Fixed-Term Contracts: When Non-Renewal Becomes Unfair Dismissal

A fixed-term contract in Malaysia protects the employer on expiry only if it is genuine; where the employee performs core, continuing work under successive renewals, the Federal Court has held the employment is in substance permanent and non-renewal amounts to a dismissal requiring just cause.

What makes a fixed-term contract genuine?

In Ahmad Zahri Mirza Abdul Hamid v AIMS Cyberjaya Sdn Bhd, the Federal Court endorsed a substance-over-form approach, examining the intention of the parties, the employer’s subsequent conduct, and the nature of the work — in particular whether it is connected with or necessary for the employer’s ordinary business.

Genuine fixed-term arrangements typically involve project work with a defined end, seasonal demand, cover for an absent employee, or funding tied to a fixed period. Where the role is a continuing function of the business and the contract is renewed repeatedly as a matter of course, courts readily find permanent employment dressed in fixed-term clothing.

What are the consequences of a disguised fixed term?

If the arrangement is in substance permanent, the expiry of the latest term does not end the analysis: declining to renew is treated as a dismissal, and the employer must prove just cause or excuse like any other termination. Backwages and reinstatement or compensation in lieu follow the usual section 20 framework.

Employers also cannot use a chain of short contracts to defeat statutory entitlements that accrue with service, such as termination benefits and annual leave tiers — continuous service across renewals is generally aggregated.

How should employers structure fixed-term hiring?

Tie the term to an objectively verifiable purpose stated in the contract — a named project, a maternity cover, a grant period. Avoid automatic or routine renewals; each renewal should be a considered decision documented with its business reason. Keep fixed-term staff distinguishable from permanent staff performing the same continuing role.

Before allowing a contract to lapse, check the renewal history: an employee on a fifth consecutive renewal performing core operations is, in practical terms, a permanent employee, and the safer course may be regularisation or a properly managed retrenchment rather than simple non-renewal.

Key Takeaways for Employers

• Courts apply substance over form: intention, conduct and the nature of the work decide the issue.
• Repeated renewals for core, continuing functions point strongly to permanent employment.
• Non-renewal of a disguised fixed term is a dismissal requiring just cause.
• State the objective purpose of the term in the contract and document each renewal decision.
• Audit long-serving contract staff — regularise or restructure before disputes arise.

Frequently Asked Questions

Is non-renewal of a fixed-term contract a dismissal?

Not if the contract is genuinely fixed-term — employment simply ends by effluxion of time. But if the arrangement is in substance permanent, non-renewal is treated as a dismissal requiring just cause.

How many renewals make a contract permanent?

There is no fixed number. Courts weigh the renewal pattern together with the nature of the work and the parties’ conduct, but routine successive renewals for a continuing role are a strong indicator of permanence.

Do fixed-term employees get statutory benefits? Yes. Employment Act entitlements apply during the term, and continuous service across renewals is generally aggregated for service-based entitlements.