go alone; if you want to go far, go together”?

While it is in the Startup’s DNA to move fast and disrupt things, it pays to slow down and heed the employment laws and other related regulations when it comes to building a startup team.

If you are a startup founder or an employee in Malaysia, you may have some questions about the legal aspects of startup employment. What are the rights and obligations of both parties? What are the best practices to avoid disputes and lawsuits? How can you protect your intellectual property and confidential information? In this article, I will attempt to provide some general guidance on these topics based on the Malaysian Employment Act 1955 and other relevant laws.

The employment contract is one of the most important documents in any employment relationship. This is a written agreement that sets out the terms and conditions of employment, such as salary, benefits, working hours, leave entitlements, termination procedures, and more. An employment contract can also include clauses that protect the interests of the startup, such as non-disclosure agreements, non-compete agreements, and intellectual property ownership.

An employment contract should be clear, fair, and mutually agreed upon by both parties. It should also comply with the minimum standards set by the Employment Act 1955 (EA1955) and other applicable laws. For example, the EA1955 stipulates that an employee is entitled to at least 11 paid holidays per year and at least 14 days of sick leave per year. The EA1955 also provides for termination benefits for employees who have been employed for more than 12 months.

It is advisable to have a lawyer review your employment contract before signing it to ensure that it is legally valid and enforceable. This is particularly important as the laws do get reviewed and updated from time to time. For example, the latest amendments to the EA 1955, which came into effect on 1 January 2023, now covers employee with wages up to RM4,000 per month, and they are now entitled to overtime payments. This is a significant change from the pre-amendment EA1955, where generally, only those with wages up to RM2,000 per month were entitled to overtime payments.

Needless to say, these drastic changes to Employment laws pose huge challenges to startups known for their limited financial resources.

However, it should be noted that employees with wages over RM4,000 per month are not covered by the EA1955. Their rights and liability are regulated by the employment contract. Suppose there is any dispute or ambiguity regarding the employment contract. In that case, the courts will interpret it according to the parties’ intention, the plain meaning of the words, and the principles of equity and justice.

Another vital issue for startups is intellectual property rights. Intellectual property refers to creations of the mind, such as inventions, designs, logos, software, content, etc. Intellectual property rights are the legal rights that grant the owner exclusive control over using and exploiting their intellectual property.

For startups, intellectual property is often their most valuable asset. Therefore, protecting it from unauthorized use or infringement by competitors, customers, or employees is crucial. There are different types of intellectual property rights in Malaysia, such as patents, trademarks, copyrights, industrial designs, and trade secrets. Each type has its own requirements, registration procedures, and protection duration.

Generally speaking, intellectual property rights belong to the person who created them. However, there are exceptions for works made for hire or under a contract of service. In these cases, intellectual property rights may belong to the employer or the person who commissioned the work unless there is an agreement to the contrary. Therefore, it is essential to have a clear and written agreement on intellectual property ownership between the startup and its employees or contractors. This agreement should specify what types of intellectual property are covered, who owns them, how they can be used or transferred, and what remedies are available in case of breach or infringement.

Another critical aspect of the employment relationship is confidential information and trade secrets. In this regard, a non-disclosure agreement (NDA) comes in handy. In short, NDA is a contract that prohibits one party from disclosing confidential information to another party. Confidential information can include trade secrets, business plans, customer data, financial data, technical data, or any other information with commercial value or competitive advantage.

For startups, NDAs are essential to safeguard their confidential information from being leaked or stolen by competitors, customers, or employees. NDAs can be signed before or during an employment relationship or before or during a business negotiation or transaction. NDAs can be unilateral (one-way) or bilateral (two-way), depending on whether one or both parties disclose confidential information.

An NDA should clearly define what constitutes confidential information, the obligations and exceptions of the parties regarding the disclosure and use of confidential information, and the consequences and remedies in case of breach or violation of the NDA.

Besides NDA, there is another crucial element in all employment contracts —- non-competition clauses. This clause can be incorporated into the employment contract, or it can stand alone in a separate agreement called a non-compete agreement (NCA). NCA, in essence, is a contract that restricts one party from engaging in activities that compete with another party. For example, an NCA may prohibit employees from working for a rival company or starting a business in the same industry after leaving their current employer.

For startups, NCAs can help prevent employees from taking advantage of their knowledge, skills, contacts, or customer base to join or start a competing venture. NCAs can also protect the startup’s trade secrets, intellectual property, and market share from being exploited by former employees.

However, NCAs are not always enforceable in Malaysia, especially when used against employees post-employment. Case law shows that Malaysian courts have ruled that such NCA or non-competition clauses are not enforceable for being in restraint of trade. In other words, as a startup founder, you cannot legally prevent your ex-employee from working with your competitor, but is it possible for you to stop them from using your confidential information or trade secret or intellectual property if they join a competitor.

Despite the unenforceability of such NCAs and non-competition clauses, why do most founders and employers still insist on including them in their employment contracts? Some might argue that they do this out of ignorance of the law, but increasingly founders and employers do this to impose a deterrent effect on their employees. In light of the complexity of this aspect of employment law, it is advisable to consult a lawyer before drafting or signing an NCA or employment contract.

Contrary to the common belief in the startup world, Startup employment law in Malaysia is a complex and evolving area that requires careful attention and planning. The last thing a usually lean and mean startup setup wants is to be dragged into mentally and financially drained employment disputes with ex-employees. Therefore, it pays for a startup to seek legal advice to ensure a clear and fair employment contract that promotes a mutually beneficial and sustainable employer-employee relationship, which is essential to the startup’s success.