Title: Mitigating the Risks of Rehiring Employees on Fixed-Term Contracts

Introduction

Fixed-term contracts are a common tool used by employers to fill temporary needs, cover specific projects, or bring in specialized skills for a defined period. However, repeatedly rehiring employees on fixed-term contracts can lead to legal challenges. This is particularly when an employer eventually decides not to renew the contract. In such cases, employees often accuse the employer of unfair termination, and courts may rule these as "fake" fixed-term contracts, designed to deprive the employee of security of tenure.? There are cases when the employer is made to pay out more than a million ringgit in compensation because the ex-employee was earning big bucks salary in a very high position and had been in continuous employment under successive fixed term contracts, a recent example being the case of Muhamad Fawaid Bin Daud And Airod Sdn. Bhd., ?Award No: 836 Of 2024.

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HR managers must know how to mitigate the risk.? We are supposed to be professionals paid to protect our employer from risks.? We must be vigilant and strategic in managing fixed-term contracts. This article outlines key strategies for HR professionals to protect their organizations from potential legal pitfalls.

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Understanding the Legal Implications

We must understand legal implications surrounding fixed-term contracts.? These implications could be complex. ?For a start, HR managers must clearly understand the differences between renewing a contract, extending a contract, and allowing a contract to lapse before rehiring the employee under a new agreement. ?Most HR managers use the terms renewing a contract or extending a contract without giving a one-minute thought to the meaning and implication of using either of these terms when an employee is accepted for rehire after the expiry of the contract. Each has distinct legal implications:

Extending a Contract: ?To extend a contract means to prolonging the duration of the existing contract by changing the expiry to a later date.? Typically, when a contract is extended, there is no alteration made to the terms of the contract? apart from the new date of expiry.? However, if there are changes, they would not be significant enough to cause the extended term of service to be severed from the previous term.? The most significant implication of extension of contract is that the entire period of service from the beginning until the end of the contract is treated as an unbroken service period under one contract.? In this situation, the employee would accrue enhanced benefits that arise from accumulated years of service.? It could easily give rise to the accusation of unfair termination if the employee is eventually not rehired after the expiry date of the last period of service.

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Renewing a Contract: ??To renew a contract usually means that the old contract has expired and given a new lease of life with renegotiated terms and conditions of employment. ?But it may not always be treated as a new contract of service due to one or combination of these reasons:

a)????? The new contract continues back-to-back with the previous agreement with an intervening (cooling off) period of non-employment.? This is particular true when we renew the contract of an employee who comes under the covering of the Termination and Lay Off Benefits Regulation, 2010.? These would be the employees who earn monthly wage of less than RM4000, and those earning more than RM4000 but who are manual labour, drivers or supervisors of manual labour.? For the employees who are under the Regulations, the intervening period must be at least 30 days, otherwise the service period between the old and new contract will be treated as a single unbroken period of service for the purpose of calculating their termination benefit.

b)???? The changes and alterations to the terms of employment in the new contract are so minor that the old contract and the new are essentially the same

c)????? The job and its tasks and responsibilities are essentially the same duties and responsibilities even though the job titles are not the same in the two contracts

d)???? There is no clear provision to end the old contract for it to be superseded by the new contract, or to sever the service period in the new contract from service period in the old contract

e)???? There are actions by the management to link the employee’s rewards or service under the new contract with the previous service period, for example, the employee is granted a bonus or annual increment based on appraisal of performance under the past contract, or the employee is granted enhanced annual leave or sick leave with the new contract.

Rehiring on a New Contract: In order to clearly separate the new contract from the old, the best approach is to let the old contract lapse and to rehire him on a new contract.? ?This would clearly distinguish the end of one employment period and the beginning of another. Even so, this method may require careful handling to ensure it does not inadvertently create continuity of service.

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Key Strategies for Risk Mitigation

To protect their organizations from unfair termination claims, HR managers should implement the following strategies:

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1. Avoid Using "Renewal" or "Extension" Terminology:

Refrain from using the terms "renewal" or "extension" to describe the rehiring process. Instead, always use the words “rehire” or “remploy” to emphasize that each contract is a new and independent agreement.

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2. Cooling off period:

Do not allow the employee to recommence work under the new contract of service before a period of 30 days has lapsed from the date of expiry of the old contract.?? The cooling off period may be lesser than 30 days generally for employees who are earning more than RM4000 per month.

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3. Include Protective Clauses in Contracts:

?? a) Awareness of Fixed-Term Nature of the contract:

????? Include a clause that explicitly states the employee's understanding that the contract is for a fixed term and not intended to lead to permanent employment. For example:

????? ?"I, …………………………… NRIC no. ………………. ?Acknowledge that it has been explained to me in the …………….. language that this contract is for a fixed term of one year and that there is no expectation of renewal or extension beyond this period. I ?further acknowledge and accept the employer’s explanation that this contract is not intended to lead to permanent employment."

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?? b) Employer's Sole Discretion:

????? Clearly state that even if the position is permanent, the employer retains the sole discretion to decide who to employ. This clause helps protect the employer's right to choose another person to take over the position when the contract expires, without creating an expectation of continuity:

??? ?"The employer reserves the exclusive right to determine the suitability of candidates for this position which is non-permanent for me. The employee understands that the expiration of this contract does not confer any rights on him to claim for continued employment or preference for other positions."

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?? c) Severance of Service Periods:

????? Ensure that the contract expressly severs the period of service under the new contract from any previous contracts. This helps prevent claims of continuous service:

????? "The Employee acknowledges that each contract entered into with the Employer represents a distinct and separate period of employment. No period of service under any previous contract shall be deemed continuous or linked with the service under this contract."

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?? d) Differentiation of Job Duties:

????? Alter the job nature between successive contracts by adding or removing significant duties and responsibilities. This ensures that the employee's role is not identical to their previous position, reducing the risk of claims of continuity. ?For example, you could add on the duties “To manage work of ?accounting and finance section employees until suitable head of Finance is recruited” ?to the job of an HR Manager, whose duties would not normally cover that area. ?

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?? e) Varying Compensation and Benefits:

????? Offer different compensation and benefits packages for each contract. This variation reinforces the idea that each contract is independent and not a continuation of the previous one.? Think of offering a lower basic salary than his last drawn salary.? This will certainly show that the new contract is not a continuation of the old one.? Offer higher benefits or payments if necessary to be fair to the person.

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?? f) Waiver of Unfair Termination Claims:

????? Include a clause where the employee agrees to waive any rights to claim unfair termination due to the contract's expiry:

???? "I, ………………………… understand that I have agreed to waive any right to claim unfair termination if I am not reemployed for any reason whatsoever upon or after the expiry of this contract. ?I acknowledge that the expiry of the contract does not constitute termination or dismissal by the Employer."

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4.? Conclusion

A fixed-term contract is a valuable tool for managing workforce needs, but it comes with inherent risks.? In Malaysia, we have seen that this risk often manifests with employees are repeatedly rehired. ?As HR managers, we must understand the legal implications and ?learn to implement protective measures in employment contracts.? HR managers can mitigate the risk of unfair termination claims and protect their organizations from costly legal disputes.? Yes, we must always think about being fair to employees.? A HR manager who does not do that is not managing risks for the employer.? He should be fired. But we must first be fair to the employer who pays us to protect his interest.? A HR manager who only know how to talk about employees’ interest and cannot learn to emphasize the employer’s interest should resign and apply for another job with the Welfare Department.

This proactive approach ensures that fixed-term contracts remain a flexible and effective solution for managing temporary employment needs, while safeguarding the employer's interests.