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The Case for A Fair Work Act, Part 4

Ensuring ‘fair contracts’

In this instalment, we delve deeper into Fair Work and explore the meaning of ‘fair contracts’, including the notion of tech consent.

By Edwin Goh & Nelleita Omar17 November 2021


Recap: our research series proposing a Fair Work Act comprises five pillars of employment, namely fair pay, fair working conditions, fair contracts, fair management and fair representation.

We kicked off this research series in Part 1 by presenting the case for updating Malaysia’s employment categories, in order to capture the evolving employment power dynamic between employers* and workers, particularly gig workers. In Part 2 we tackled the notion of fair pay, in which we argued for clearly defining the basis for the ‘minimum wage’, advocating for setting it based on the local ‘living’ wage accompanied with wage subsidy policies for selected employment categories. Part 3 was a broad overview of the large subject of fair working conditions, where we outlined key on-the-job benefits and off-the-job protections that should be in place.

*Note: The term ‘employer’ is used broadly throughout this piece, representing the party that either employs the worker or is the intermediary for the supply of jobs.

The fourth instalment of the research series will focus on the next pillar of Fair Work, fair contracts. This article attempts to answer two questions: firstly, what do fair contracts mean? And secondly, how would it apply to different employment categories?

What do ‘fair contracts’ cover?

Employment contracts are a fairly recent legal innovation; the first ones were developed around the late 1800s to early 1900s in England, precipitated by the Second Industrial Revolution. The master-servant employment relationships in the booming mining and manufacturing industries had led to various labour abuses, such as termination of work without compensation and unpaid work. To curb such exploitation, the government developed the judicial concept of labour contracts to serve two purposes: to recognise reciprocal obligations between employer and worker and to support delivery of the state welfare system.

Today, many countries including Malaysia have labour laws that make employment contracts mandatory for employees. A labour contract has become the legal agreement for defining the employment status of an employee (if not all workers), as well as the rights, benefits and responsibilities owed to them by employers and vice versa. The purpose of employment contracts is also spelled out in the ILO Convention on Employment Relationship Recommendation, which requires labour contracts to define employment relationships, standardise contractual arrangements for those in the same employment classification, and list out items relating to employment benefits and protection against labour exploitation and discrimination.

But what do fair contracts mean? According to the Fair Work Initiative, a fair employment contract is one that provides clear and transparent terms and conditions, with no unfair contract terms. Building on this broad description as well as the abovementioned ILO Convention, our proposed criteria of ‘fair contracts’ comprises the following three pillars.

Firstly, a fair contract should not contain terms that fall below or violate fair labour standards, which we discussed in Part 1, Part 2 and Part 3 of our research series. Secondly, the terms and conditions in the contract should be verifiably clear, transparent and understandable to workers. Thirdly, a fair employment contract should inform and seek the worker’s consent on the use of technologies and algorithms that impact the worker.

The following sections will cover current laws, current shortfalls and proposed measures to get closer to the ideal of fair contracts.

Current Malaysian laws on labour contracts

In Malaysia, employment contracts are governed differently for employees and contractors. The traditional employer-employee relationship is regulated mainly by the Employment Act 1955, accompanied by other relevant labour laws (see Figure 1). Labour contracts between contractors and their clients or employers are known as service contracts, or contracts for service, which fall under the purview of the Contract Act 1950.

For employees, the Employment Act 1955 obligates all employers and employees to establish a labour contract with terms and conditions that follow the labour standards stipulated in current labour laws*. These labour legislations set the minimum premise of employment contracts and draw legal boundaries with the aim of protecting employees from exploitative labour conditions.

*Note: Read Part 1, Part 2 and Part 3 of our Fair Work Act research series to learn more about minimum labour standards in existing labour laws.

Labour contracts for non-employees, i.e. contractors, are governed by the Contracts Act 1950, which defines the relationship between contractor and client-employer as a promisor-promisee relationship, and not an employer-employee relationship. Contractors are to negotiate the terms of their contract with their client-employers based on a willing seller willing buyer premise.

Key pieces of current legislation related directly to employment contracts are outlined in Figure 1 below.


Figure 1: Current Malaysian legislation relating to employment contracts

*Clauses on the right of representation in the EA 1955 and the Industrial Relations Act 1967 are identical. The EA 1955 directs readers/judges to the Industrial Relations Act 1967 for more detailed provisions relating to workers’ right of representation.

In case of dispute, employers and employees could settle their disagreements either at the Labour Court or the Industrial Court. Although the jurisdiction of the two courts appears to overlap with each other, each covers very different types of labour issues.

The Labour Court functions according to the Employment Act 1955 and addresses disputes relating to the monetary aspects of employment brought by manual workers of selected industries or employees who earn less than RM5,000 a month*. The Industrial Court is under the purview of the Industrial Relations Act 1967 and handles complaints regarding unfair dismissal, trade union matters and trade disputes brought in by any employee. Figure 2 below shows the differences between the Labour Court and the Industrial Court.

*The Employment (Amendment) Bill 2021 will remove the salary requirement of employees who can bring disputes before the Labour Court if passed.


Figure 2: Differences between Malaysia’s Labour Court and Industrial Court

Any contractual disputes involving contractors and their clients or employers need to be brought to the civil courts as contractors do not meet the criteria of ‘employee’ covered by the Labour Court or the Industrial Court. Civil court decisions would be made based on the terms and conditions written in their service contracts. Contractors seeking to bring any complaint to the Labour Court or the Industrial Court would need to get a referral from the Director-General of Labour or the Human Resources Minister respectively.

A former Grab driver attempted to seek the Human Resources Minister’s help to refer her case of alleged unfair dismissal to the Industrial Court but was denied. The terminated Grab driver subsequently took legal action to challenge the minister’s decision, whereupon the High Court ruled to dismiss the application citing that Grab drivers are not employees.


Addressing today’s shortfalls relating to fair contracts

Much like the topic of fair pay and fair working conditions, which we highlighted in previous instalments of this research series, rapid digital transformation and increasing labour informalisation have exposed gaps in the current legal framework with respect to fair employment contracts. We discuss the shortfalls and potential policy solutions below.

(1) A fair contract should not fall short of minimum labour standards

Today, Malaysian laws on labour contracts for employees do stipulate that terms cannot fall short or violate minimum labour standards contained in relevant Acts. As specified in the Employment Act 1955, in every agreement between an employer and employee, “the parties thereto shall be subject to, and shall be entitled to the benefits of, this Act”. The term ‘benefits’ comprise various provisions on termination of employment, payment of wages, maternity-related benefits, social security contributions and more.

The main issue here is whether the minimum labour standards prescribed by Malaysia’s labour laws today can be construed as ‘fair’. As argued in Parts 1, 2 and 3 of our research series, there are several shortcomings concerning pay and working conditions, rendering these labour standards as less than fair in our estimation. Apart from some major issues around threshold setting and exclusions, these shortfalls are also partially driven by a lack of appropriate employment categorisation for certain types of workers in the informal sector, such as full-time gig platform workers.

Compared to employees though, independent contractors have even fewer safeguards in their contracts for service with regard to ensuring minimum labour standards. There is currently no legal provision that stipulates adherence to minimum labour standards in contracts for service. The Contract Act 1950 only states that a contract is a legal proposal made by either of the parties involved to recognise their legal relationship and promises, where acceptance of the legal proposal must be done with sound minds, consideration, certainty and free will.

Policy recommendations

To deliver on fair labour contracts, the minimum labour standards presumed in the contracts also need to be ‘fair’. Our earlier instalments of this research series have covered what fair standards could look like for classification, pay and working conditions. Current labour laws, in particular the Employment Act 1955, would need to be revised to spell out, amongst others, minimum fair pay and minimum fair working conditions for different employment categories.

To ensure fair contracts for independent contractors, the government could consider a supplementary bill to make it mandatory that contracts for service contain or adhere to minimum labour standards for contractors. The Freelance Workers Protection Act in the Philippines is an example, requiring freelancers and their client-employers to establish a written contract detailing itemization of all services provided by freelancers, tenure of work, rate and method of compensation, payment deadline, grounds for termination and other terms and benefits imposed by the government.

(2) A contract should be verifiably clear, transparent and understandable to workers

The signing of an employment contract does not necessarily mean full understanding of the employment contract by the worker. Even for workers with a degree, the legalese language in employment contracts can be difficult to understand. Some employees may be informed about their rights and benefits during onboarding, but not all companies have structured onboarding processes. Even companies with onboarding processes may not fully brief the employee on all terms of the employment contract, nor check for the employee’s full comprehension of the terms.

For non-employees, there is no stipulation mandating them to have a written contract for service with their client-employers. As such, some in the informal sector may only have verbal agreements, and terms can be altered easily and unilaterally by client-employers without consent. Even non-employees with a written contract for service may not fully comprehend all the terms, unless they hire a lawyer to craft, explain and or even negotiate on their behalf.

Policy recommendations

The Employment Act 1955 requires employers and employees to establish a written contract, while non-employees are free to form a written contract under the Contract Act 1950 with their client-employer if they prefer. In principle and in policy, written labour contracts should be made mandatory for most workers, whether employee or contractor.

Some informal jobs are only one-off or comprise piecemeal work, in which having a contract could overcomplicate the employment relationship and incur extra labour costs for contract drafting. To avoid this, the government could set minimum criteria where those earning above a specific income level per job must establish a written labour contract.

In the Philippines, for example, the Freelance Workers Protection Act only requires freelancers to establish a written contract for services that have a minimum value of 10,000PHP. In New York City, only freelancers who provide a service worth USD800 upwards are mandated to form a written contract with their client-employer under the Freelance Isn’t Free Act.

At any rate, there is no requirement in any Malaysian law which stipulate for labour contracts to be written in concise and clear language. Irrespective of employment classification, laws should require that all labour contracts be written in plain language understandable to both workers and employers. Example can be taken from the United States which introduced the Plain Writing Act 2010, propelled by the Plain Language Movement, to ensure writing in all government documents is clear, concise, and well organised for its intended audience. Replacing a contract full of confusing legalese with a plain language contract could ensure fuller understanding of labour contracts, regardless of who the parties’ educational or socioeconomic background.

Plain language contracts are increasingly popular globally, especially in corporate settings. Interestingly, some employers in Australia and South Africa have even adopted comic format contracts to ensure labour contracts are understandable to all workers, especially for those who are illiterate. To facilitate the drafting of plain language contracts, the government could provide contract guidelines as provided by Australia’s Fair Work Ombudsman and Hong Kong’s Labour Department.

The worker’s understanding of the contract terms should also be verifiable, namely, that there are simple ways to check and confirm the worker’s comprehension and acceptance. Be it paper or electronic labour contract, workers could indicate and affirm their understanding of the terms (written in plain language) by, for example, signing each section of the contract. Explanation and clarification of labour contracts should not only be done when onboarding new workers but also when there are any ad-hoc contractual changes which could affect their employment entitlements and work expectations.

(3) A contract should inform and seek worker’s consent on the use of technologies

Given the rapid digitalisation of work and rising remote working culture, the use of staff monitoring software is an increasing norm at work, especially among gig platform workers. The algorithm embedded in these technologies has taken over previously manual roles to allocate tasks, monitor, evaluate and reward work based on data gathered from worker behaviours (i.e. consumer reviews, time efficiency) and broad contextual factors (i.e. weather and seasonal patterns).

To clarify, the application of algorithms or monitoring software is not objectively wrong. But in practice, workers could be in the dark as to how the algorithms impact them, for example in how jobs are allocated or prioritised. With employers protecting algorithm design as trade secrets, workers may be faced with no option but to accept the application of such technologies without full comprehension.

The problem here is the lack of meaningful consent for the use of technologies, especially if it involves data collection and sharing. The worker would neither know nor be given the choice to decide whether they willingly agree to how their data is collected, stored, processed and used.

Policy recommendations

It is high time to rethink the workers’ consent in the use of technologies at work in ways that can be more meaningful than a rubber stamp which they cannot negotiate or opt-out.

Whether the worker is an employee, a dependent contractor or an independent contractor, employers should seek individual-level consent from workers for accessing their digital and data rights. At the minimum, workers should be informed about how technological applications related to labour practices could impact them with clear and understandable terms listed in their labour contracts. Beyond that, the government could consider requiring employers to seek collective consent* from workers to enable them to determine the access, ownership and usage of their data.

*More on this topic in the instalment of our research series on fair management and fair representation.

The world may be moving from a state of pandemic to endemic COVID-19, but remote working is here to stay. With that is rising concern for employee monitoring, including the application of activity monitoring software for productivity tracking and the lack of remote working protocols.

There is a fine line between monitoring and surveillance. Some of the monitoring tools used track workers’ micro-behaviours such as internet activities and keystroke movements. These technologies bring up serious questions on the extent of permissible surveillance, privacy and wellbeing. As yet, workers do not have much say in deciding or consenting to the application of such monitoring technologies.

If passed, the Employment (Amendment) Bill 2021 tabled by the government will include clauses on employer responsibility for the safety and wellbeing of employees in work-from-home settings. While this is a positive step, for better transparency on privacy rights, the information and consent on such technologies should also be incorporated in labour contracts.

Putting fair contracts into practice

It has been more than two centuries since the judicial concept of labour contracts was conceived, and its purposes have remained largely unchanged. But while labour contracts play an important role in recognising employer-worker relationships and supporting the delivery of the state welfare system, the job market has evolved drastically with increasing labour informalisation driven by rapid digitalisation.

In adapting to the changing world of work, we not only need to ensure that fair labour standards are presumed within labour contracts, but that the contracts themselves are presented in an understandable way to all workers, with contract acceptance indicating meaningful and informed consent.

That said, we keep in mind that having a fair contract does not guarantee that terms and conditions would be translated into fair labour practices for all workers. In reality, putting fair contracts into practice would also require fair management practices and fair representation to ensure fair labour practices. We discuss these topics in the next and final instalment of this research series.

Email us your views or suggestions at editorial@centre.my


The Centre is a centrist think tank driven by research and advocacy of progressive and pragmatic policy ideas. We are a not-for-profit and a mostly remote working organisation.

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