Employment Bonds and Training Bonds in Malaysia

Fast staff attrition has become a major problem for employers. Employers are trying hard to retain employees and one of the common strategies is to provide training to employees. Statistics have shown that employee training is not only essential for an organisation’s success, but it also instils loyalty and commitment from employees.

However, we know that training costs aren’t cheap. We understand that employers are worried that their investment in providing training would go down the drain if employees can leave the company whenever they wish.

So, how can an employer minimise the risk in making large investment in new hires? Perhaps having an employment bond is a good option.

An employment bond is essentially an agreement entered into between the company (employer) and the employee, whereby the employee agrees to stay with the company for a particular period in exchange for training or other benefits provided by the company (“Bond”). In the event that the employee breaches the terms of the Bond, it is quite usual for Bonds to contain terms requiring the employee to pay back the expense incurred by the company for the training/benefit. In some cases, the Bond may also contain a stipulation that a fixed “penalty” amount has to be paid where there is a breach of terms of the Bond. This sum which is fixed under the Bond is called “liquidated damages”.

Are such employment bonds legal and enforceable under Malaysian law? The answer is YES, provided that the following conditions are met.

The employee signs the Bond voluntarily with free consent – without coercion, pressure, duress or undue influence.

There must be consideration in the form of training or otherwise. A Bond is like any other contract and requires consideration in order to be enforceable. This means that the employer must provide something to the employee in exchange for the employee’s commitment to serve the company for a particular period. Where training is offered in exchange for a bond, the bond should be signed before the training is completed. It is also prudent for employers to keep training material to prove such training existed and was actually provided.

The terms of the Bond must not contravene Section 28 of the Contracts Act 1950, which provides that every agreement in restraint of trade or profession is void. An employer cannot stop the employee from working elsewhere after the employee has resigned. The employee has every right to terminate the Bond and/or resign prematurely, but he must do it in a manner which is in accordance to the terms of the Bond, including the financial consequences.

The terms of the Bond must be reasonable. There is no legal definition as to what amounts to “reasonable” terms in a Bond. There are cases where Bonds have been set aside because they contain terms which are unfair, unconscionable or lopsided. One example would be an excessive penalty clause for breaking the bond, which far exceeds the value/cost of the training provided.

Speaking of penalty clauses or “liquidated damages”, Malaysian courts are hesitant to award employers liquidated damages and/or penalty where loss has not been proven, even though the same is expressly stated in the Bond. The courts may still require the employer to prove their actual loss suffered due to the breaking of the Bond. Therefore, it is important for employers keep proper records of the training provided to the employee (including receipts for expenditure) to show that the company did incurred expenses for the employee in consideration of the Bond.

Donovan & Ho is a law firm in Malaysia, and our employment practice group has built a reputation for providing strategic employment advice to local and global organisations. Our team of employment lawyers provide advice on employment law and industrial relations including review of employment contracts, policies and handbooks, advising on workforce reductions, and managing dismissals of employees for poor performance or misconduct. We also represent clients in unfair dismissal claims and employment-related litigation. Have a question? Please contact us.