Employment Law in Malaysia

In Malaysia, employers are obligated to adhere to a comprehensive framework of employment law. This framework encompasses various aspects of the employment lifecycle, from the initial hiring process to the management of employees and eventual terminations.

Compliance entails a range of responsibilities, including securing foreign quota approvals for foreign employees, stipulating leave entitlements, defining working hours, registering with the Employees Provident Fund, crafting meticulous employment contracts, and ensuring the provision of severance payments.

To facilitate your understanding and effective navigation of these intricate legal requirements and responsibilities, we have compiled a comprehensive guide.

Within this guide, RS 36 Solutions will elucidate some of the most pivotal provisions that employers need to be well-versed in while engaging in the process of hiring, managing, and eventually terminating employees in Malaysia. You may now approach us for all sort of payroll related services.

Employment Contracts in Malaysia

In Malaysia, the establishment of employment contracts serves as a fundamental step in formalizing every employment engagement that extends beyond one month. These written contracts play a pivotal role in delineating the core elements of the employment relationship.

They encompass crucial details, including the workplace location, job responsibilities, wage structures, holiday entitlements, benefits, and provisions designed to safeguard the health and safety of the employee.

The regulatory framework governing employment contracts in Malaysia finds its roots in the Employment Act of 1955. According to this legislation, employers are mandated to maintain these contracts for a minimum of seven years, even after their expiry.

Under the Employment Act, a written contract of service is obligatory in cases where the employment period spans beyond one month or involves the performance of a specified project or task that reasonably exceeds or may exceed one month.

Furthermore, these written contracts must incorporate a clause outlining the procedures for termination, affording both parties a clear understanding of their rights and obligations.

Probationary Periods

In Malaysia, probationary periods do not fall under strict regulatory control. It is customary to observe probationary periods ranging from 1 to 6 months. During this time, probationary employees generally enjoy a degree of job security akin to that of confirmed or permanent employees.

Any decision regarding the confirmation or non-confirmation of employment during or at the conclusion of the probationary period must be made based on reasonable grounds.

Key Provisions of the Employment Law in Malaysia

Minimum Wage

As of May 1, 2022, Malaysia’s monthly minimum wage underwent an increase, reaching RM1,500 nationwide. However, there exists a temporary exemption until July 1, 2023, which applies to employers with fewer than five employees.

It’s essential to note that this exemption does not extend to employers engaged in professional activities, regardless of the size of their workforce.

For more detailed information, refer to the related article: Confirmed: New Minimum Wages Order effective 1 May 2022; employers with less than 5 employees exempted

Overtime Pay

For overtime work on a regular working day, employees must receive compensation at a rate of 1.5 times their hourly wage rate. This provision applies to employees with wages up to RM4,000 per month. “Normal hours of work” refer to the hours agreed upon in the employment contract as the usual daily working hours.

Overtime Work Hours	Overtime Pay Calculation
Rest day but required to work normal hours	Overtime work not exceeding half the normal work hours: 1/2 of the normal rate of pay<br> Overtime work exceeding half but not exceeding the regular work hours: one full day’s wage at the normal rate of pay
Rest day but required to work in excess of normal working hours	Two times the hourly wage
Public holiday but required to work normal working hours	Two days’ wage
Public holiday but required to work in excess of normal working hours	Three times the hourly wage

Public Holidays

Employees are entitled to a paid holiday at their ordinary rate of pay on 11 of the gazetted public holidays and on any day designated as a public holiday under the Holidays Act of 1951. The Employment Act specifies that five of those 11 gazetted public holidays must include:

The National Day.
The Birthday of the Yang di-Pertuan Agong.
The Birthday of the Ruler or the Yang di-Pertua Negeri, as applicable to the State in which the employee primarily works under their contract of service, or the Federal Territory Day, if the employee predominantly works in the Federal Territory.
Workers’ Day.
Malaysia Day.

Additionally, if any of the public holidays falls on a rest day or another public holiday, the working day immediately following the rest day or the other public holiday shall be considered a paid holiday.

It is common market practice for all employees to be granted paid holidays on all National and State-level public holidays.

According to Section 60D(1) of the Employment Act, every employee is entitled to 11 gazetted public holidays, including the mandatory five listed above.

Employers have the flexibility to choose the remaining 6 gazetted public holidays to complete the 11 days. These selected days must be effectively communicated to employees through notice or stipulated in the employment contract. These additional public holidays may include:

Birthday of the Prophet Muhammad (s.a.w).
Chinese New Year (2 days, except 1 day in the states of Terengganu and Kelantan).
Wesak Day.
Hari Raya Puasa (2 days).
Hari Raya Haji (1 day, except 2 days in the states of Terengganu and Kelantan).
Deepavali.
Christmas Day.
Nuzul Al-Quran (only in the Federal Territory of Kuala Lumpur, Putrajaya, and Labuan).

Regardless of whether an employee falls under the purview of the Employment Act, all Malaysian employees are entitled to any days that are appointed as public holidays under section 8 of the Holidays Act of 1951, commonly known as Ad Hoc Public Holidays.

In the event an employee is required to work on a public holiday, they shall be compensated at a rate not less than 3 times their daily rate of pay. The same principle applies should they be required to work overtime on the said public holiday.

Leave Entitlement of Employment Law Malaysia

Annual Leave

Employees in Malaysia are entitled to paid annual leave depending on the number of years of service.

Years of Service	Leave per Year
One to two years	Eight days
Two to five years	12 days
More than five years	16 days

If the employee has not completed 12 months of continuous service with the same employer during the year in which their contract of service terminates, their entitlement to paid annual leave shall be in direct proportion to the number of completed months of service.

Sick Leave

Full-time employees are entitled to paid sick leave in accordance with the length of service with the company.

Years of Service	Leave per Year
Less than two years	14 days
Two to five years	18 days
More than five years	22 days

In the case of hospitalization, employees are eligible for 60 days of hospitalization leave a year in addition to the number of days for sick leave.

Maternity Leave

Female employees in the private sector are entitled to maternity leave as follows:

60 days of maternity leave.

Employees in the public sector are entitled to 90 days of maternity leave.

The Malaysian 2020 Budget extended the maternity leave for private employees to 98 days starting on January 1, 2023.

Termination of Employment Under Malaysia Employment Law

Termination Notice

Termination notice must be uniform for both employers and employees, and the notice’s duration can be determined by the employment contract. In cases where the contract does not specify, the following statutory termination notice periods apply:

Length of Notice	Years of Service
Four weeks	Employed for less than two years
Six weeks	Employed between two to five years
Eight weeks	Employed for longer than five years

Alternatively, either party can opt for a payment in lieu of notice. Notice of termination is not required if there is a serious misconduct or a “wilful breach” of the employment contract.

According to section 12 of the Employment Act 1955, the employer or employee must provide notice within the specified lengths based on the employee’s years of service.

Retrenchment/Redundancy

Employers conducting a retrenchment exercise must submit a notification to the nearest Department of Labour at least 30 days before terminating employment. This notification should use the standard “Borang PK” form.

Retrenchments can be justified by various reasons, including redundancy or financial challenges. However, in the event of a challenge, employers must be prepared to demonstrate that the retrenchment was carried out for genuine reasons.

Employers should follow the “Last In, First Out” (LIFO) principle or an alternative fair and objective selection criteria when selecting employees for retrenchment.

While it’s not mandatory, employers are encouraged to adhere to the Code of Conduct for Industrial Harmony when implementing a retrenchment exercise.

Poor Performance Dismissals

Poor performance is an acceptable reason for unilateral termination, but it must be handled fairly. Employers dismissing employees for poor performance risk a successful unfair dismissal claim if the termination is not conducted fairly. The fairness of a termination based on poor performance is assessed on a case-by-case basis.

To be considered fair, a termination due to poor performance generally requires the following:

Reasonable, clear, and measurable performance standards that the employee is aware of.
Clear communication to the employee that their performance is below expectations.
Constructive feedback and guidance on how the employee can improve to meet expectations.
Provision of necessary guidance or training, if required, and a reasonable timeframe for performance improvement.
Possibly, multiple rounds of feedback and opportunities for improvement, with documentation of feedback sessions.

Mutually-Agreed Separations

In cases where an employer is uncertain about the fairness of a dismissal or wishes to have the employee agree to additional post-employment conditions, they may offer an ex gratia payment in exchange for a mutual separation agreement. This arrangement transforms the termination into a mutually-agreed separation.

A mutual separation agreement reduces the likelihood of an unfair dismissal claim by the employee. However, it’s important to note that the release of claims may not entirely prevent an employee from making such a claim.

Post-Termination Restrictions

Post-termination non-compete restrictions are considered void and unenforceable under Section 28 of the Contracts Act as they constitute a restraint of trade.

Post-termination non-solicitation restrictions, involving customers and employees, do not directly violate Section 28 of the Contracts Act. However, they are challenging to enforce and typically only hold up when there has been a breach of confidentiality, misuse of confidential information, or trade secrets.

Severance Payment

The entitlement to severance payment in Malaysia is as follows:

Severance Payments Table

Length of Service	Severance Payment
Less than 2 years	10 days' wage for every year of service completed
2 to 5 years	15 days' wage for every year of service completed
5 years or more	20 days' wage for every year of service completed

It’s important to note that employees who are dismissed for misconduct, voluntarily terminate their contract, or retire are not entitled to severance pay.

For employees with monthly wages of up to RM4,000 who have been employed for 12 months or more, the minimum statutory severance payments are as follows, based on the Employment (Termination and Lay-Off Benefits) Regulations 1980:

Severance Payments Table

Length of Employment	Severance Payment
Less than 2 years	10 days' wages for every year of employment
2 years or more but less than 5 years	15 days' wages for every year of employment
5 years or more	20 days' wages for every year of employment

For employees with monthly wages exceeding RM4,000, the entitlement to severance payments depends on the terms of the employment contract. If the contract is silent on this matter, there is no statutory right to termination benefits.

However, there may still be an expectation that a financially capable employer should provide reasonable severance compensation in certain circumstances.

Unfair Dismissal Claims

Employees have the right to file an unfair dismissal complaint at the Industrial Relations Department within 60 days of their last employment date. This is a strict deadline.

Upon receiving a complaint, the Industrial Relations Department arranges an informal conciliation meeting between the employer and employee to attempt to mediate a settlement. If a settlement cannot be reached, the matter proceeds to an Industrial Court trial.

In the event of a successful unfair dismissal claim, an employer may face the following financial consequences:

Backwages, which can be up to a maximum of 24 months.
Compensation in lieu of reinstatement, calculated at one month per year of service.

These potential financial liabilities underscore the importance of adhering to fair and lawful termination procedures to minimize the risk of unfair dismissal claims.

Flexible Working Arrangement

The Employment (Amendment) Act 2022 grants employees the right to apply for a flexible working arrangement, allowing them to modify their work hours, days, or location.

Employers must respond to these applications within 60 days, either approving or refusing them, with reasons provided for any refusals.

While not mandatory, having a Flexible Working Policy is considered a recommended best practice.

Employee Transfers in Sale of Assets/Business Transactions

In Malaysia, there is no equivalent to the ARD/TUPE (Transfer of Undertakings, Protection of Employment) regulations. Automatic transfer of employment in asset or business sales does not exist, and employees typically remain employed by the seller by default.

Any transfer of employees in such transactions is achieved through termination by the seller and rehiring by the buyer.

The seller is exempt from statutory severance payments under the Employment (Termination and Lay-Off Benefits) Regulations 1980 if the new offer from the buyer provides terms and conditions of employment that are not less favorable than those the employee had with the seller.

Statutory severance payment is not applicable if the employee unreasonably rejects the new offer.

EPF & SOCSO & other contributions

Irrespective of whether the employee falls under the purview of the EA, employers have a legal obligation to make the following statutory contributions:

a) Employees Provident Fund (‘EPF’)
b) Social Security Organization (‘SOCSO’)
c) Employee Insurance System (‘EIS’) Scheme
d) Schedular Tax Deduction or ‘Potongan Cukai Berjadual’ (‘PCB’)
e) Trade Union Subscription Fees or PTPTN loan repayment (subjected to a written request by the employee)

Details about the rates for these contributions can be found in Malaysian Employment Law: 5 Compulsory Statutory Contributions or Deductions.

Employees Provident Fund (EPF)

The Employees Provident Fund (EPF) is a retirement savings scheme for employees in Malaysia, consisting of both employer and employee monthly contributions. This is an important elements in the accounting services.

Employers are required to register with the EPF within seven days of hiring their first employee and must also register the employee as an EPF member.

The contribution rates for both employees and employers are as follows:

Monthly salary	RM 5,000 and below	More than RM 5,000
Employee’s status	Employer’s contribution rate	Employee’s contribution rate
Residents ages below 60	13%	11%
Residents ages 60 and above	4%	0%
Permanent residents ages below 60	13%	11%
Permanent residents ages 60 and above	6.5%	5.5%
Non-residents ages below 60	RM 5.00	11%
Non-residents ages 60 and above	RM 5.00	5.5%

These contributions are essential for securing employees’ financial future and ensuring social security during their retirement years.

Sexual Harassment

Section 81A – 81G of the EA provides that the law against sexual harassment are basically applicable to all employees regardless of whether they fall under the purview of EA.

The law now sets out the employer’s duty to act by inquiring into the complaint of sexual harassment, failing which shall be liable to fine not exceeding RM 10,000.

Details of law on sexual harassment can be found in Sexual Harassment Law at Private Employment in Malaysia

Retirement Benefits

Retirement benefits are not compulsory benefit under the law unless if it is provided in the employment contract.

Other Relevant Provisions:

It is pertinent to note that the Minimum Wages Order 2018 and Minimum Wages Order (Amendment) 2018 as enacted under Section 23 of the National Wages Consultative Council Act provides that the minimum wages rates payable to an employee shall be RM 1,100 per month. Details of which can be found in Employment Law: Minimum Wages in Malaysia.
Minimum Retirement Age Act 2012 provides that with effective from 01.07.2013, the employee’s retirement age for the private sector is 60 years old, details of which can be found in Law on Retirement Age in Malaysia.
Pursuant to Personal Data Protection Act 2010, effective from 15.11.2013, ‘active’ measures need to be taken by the employer to comply with the Personal Data Protection Act 2010 and its regulations or risk facing prosecution with a maximum fine of RM 500,000 or up to three years in jail, or both. These are recommended compliance exercises to be undertaken by the employer:
(a) Obtain a certificate of registration; and
(b) Notify its employee of the privacy policy.
Details of which can be found in the Basics of Personal Data Protection for Employers
Any of such clauses in the employment contract for the purpose of restraining an employee from pursuing the same career after the termination of the employment contract is invalid due to its direct contradiction with Section 28 of the Contracts Act 1950, which states that “Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.” Detailed explanations can be found in The Legal Effect of Restraint of Trade clause in Employment Contracts

Conclusion

In conclusion, navigating the complex landscape of employment and labor laws in Malaysia is crucial for employers to ensure they remain compliant and foster a harmonious workplace.

This comprehensive guide has outlined key provisions of the Employment Act 1955, regulations governing leave entitlements, statutory contributions, and other essential aspects of Malaysian labor laws.

It has shed light on the intricacies of employment contracts, termination procedures, and the importance of addressing issues such as sexual harassment.

Employers are encouraged to adopt a proactive approach by implementing compliance strategies and staying informed about legal updates to protect the rights of both employees and the organization.

As Malaysia continues to evolve its labor regulations, it is paramount for businesses to uphold ethical employment practices, respect the rights of their workforce, and create an inclusive work environment.

By adhering to the principles outlined in this guide and seeking professional advice when needed, employers can mitigate risks, enhance their reputation, and contribute to the growth of a vibrant and equitable labor market in Malaysia.

In doing so, they not only comply with the law but also promote a culture of fairness and responsibility that benefits both employees and employers alike.