Hire Employees in Malaysia – A Guide to Hiring Options, Employment Legislation, and Payroll

The economy of Malaysia is one of the most important economies in Southeast Asia (in position number six in the area). Malaysia is one of the most open economies in the world with a trade to GDP ratio averaging over 130% since 2010. Openness to trade and investment has been instrumental in employment creation and income growth.

But like many countries around the world, the employment law and the opportunities to hire employees to start a business in the country are not always clear and easy to understand. 

In this guide, we want to offer you a better understanding of the aspects related to employment, so that you can have a better comprehension of how to hire employees in Malaysia and start your business.

• Requirements to hire employees in Malaysia
• Overview of options to hire employees in Malaysia
• Hiring and employment practice in Malaysia
  • Employees and employment act
  • Probationary period
  • Annual leave
  • Public holidays
  • Sick leave
  • Maternity leave
  • Minimum wage
  • Working hours and overtime
  • Employee dismissal and termination
• Payroll, deductions, and taxes in Malaysia
  • Employees Provident Fund (EPF)
  • Social Security Organization (SOCSO)
  • Human Resources Development Fund (HRDF)
  • Personal Income Tax (PIT)
• How to hire employees in Malaysia without a local entity

Requirements to hire employees in Malaysia

Malaysia has a well-defined set of regulations for employment and deductions and taxation, that all companies hiring in the country have to follow. There are several complications though, with the defined law only applying to certain workers, and a system of mandatory deductions that are separately set and managed.

Employment in Malaysia is governed by the Employment Act 1955. Critically though, this only applies to certain workers (including all manual workers and others with a salary under RM2,000 per month). Employees who are office-based (not considered manual labor) are therefore only covered by the Employment Act if they have a salary of less than RM2,000 monthly.

The Employment Act sets out minimum standards for employment contracts – the legal minimum conditions and rights that should apply. It is common practice to still base contracts of employees that don’t qualify on the Employment Act. But employers have the discretion to alter employment terms.

You can access the full Employment Act 1955 on the Malaysian government website.

To hire employees in Malaysia, a local company is needed. This company can then issue a contract to an employee (based on the Employment Act) and pay salary with the appropriate deductions taken. Statutory deductions apply whether the employee is covered by the Employment Act or not.

Overview of options to hire employees in Malaysia

To hire an employee under a local contract, there are two main options for an overseas company:

1. Set up a local company in Malaysia. This can be a costly and time-consuming task. But doing so would allow a company to take on its own staff and manage its own contracts and payroll.
2. Use a third party company to hire employees. A PEO (Professional Employer Organization) can take on employees and act as the Employer of Record (EOR). The foreign company then manages the day to day work but is free from the complications of legal requirements and payroll. It is also a much faster way to get staff working for a company.

Whichever route is taken for hiring, companies should be aware of several aspects of employment law and standard practice in Malaysia. This guide sets out the main areas to be mindful of.

Hiring & employment practice in Malaysia

Employees and employment act

Employment in Malaysia is governed by the Employment Act 1955. This sets out comprehensive legal obligations for employers in Malaysia, and in general, is well defined. There are a few differences between states, but it applies nationally.

However, the Employment Act only covers employers in certain categories. This includes employees:

• Whose monthly salary does not exceed RM2,000
• Employed in manual labor, regardless of salary
• Engaged in the operation or maintenance of mechanically propelled vehicles
• Employees who supervise other employees engaged in manual labor
• Employees engaged in any capacity on a vessel

This is critical for companies employing staff in Malaysia to understand. When employing staff who fall into these categories, contracts will be governed by the tight legislation of the Employment Act. This sets minimum requirements for probation, holiday, and wage, amongst many other things.

But when employing staff outside of these categories, employers are free to amend these terms. While it is usual to keep the Employment Act minimums, there is no requirement too. And what is defined in the employment contract becomes the legally binding terms of employment.

Probationary period

There is no requirement under employment law to offer a separately defined probation period, and indeed the Employment Act makes no reference to probation in Malaysia.

It is common practice for many employers, though, to place new hires on a probationary period of between 3 and 6 months. However, they will be treated the same under the law throughout this period, meaning that they cannot be dismissed without proper reason. They must also be paid the same (before 2016, there was an allowance for probationers to be paid 30% less than minimum wage for the first 6 months).

The handling of a dismissal case through the courts would be different, however. At this stage, there is recognition of the different expectations of a probationer. There are lower requirements for the employee to provide justification and reduced compensation levels (up to 12 months salary as opposed to 24 months salary for fully confirmed employees).

Annual leave

The amount of leave mandated by the Employment Act depends on the employee’s length of service.

The minimum level is set as follows:

Public holidays

Employees are entitled to 11 paid public holiday days off per year. 5 of these are mandatory for all employers, and the other 6 can be chosen by the company (but must be consistent for all company employees).

The mandatory public holidays are:

• National Day
• Birthday of Yang di-Pertuan Agong
• Birthday of the Ruler or the Yang di-Pertua Negeri of the state where the employee works
• Labour Day / Worker’s Day
• Malaysia day

Sick leave

All full-time and part-time employees (working up to 30% of standard hours) are entitled to paid sick leave under the Employment Act. The minimum level is set as follows:

Also, if hospitalization is required, paid sick leave is required up to 60 days in total.

Maternity Leave

Paid maternity leave is offered for up to 90 days. This was increased from 60 days (which was notably less than in many other countries) only in February 2020. To qualify, an employee must have worked at least 90 days over the previous 9 months. Employers cannot terminate a contract when an employee is on maternity leave.

There is no requirement under the Employment Act to offer paid paternity leave for men.

Minimum wage

The requirements for a national minimum wage are set in the Employment Act and the current applicable rates in the published Minimum Wages Orders.

The latest rates changes took place in February 2020 (under the Minimum Wages Order 2020) and set a minimum wage as follows:

The current government has set an objective to increase the minimum wage (in city and council areas) to RM1,500 per month within 5 years. There has been some criticism of the most recent increase being introduced amidst a difficult economic period.

The city and municipal council areas are defined as follows:

 City councils: Kuala Lumpur, Shah Alam, Petaling Jaya, Kuala Terengganu, Kuching Utara, Kuching Selatan, Miri, Kota Kinabalu, Seremban, Johor Bahru, Iskandar Puteri, Alor Setar, Melaka Bersejarah, Pulau Pinang, Seberang Perai, and Ipoh.

Municipal councils: Sandakan, Tawau, Putrajaya, Batu Pahat, Kluang, Kulai, Muar, Segamat, Pasir Gudang, Kulim, Sungai Petani, Langkawi, Kubang Pasu, Kota Bharu, Alor Gajah, Jasin, Hang Tuah Jaya, Port Dickson, Jempol, Kuantan, Temerloh, Bentong, Manjung, Kuala Kangsar, Taiping, Teluk Intan, Kangar, Ampang Jaya, Kajang, Klang, Selayang, Subang Jaya, Sepang, Kemaman, Dungun, Padawan, Sibu, Kota Samarahan, Bintulu, and Labuan.

Working hours and overtime

The Employment Act sets strict definitions for working time.  This includes the following high-level regulations:

• Work should not exceed an average of 8 hours per day or 48 hours per week
• A maximum of 12 hours per day can be worked
• Employees must get a 30-minute rest period after 5 hours of consecutive work or 45 minutes after 8 hours.

Rules are also set for the payment of overtime. Hours in excess of those in the contract are paid as follows:

• Excess hours on a normal working day: 1.5 times hourly rate
• Excess hours on a rest day: 2 times hourly rate
• Work on a public holiday: 2 times hourly rate

Excess hours on a public holiday: 3 times hourly rate

Employee dismissal and termination

To end an employee contract, one month’s notice must usually be given (although more can be specified in the contract). There must also just cause for the dismissal. As long as the dismissal is justified, no additional compensation or severance pay needs to be offered.

Reasons for justification are poorly defined in law but include employee performance and behavior, redundancy, or elimination of work. It is essential to be clear on these reasons and keep related documentation.

If an employee believes they have been unfairly or unjustly dismissed, they can appeal to the government Industrial Relations Department. Such action is governed by the Industrial Relations Act 1967.

It will assess the dismissal and, if appropriate, award back wages (up to 24 months) and order reinstatement or alternative compensation (usually set at around one month wages per year of service).

Payroll, deductions, and taxes in Malaysia

As in most countries, employers in Malaysia should make salary payments to staff after several deductions have been made. There is no requirement in Malaysia to process payroll or payment submission electronically, but of course, this is more efficient for most employers.

The main statutory payments that must be made for all employees are:

• Employees Provident Fund (EPF)
• Social Security Organization (SOCSO)
• Human Resources Development Fund (HRDF) for some sectors only

These deductions apply to all employees, regardless of whether they are covered under the Employment Act or not.

Employees Provident Fund (EPF)

The EPF is a retirement scheme for Malaysian citizens. These contributions are governed by the Employee Provident Fund Act 1991.

The contribution is split between employer and employee. The employee contribution should be deducted from salary, and the employer contribution paid in addition.

For 2020, the rates are set as follows:

The employee contributions of 11% have been reduced from 11% to 7% as a temporary measure in 2020 to recognize the impact the coronavirus is having. It is due to revert to standard rates in January 2021.

Note that these employee contributions are minimum levels. Employees can opt to make higher payments.

The actual rate to be paid is a fixed amount set according to bands (so will vary slightly from the exact percentage). Full rates are detailed in the third schedule of the Employee Provident Fund Act.

Social Security Organization (SOCSO)

SOCSO payments are for schemes that protect employees (both Malaysian and foreign) against accident or injury at work and provide cover for employees unable to work due to illness.

SOCSO deductions are mandatory for all employees (prior to 2016, they were only required for employees earning less than 3,000RM per month). But the maximum salary taken into account for deduction calculation is 4,000RM per month.

Like the EPF contribution, the SOCSO contribution is also split between employer and employee. The rate is set in bands (so it will be rounded up or down depending on salary) but is set at:

• Employer contribution: 1.75% of salary (reduced to 1.25% for employees over 60 years old)
• Employee contribution: 0.5% of salary

The rates are detailed in full in the Employees’ Social Security (Amendment) Act 2016.

Human Resources Development Fund (HRDF)

This is a contributory fund that aims to develop human capital and workforce ability in Malaysia through employee training.

Contributions are compulsory only for employers in the manufacturing, service, and mining sectors. And no contribution (or deduction) is needed for employees; this is an employer-funded scheme only.

• The rate is set at 1% of employee salary if the company employs more than 10 Malaysian employees
• Voluntary contributions of 0.5% can be made if between 5 and 9 people are employed.

Legislation is given in the Human Resources Development Act 1992. Full details of the HRDF and which sectors need to register can be found here.

Personal Income Tax (PIT)

Income Tax legislation is set out in the Income Tax Act 1967, and the government sets the rates each year. Rates are set on a progressive scale depending on salary, where rates are income within each band.

It should be noted that foreign/expatriate workers may be taxed differently:

• There is no PIT liability for anyone in the country less than 60 days in the year
• If they are in the country between 60 and 181 days of the year, then a flat tax rate of 30% is applied.
• For 182 and above days of residency, standard progressive tax rates apply.

The progressive PIT rates for 2020 are as follows:

How to hire employees in Malaysia without a local entity

Employment law in Malaysia is well defined, but there are plenty of rules and exceptions to follow. The complexity of the scope of application of the Employment Act and how to deal with contracts for employees not covered by this adds another layer of complexity.

Setting up a legal entity to handle employment is a complex undertaking. And on top of the cost and administration requirements to form a company, the new company will have a steep learning curve to handle employment and the required payroll and deductions correctly.

Foreign companies can use a PEO (Professional Employer Organization) solution instead of setting up their own legal entity. This company will act as Employer of Record for Malaysian employees and handle the recruitment, payroll, benefits management, compliance, and required reporting.

Some of the advantages of using a PEO in Malaysia include:

• No need to set up a company in Malaysia. This is especially beneficial for new companies, getting them into the market quicker. Companies may also want to research or be surer of the market before making such a commitment.
• PEO provider has detailed knowledge of employment and payroll law and procedures and remains up to date with changes. There have been many changes to deductions, for example, in 2020, and close attention needs to be paid to changes that could follow.
• A PEO can assist with contract definition. Many types of employee are not covered under the Employment Act and its standard contract minimums. It is important then to define contract terms correctly as these are still enforceable.
• PEO will handle all paperwork, compliance, payroll administration, and payments and filings. There is no centralized system for payments to governments in Malaysia (each deduction needs to be recorded and paid separately).
• The company maintains day to day control of the employee.
• Many PEO providers can also provide employment and payroll services in other countries, helping companies explore or expand in other markets. There are close links across South East Asia, and a PEO can assist in other regional countries or finding employees well placed to do this.