Employer of Record (EOR) Malaysia

EOR Solutions in Malaysia

Employment Contracts in Malaysia

Malaysia remains a compelling destination for foreign direct investment in Southeast Asia, providing overseas employers access to a skilled workforce at competitive rates.

However, the country’s historical concern over exploitative labor practices and the subsequent legal ramifications necessitates caution among foreign investors. There is a need to navigate carefully to avoid running afoul of local employment laws or triggering costly labor disputes. In response to these challenges, Malaysia, along with fellow members of the Association of Southeast Asian Nations (ASEAN) like Indonesia and Vietnam, has taken proactive measures.

They now mandate the necessity of a formal, written employment contract signed by all relevant parties. When crafted with a thorough understanding of Malaysia’s regulatory landscape and labor laws, these formal contracts can establish a robust foundation for effective HR management in the country.

It is crucial to note that any employment arrangement lasting more than one month in Malaysia must be formalized through a written contract. This approach ensures clarity, compliance, and a structured framework for employer-employee relationships in the dynamic business environment of Malaysia.

Probation Period

The length of the probationary period is subject to variation among different companies and relies on the terms outlined in the employment contract. As there is no legal stipulation regarding the duration of probation, it typically spans from three (3) to six (6) months in Malaysia, as indicated in the employment agreement.

In today’s dynamic work landscape, there is a growing trend towards greater flexibility in the duration of probationary periods. Organizations are acknowledging the importance of customizing probation lengths to align with the complexity of roles and the adaptability demanded by various job functions.

Notice Period

The termination notice period should be equal for both the employer and employee, and its duration can be specified in the contract. In cases where the contract is silent on this matter, the statutory termination notice periods come into effect:

Alternatively, either party can opt for a payment in lieu of notice. Termination notice is not obligatory in instances of serious misconduct or a “wilful breach” of the employment contract.

Severance Payments

In Malaysia, there is no equivalent to ARD/TUPE, which means there is no automatic transfer of employment in asset or business sales. In such transactions, employees will typically continue their employment with the seller by default. Any employee “transfer” is executed through termination by the seller and subsequent rehiring by the buyer. The seller is exempt from statutory severance payment obligations if the buyer’s offer matches or surpasses the terms and conditions of the original employment. An employee forfeits the right to statutory severance payment if they unreasonably reject the new offer.

Working Hours

Overtime Pay

Overtime is any work beyond the standard 8 hours per day or 45 hours per week. Employees may be asked to work overtime in cases of accidents, continuous operations, community well-being, or urgent tasks.

If work extends beyond a 10-hour spread over period, the time from the end of the spread over period until the employee stops working is considered overtime.

The maximum monthly overtime hours for an employee should not exceed 104 hours. Work on rest days, public holidays, or substituted paid holidays is not counted towards the 104-hour limit.

No employee should be required to work more than 12 hours in a day, inclusive of overtime.

For overtime work, employees are entitled to a premium payment at a rate not less than 1.5 times their hourly pay, as per the Employment Act, 1955 §60A(2), 60A(4)(a), and Employment (Limitations on overtime work) Regulations, Art. 2.

Employees vs Independent Contractors in Malaysia

Payroll in Malaysia

Minimum Wages

Starting from July 1, 2023, the minimum wage for micro-enterprises in Malaysia, which was previously delayed since 2022, has now come into effect. In May 2022, Malaysia raised the national minimum wage by 25% to 1,500 ringgit (US$331) from 1,200 ringgit (US$265). Micro-enterprises, with five employees or fewer, were initially granted an extension until January 2023, further extended to July 2023 for better preparation. In city or municipal council areas, the new minimum wage is:

• 57.69 ringgit (US$12.74) per day for six-day workweeks
• 69.23 ringgit (US$15.29) per day for five-day workweeks
• 86.54 ringgit (US$19.11) per day for four-day workweeks

Micro-enterprises, contributing 40% to Malaysia’s GDP and employing two-thirds of the workforce, play a crucial role in the country’s economy.

Payroll Cycle

In Malaysia, payroll operates on a monthly schedule, with salaries required to be deposited by the 7th of each month through methods such as cash, cheque, or bank credit. Companies manage payroll internally or opt for outsourcing to a third party, especially when faced with constraints in time and resources.

Mercans’ Payroll Capabilities in Malaysia

Social Security in Malaysia

Social security in Malaysia encompasses various programs and initiatives designed to provide financial protection and support to the country’s citizens. The key components of social security in Malaysia include:

Employee Hiring Cost in Malaysia

Total Annual Employer Costs

• Employees Provident Fund (EPF) Contribution: MYR [X] (this is typically a percentage of the gross salary, e.g., 11%)
• Social Security Organization (SOCSO) Contribution: MYR [Y] (another percentage, e.g., 1.75%)
• Other Statutory Contributions or Insurances: MYR [Z] (additional costs, if any)

Total Annual Cost

Here’s a hypothetical breakdown of the costs to hire an employee in Malaysia based on the provided figures:

Gross Annual Salary + Total Annual Employer Costs

Using hypothetical figures for EPF (11%), SOCSO (1.75%), and other contributions (0.25%)

Total Annual Employer Costs

• EPF Contribution: MYR 1,099.99 (11% of MYR 9,999.96)
• SOCSO Contribution: MYR 174.99 (1.75% of MYR 9,999.96)
• Other Contributions: MYR 441.26 (0.25% of MYR 9,999.96)

Total Annual Employer Costs

• MYR 1,716.24
• Total Annual Cost:MYR 9,999.96 (Gross Annual Salary) + MYR 1,716.24 (Total Annual Employer Costs) = MYR 11,716.20

Gross Annual Salary

MYR 9,999.96

Therefore, the total annual cost to hire an employee with a gross annual salary of MYR 9,999.96 would be MYR 11,716.20, taking into account various employer contributions and statutory costs in Malaysia. Please note that the actual percentages for EPF, SOCSO, and other contributions may vary, and it’s recommended to consult local authorities or employment experts for precise calculations.

Personal Income Tax

Non-resident individuals are subject to a flat tax rate of 30% on total taxable income. Knowledge workers residing in Iskandar Malaysia, defined as qualified persons, are taxed at a rate of 15% on income from employment with designated companies engaged in qualified activities in the specified region. Approved resident individuals under the Returning Expert Programme, having or exercising employment in Malaysia, enjoy a 15% tax rate for five years on income from employment. Qualified individuals holding key positions (C-Suite) are taxed at a rate of 15% on income from employment with companies granted relocation tax incentives under the PENJANA initiative.

Employee Benefits in Malaysia

Malaysia stands out as a business-friendly destination globally. Nevertheless, compliance with the Malaysian Employment Act is imperative for any company operating or hiring in the country. This legislation outlines the compulsory benefits that employers must provide to their workforce, encompassing:

Leave Entitlements

The duration of paid leave hinges on the tenure of the employment. The leave entitlements are structured as follows:

• Up to 2 years of employment 8 days of annual paid leave
• 2 to 5 years of employment 8 days of annual paid leave
• 5 or more years of employment 16 days of annual paid leave

Maternity and Paternity Leave

Maternity leave requires a minimum of two months of paid leave, applicable to employees who have been with the same employer for at least three months in the nine months preceding childbirth. Paternity leave, though not mandatory, commonly involves a minimum of three working days off.

Insurance

While not legally required, employers are expected to offer insurance coverage to safeguard employees. Common insurance benefits include medical, dental, optical, and personal accident coverage.

Sick Leave and Hospitalization

Employees in Malaysia are entitled to sick and hospitalization leave, subject to medical practitioner approval:

• Less than two years of employment 14 days of annual sick leave
• Two to five years of employment 18 days of annual sick leave
• Over five years of employment 22 days of annual sick leave

Hospitalized employees are entitled to up to 60 days of sick leave at their regular pay rate. Employers should clearly communicate these benefits during the hiring process, emphasizing them in the letter of employment or offer letter. If employees are ineligible for retirement benefit schemes, employers are obligated to contribute to the Employment Insurance System.

Termination Policy in Malaysia

In Malaysia, the employment landscape operates without an “at-will employment” system. Employers cannot hire and fire employees at their discretion. However, termination is permissible if justified, carried out in good faith, and follows fair procedures.

In essence, Malaysian labor law aims to balance the rights of both employers and employees, recognizing the prerogatives of employers while safeguarding employees against unfair dismissals. It provides a structured framework to resolve disputes and ensures fairness in the employment termination process.

Work Permit in Malaysia

Foreign nationals aspiring to work in Malaysia need to obtain a Malaysian work visa, which encompasses the entire process of securing authorization to work. Before working, a foreign national must find employment with a Malaysian company willing to hire them. Subsequently, the employer applies for a Malaysia work permit on behalf of the employee, subject to approval by the relevant authorities.