A Beginner’s Guide to Malaysia Market Entry: PEO Services, Hiring Requirements, Business Etiquette, Register Company.
Many foreign investors have been finding ways to break into the Malaysian market to take advantage of the investment and business opportunities.
Malaysia has evolved since the 1970s from a producer of raw materials into a multi-sector economy. Malaysia has been working to achieve high-income status to elevate up the value-added production chain by promoting investment in high technology, knowledge-based industries and services.
In 2010, Malaysia’s Prime Minister Najib started the Economic Transformation Program. It is a series of projects and policy measures intended to encourage the country’s economic growth significantly by the year 2020.
Keep reading as we lay out everything you need to know about entering the Malaysia market.
A. PEO Services in Malaysia
It’s very important to consider certain factors before hiring foreign employees. Malaysia’s government has created initiatives to provide free education. They have contributed greatly toward the development of productive workforce in the country. Professional employment solutions allow multinationals to legally hire employees, even a company doesn’t have a legal entity or representative office in Malaysia.
B. Malaysia Hiring Requirements
Below are the local policies required to help guide you when hiring employees in Malaysia.
Malaysia mandates the need for a formal, written employment contract signed by all relevant parties.
There are two types of contracts: Fixed-term labor contracts and Indefinite period labor contracts.
b. Work Hours and Minimum Wage
In Malaysia, an employee shall not be required under his/her contract of service to work:
- More than 8 hours in one day
- More than 5 consecutive hours without a break of at least 30 minutes
- More than 48 hours a week
Malaysian employees are entitled to one whole day off per week.
The Malaysian government increased the minimum wage for major towns under 56 city and municipality councils.
The new wage increase came into effect on February 1, 2020.
- Employees are now eligible to receive a minimum of MYR 1,200 ($283 USD) monthly, an increase of MYR 100 ($23 USD) from 2019
- Employees earning an hourly wage, the rate has been increased to MYR 5.77 ($1.36 USD) from MYR 5.29 ($1.25 USD)
In addition to the minimum wage increase, the government will increase the maternity leave from 60 days to 90 days effective from 2021. And workers earning less than MYR 4,000 ($944 USD) per month are now eligible for overtime pay.
c. Social Security Contribution Rates
Both employers and employees need to contribute to an individual’s social insurance through the Employees’ Provident Fund (EPF), Social Security Organization (SOCSO), and Employment Insurance System (EIS) which cover survivor’s benefits, retirement, disability and medical payments.
I. Employees’ Provident Fund (EPF)
II. Social Security Organization (SOCSO)
Malaysia has a Social Security Organization (SOCSO) who administers the Employment Injury Insurance Scheme (EIIS) and the Invalidity Pension Scheme (IPS). SOCSO coverage and protection is limited to Malaysian citizens and permanent residents. A monthly contribution must be made and may fall under one of two categories:
- Both the employer and employee make monthly contributions to EIIS and IPS. The sum is based on the employee’s monthly wages. And it is restricted to a maximum of MYR 69.05 for the employer and MYR 19.75 for the employee.
- The employer contributes to EIIS only for employees who are not eligible to be covered under the IPS, with the amount restricted to a monthly maximum of MYR 49.40 or 1.25% of the employee’s monthly salary.
Effective January 1, 2019, Malaysian employers are required to contribute to SOCSO on a monthly basis for all their foreign employees (including expatriates).
However, the employment or assignment arrangement could impact the applicability of the requirement onto the employee. As a result, each case needs to be examined individually to determine the applicability.
III. Employment Insurance System
To protect employees who face risk of retrenchment, the Malaysian government passed the Employment Insurance System Bill in October 2017 as a new protection measure, and it became compulsory on January 1, 2018.
- The insurance scheme is administered by SOCSO and seeks to provide temporary financial assistance for up to six months to workers who are retrenched.
- Employees who are retrenched will be given a portion of the insured salary from the 0.4% monthly contribution.
- Employers contribute 0.2%, while employees contribute the remaining 0.2% under this law
d. Individual Income Tax
Malaysia’s income tax rate is progressive and ranges from 0-30% of an employee’s monthly remuneration. Taxation is dependent on ‘residential’ or ‘non-residential’ status:
- ‘Resident’ taxpayers are those who spend 182 days or more in Malaysia in an assessment year. Residents pay tax at a progressive rate.
- Non-resident’ taxpayers are those who spend less than 182 days in Malaysia. Non-residents are subjected to a flat taxation rate of 30%.
The applicable tax rates are the following:
Malaysian Personal Income Tax
|Income||Tax Rate (%)|
|MYR 0-5,000 ($1,222 USD)||0|
|MYR 5,001-20,000 ($1,223-$4,891 USD)||1|
|MYR 20,001-35,000 ($4,891-US$8,559)||3|
|MYR 35,001-50,000 ($8,559-$12,227 USD)||8|
|MYR 50,001-70,000 ($12,227-$17,118 USD)||14|
|MYR 70,001-100,000 ($17,118-$24,465 USD)||21|
|MYR 100,001-250,000 ($24,465-$61,134 USD)||24|
|MYR 250,001-400,000 ($61,134-$97,813 USD)||24.5|
|MYR 400,001-600,000 ($97,813-$146,885 USD)||25|
|MYR 600,001-1,000,000 ($146,885-$244,493 USD)||26|
|MYR 1,000,001-2,000,000 ($244,493-$489,000 USD)||28|
|Exceeding MYR 2,000,000 ($489,000 USD)||30|
e. Employee Termination Policies
Direct Dismissal: It is the situation where an employer decides to end the employment and dismisses the employee, usually by way of a formal letter of termination. Most of the time, the courts grant employers an ample space to make [managerial] decisions for their businesses, including the dismissal of employees. The courts will only interfere with a decision to directly dismiss an employee if it is proven unfair.
Constructive Dismissal: It involves the situation like an employer has shown intention not to continue with the employment relationship. As such, an employee would be entitled to regard the contract as having been terminated by the employer, and that he or she has been dismissed.
|Employer Initiated Termination||Employee Initiated Termination||Natural Termination|
Termination with Notice Period: the following shall apply once the provision is made in writing:
- Employment period of less than 2 years: 4 weeks’ notice period
- Employment period of 2 – 5 years: 6 weeks’ notice period
- Employment period of 5 years and above: 8 weeks’ notice period
- The notice period can be waived upon mutual agreement between both parties
Termination Benefits: Under federal regulations, only employees who have been employed under a continuous contract of employment of not less than 12 months before the date of termination are entitled to the termination benefits, which are as follows
|Length of Service||Termination Benefits|
|Less than 2 years||10 days wages for every year of service|
|2 years or more, but less than 5 years||15 days wages for every year of service|
|5 years or more||20 days wages for every year of service|
f. Severance Pay
Severance pay is payable where the termination is by way of retrenchment or upon closure of business. Currently, one month’s salary for each year of service is considered fair and reasonable.
However, for Employment Act employees, the law prescribes that the statutory minimum termination benefits are as follows and pro rata in respect of an incomplete year of service, calculated to the nearest month:
- 10 days’ wages for every year of employment if he/she has been employed for a period of less than two years
- 15 days’ wages for every year of employment if he/she has been employed for a period of two years or more but less than five years
- 20 days’ wages for every year of employment if he/she has been employed for a period of five years or more.
g. Probationary Period
Although the Employment Act doesn’t stipulate a maximum probationary period, they usually last up to three months. Employers have the right to prolong the probationary period if a new staff member isn’t up to scratch.
In Malaysia, the Employment Act 1955 highlights the fact that a probationary employee enjoys all the same rights and benefits as confirmed employees. A probationary employee CANNOT be terminated without just cause or excuse.
The law states that a probationary employee shall not be deemed confirmed unless there is an express act confirming the employee (by way of letter, salary increase or benefit entitlement).
h. Rest Days and Holidays
C. Malaysian Business Etiquette
It is important to note that Malaysia is a multi-cultural society. The main ethnic groups are the native Malays and a large population of Chinese and Indian people. Each ethnicity retains their religions, customs, and way of life. Undoubtedly, it is important to respect those values.
- Among all cultures, there’s a general tendency to introduce the most important person to the lower ranking person, the oldest person to the youngest person, and women to men.
- It is important that professional(professor, doctor, engineer) and honorific titles are used in business. Malays and Indians use titles with their first name while Chinese use titles with their surname.
- Silence is an important element of Malaysian communication. Pausing before responding to a question indicates that they have given the question appropriate thought and considered their response carefully.
- Use two hands or the right hand only to exchange business cards.
- Many Malays and Indians are uncomfortable shaking hands with a member of the opposite sex. To demonstrate respect Chinese may look downwards rather than at the person they are meeting.
D. Register Company
Malaysia is a great location to start one’s business for a number of reasons. Malaysia is a part of the Association of South East Asian Nations (ASEAN). Investors that engage in Malaysia will have accessible trade routes with Indonesia, Singapore, Thailand, Philippines, Vietnam, Brunei, Laos, Cambodia, and Myanmar. Malaysia also has a peaceful political climate that supports socio-economic development.
At NNRoad, we want to make your incorporation process in Malaysia as smooth as possible so you can spend more time focusing on your core business. When considering the establishment and incorporation of your company a foreign market, it is important to develop a preliminary plan. It is crucial to think about:
- Business scope
- Company structure
- Business environment
- Tax system
- Company name
- Capital requirement
To learn more about company formation, what to look for, and how it can benefit your business, check out our What to Look For in a Company Formation Services Firm blog.
E. Malaysia Market Entry Package
NNRoad offers a complete market entry solution for companies wishing to have local professional support during their market entry into Malaysia. The total market package means we will guide you every step of the market entry process. NNRoad allows you to take it at your own pace, and with us as your partner from beginning, to successful set up in the Malaysia. We can also support with taxes and accounting after your company is setup.
This package enables you to hire employees even before your company is completely set up in Malaysia. By the time your company’s formation is complete, NNRoad transfers all employment relationships to your new entity.
If you are interested in reading a more in-depth guide on PEOs, its advantages and the process itself, check out our Guide to Professional Employer Organization Services.