Malaysia continues to be an attractive South East Asian destination for foreign direct investment, offering overseas employers a skilled workforce at competitive rates.
But an historic sensitivity to abusive labour practices and the litigation that inevitably followed means that foreign investors need to tread carefully in case they fall foul of local employment laws or trigger costly labour disputes.
In a bid to tackle the issue, Malaysia as well as some fellow members of the Association of South East Asian Nations (ASEAN) trading bloc such as Indonesia and Vietnam, have distinguished themselves by mandating the need for a formal, written employment contract signed by all relevant parties. When drafted with a strong understanding of Malaysia’s regulatory landscape and labour laws, these formal contracts can serve as a firm foundation for undertaking HR management in the country.
Written contract
Any form of employment that lasts for more than one month must be formalised by a written contract. This contract should specify the key terms of the employment relationship, including work location, scope, wage rates, wage period, holidays, benefits and health and safety issues.
In Malaysia, all labour contracts are governed by the Employment Act 1955, which stipulates that the right of employees to participate or join trade unions cannot be restricted. Employers are also obliged to retain these contracts for six years after they expire.
Employment terms
Employment contracts can be either for a fixedterm or indefinite period. But if a fixed-term contract is renewed on multiple occasions, the Malaysian courts may consider the employee concerned to be a permanent staff member should they be dismissed.
Although the Employment Act does not stipulate a maximum probationary period, they usually last up to three months. Employers also have the right to prolong the probationary period if a new staff member is not up to scratch.
Labour contracts, on the other hand, should explicitly state the length of an employee’s probationary period, expected standards of work and subsequent recourse if those standards are not met.
Special provisions: Retirement, non-compete clauses and confidentiality
The minimum retirement age for employees in Malaysia is 60, although employment contracts may stipulate an earlier age. In fact, retirement ages must be included in all labour contracts if an employer wants to avoid being responsible for paying severance to elderly personnel.
While non-compete clauses are difficult to enforce in the country, employment contracts can and should prohibit former employees from sharing confidential information obtained during employment and from interfering with their former employer’s business.
This means that, although employers will struggle to enforce a general non-compete contract clause, they can take legal action if a former employee poaches clients or colleagues.
Terminating an employment contract
Employers and employees alike have the right to terminate an employment contract. If it does not specify a mandatory notice period, the notice period should correspond with the length of time the staff member has worked for the company. For instance, employees that have worked for:
• Less than two years must either give or be given four weeks notice;
• Two to five years must give or be given six weeks notice;
• More than five years must give or be given eight weeks notice.
If an employer terminates a worker’s contract without providing them with the necessary notice, they must pay their staff member the same wages as if they had been given notice.
Employers may terminate an employee’s contract without proper notification due to misconduct – although they must conduct a proper inquiry into the situation. But because the Employment Act does not comprehensively define what misconduct entails, labour contracts need to be very clear as to what kinds of action constitute it. They must also lay out the repercussions of such actions.
Severance pay
Staff members who complete less than two years of employment are entitled to 10 days wages for every full year of service. Individuals that have been employed for two to five years are entitled to 15 days wages for each full year worked. Workers that have five or more years under their belt are entitled to 20 days wages for each full year of employment.
Employees who are dismissed for misconduct, retire or voluntarily terminate their employment contract are not entitled to severance pay. Dispute resolution It is possible to resolve labour disputes either by private arbitration or through Malaysia’s Industrial Court, depending on the preferences of both parties and the severity of the clash. The Industrial Court is a statutory tribunal specifically established to hear disputes between employers and employees or between employers and trade unions.
Personal income tax and social security
Malaysia employs multiple tax brackets based on an employee’s salary and tax status. Staff members who work in the country for 182 days or more each year are usually considered taxresidents. Non-tax residents are taxed at a flat rate of 28%.
Both employers and employees need to contribute to an individual’s social insurance through the Employees’ Provident Fund (EPF) and Social Security Organization (SOCSO), which cover survivor’s benefits, retirement, disability and medical payments. Domestic and foreign workers, self-employed people and the spouses of the selfemployed are not required to contribute to either the EPF or SOCSO.
Conclusion
Rather than view the task of preparing and signing a clear and comprehensive labour contract as a bureaucratic chore imposed on them by Malaysian law, foreign investors should recognise it as an opportunity to establish a firm foundation for positive labour relations, cultivating workforce stability and helping to limit disputes and disruption in the process.
- First published by ASEAN Briefing. Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and ASEAN, we are your reliable partner for business expansion in this region and beyond. For inquiries, please email usat info@dezshira.com. Further information about the firm can be found at: www.dezshira.com.
Malaysia continues to be an attractive South East Asian destination for foreign direct investment, offering overseas employers a skilled workforce at competitive rates.
But an historic sensitivity to abusive labour practices and the litigation that inevitably followed means that foreign investors need to tread carefully in case they fall foul of local employment laws or trigger costly labour disputes.
In a bid to tackle the issue, Malaysia as well as some fellow members of the Association of South East Asian Nations (ASEAN) trading bloc such as Indonesia and Vietnam, have distinguished themselves by mandating the need for a formal, written employment contract signed by all relevant parties. When drafted with a strong understanding of Malaysia’s regulatory landscape and labour laws, these formal contracts can serve as a firm foundation for undertaking HR management in the country.
Written contract
Any form of employment that lasts for more than one month must be formalised by a written contract. This contract should specify the key terms of the employment relationship, including work location, scope, wage rates, wage period, holidays, benefits and health and safety issues.
In Malaysia, all labour contracts are governed by the Employment Act 1955, which stipulates that the right of employees to participate or join trade unions cannot be restricted. Employers are also obliged to retain these contracts for six years after they expire.
Employment terms
Employment contracts can be either for a fixedterm or indefinite period. But if a fixed-term contract is renewed on multiple occasions, the Malaysian courts may consider the employee concerned to be a permanent staff member should they be dismissed.
Although the Employment Act does not stipulate a maximum probationary period, they usually last up to three months. Employers also have the right to prolong the probationary period if a new staff member is not up to scratch.
Labour contracts, on the other hand, should explicitly state the length of an employee’s probationary period, expected standards of work and subsequent recourse if those standards are not met.
Special provisions: Retirement, non-compete clauses and confidentiality
The minimum retirement age for employees in Malaysia is 60, although employment contracts may stipulate an earlier age. In fact, retirement ages must be included in all labour contracts if an employer wants to avoid being responsible for paying severance to elderly personnel.
While non-compete clauses are difficult to enforce in the country, employment contracts can and should prohibit former employees from sharing confidential information obtained during employment and from interfering with their former employer’s business.
This means that, although employers will struggle to enforce a general non-compete contract clause, they can take legal action if a former employee poaches clients or colleagues.
Terminating an employment contract
Employers and employees alike have the right to terminate an employment contract. If it does not specify a mandatory notice period, the notice period should correspond with the length of time the staff member has worked for the company. For instance, employees that have worked for:
• Less than two years must either give or be given four weeks notice;
• Two to five years must give or be given six weeks notice;
• More than five years must give or be given eight weeks notice.
If an employer terminates a worker’s contract without providing them with the necessary notice, they must pay their staff member the same wages as if they had been given notice.
Employers may terminate an employee’s contract without proper notification due to misconduct – although they must conduct a proper inquiry into the situation. But because the Employment Act does not comprehensively define what misconduct entails, labour contracts need to be very clear as to what kinds of action constitute it. They must also lay out the repercussions of such actions.
Severance pay
Staff members who complete less than two years of employment are entitled to 10 days wages for every full year of service. Individuals that have been employed for two to five years are entitled to 15 days wages for each full year worked. Workers that have five or more years under their belt are entitled to 20 days wages for each full year of employment.
Employees who are dismissed for misconduct, retire or voluntarily terminate their employment contract are not entitled to severance pay. Dispute resolution It is possible to resolve labour disputes either by private arbitration or through Malaysia’s Industrial Court, depending on the preferences of both parties and the severity of the clash. The Industrial Court is a statutory tribunal specifically established to hear disputes between employers and employees or between employers and trade unions.
Personal income tax and social security
Malaysia employs multiple tax brackets based on an employee’s salary and tax status. Staff members who work in the country for 182 days or more each year are usually considered taxresidents. Non-tax residents are taxed at a flat rate of 28%.
Both employers and employees need to contribute to an individual’s social insurance through the Employees’ Provident Fund (EPF) and Social Security Organization (SOCSO), which cover survivor’s benefits, retirement, disability and medical payments. Domestic and foreign workers, self-employed people and the spouses of the selfemployed are not required to contribute to either the EPF or SOCSO.
Conclusion
Rather than view the task of preparing and signing a clear and comprehensive labour contract as a bureaucratic chore imposed on them by Malaysian law, foreign investors should recognise it as an opportunity to establish a firm foundation for positive labour relations, cultivating workforce stability and helping to limit disputes and disruption in the process.
- First published by ASEAN Briefing. Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and ASEAN, we are your reliable partner for business expansion in this region and beyond. For inquiries, please email usat info@dezshira.com. Further information about the firm can be found at: www.dezshira.com.
