Guide to Malaysian Employment Law

This Guide is a one-stop introductory guide to Malaysian employment law, written by The Malaysian Lawyer co-founder Marcus van Geyzel, and includes categorised links to employment law articles Marcus has published on The Malaysian Lawyer.

The topics in this Guide have been selected based on feedback from in-house counsel and HR professionals, and cover the usual high-level background legal information they would like to have on-hand, particularly as professionals from other jurisdictions considering employment issues in Malaysia.

Nothing in this Guide is legal advice, and its contents will be updated from time-to-time. This Guide was last updated on 1 October 2021.

General information

The legal framework to the Malaysian employment and industrial relations ecosystem is generally provided by the Employment Act 1955 and the Industrial Relations Act 1967.

The Employment Act sets out minimum statutory benefits and entitlements. However, most of the Employment Act only applies to employees who fall within the scope of the Act (referred to here as “EA Employees”). EA Employees are generally — (1) those whose wages do not exceed RM2,000/month; or (2) those who, irrespective of wages, are engaged in manual labour, engaged in the operation/maintenance of vehicles, supervise/oversee other employees engaged in manual labour, are engaged in any vessel, or are engaged as a domestic servant.

This distinction between EA Employees and non-EA Employees is important, and the employment terms and conditions of non-EA Employees are usually freely negotiable between employer and employee, and would be whatever is set out in the employment contract and other employment documents. Having said that, as a general market practice, most non-EA Employees would be contractually-entitled to benefits as good as or better than those provided in the Employment Act (with obvious exceptions such as entitlement to overtime payments).

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Employer legal entity requirements

There is no requirement for a foreign employer to establish an entity in Malaysia purely to engage an employee in Malaysia. This is of course subject to tax and permanent establishment considerations, depending on the nature of the business and the role of the employee.

While the Companies Act requires foreign companies to be registered as a foreign company in Malaysia before “carrying on business in Malaysia”, merely hiring employees does not constitute “carrying on business”.

Foreign companies can of course choose to incorporate a subsidiary in Malaysia, or register a branch or representative office.

Other common international structures such as MSPs and PEOs can also be used in the Malaysian market.

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Pre-employment considerations

There is no regulation of pre-employment background checks, and extent of these checks are industry or employer-specific. Employers should obtain the individual’s consent for the processing of any personal data, and ensure compliance with the Personal Data Protection Act 2010.

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Options for engagement

Employees can be engaged on a permanent, fixed-term, full-time, or part-time basis.

Individuals can also be engaged as independent contractors either directly or through a service provider. There is the same misclassification risk as in most other jurisdictions. The risk level depends on a range of factors, and the courts will look at the substance of the relationship (including work instructions, level of control, exclusivity, benefits entitlements, organisational integration) over its form.

Employment contracts, policies, and other documentation

For EA Employees, the Employment Act requires that a contract of service be in writing where the contract is for a specified period of time exceeding one month or for the performance of a specified piece of work, where the time reasonably required for the completion of the work exceeds or may exceed one month. The Employment Act also requires this written contract of service to include a clause setting out the manner in which such contracts may be terminated by either party.

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Probationary periods

Probationary periods are not regulated, and it is common to see probationary periods of 1-6 months. Probationers are generally entitled to similar security of tenure as confirmed/permanent employees, and any non-confirmation of employment during or at the end of the probationary period must be reasonable.

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Other employment policies

There are no compulsory employment policies. Common policies include those in relation to workplace health and safety, whistleblowing, grievance and harassment, and intellectual property or proprietary invention and assignment matters. Some employers also have a standalone data privacy policy to address the consent/notice requirements of the Personal Data Protection Act (see the “Data privacy” section below).

Minimum wage

Pursuant to the Minimum Wages Order 2020, the minimum wage for employees employed in major towns under a list of 56 city and municipality councils is RM1,200/month, or RM5.77/hour for those earning an hourly rate. The minimum wage for employees outside that list of locations is RM1,100/month, or RM5.29/hour for those earning an hourly rate.

Minimum employment rights, and standard terms and conditions

The Employment Act provides statutory minimum employment rights and terms and conditions for EA Employees. The employment terms and conditions of non-EA Employees can be freely negotiated and agreed between the parties, other than some limited employment rights which are provided by the Employment Act. We list some of the entitlements under the Employment Act in this section, and point out where these also apply to non-EA Employees.

Hours of work

An EA Employee shall not be required under his contract of service to work —

  • more than 5 consecutive hours without a period of leisure of not less than 30 minutes;
  • more than 8 hours in one day;
  • in excess of a spread over period of 10 hours in one day;
  • more than 48 hours in one week,

provided that —

  • any break of less than 30 minutes in the 5 consecutive hours shall not break the continuity of that 5 consecutive hours;
  • an employee who is engaged in work which must be carried on continuously and which requires his continual attendance may be required to work for 8 consecutive hours inclusive of a period or periods of not less than 45 minutes in the aggregate during which he shall have the opportunity to have a meal; and
  • where, by agreement under the contract of service between the employee and the employer, the number of hours of work on one or more days of the week is less than 8, the limit of 8 hours may be exceeded on the remaining days of the week, but so that no employee shall be required to work for more than 9 hours in one day or 48 hours in one week.

Overtime payments

EA Employees are entitled to overtime compensation under the Employment Act. Pursuant to the Employment Act, for any overtime work carried out in excess of the normal hours of work, an EA Employee shall be paid at a rate not less than 1.5 times his hourly rate of pay irrespective of the basis on which his rate of pay is fixed. Here “normal hours of work” means the number of hours of work as agreed between an employer and an employee in the contract of service to be the usual hours of work per day.

Public holidays

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

  • the National Day;
  • the Birthday of the Yang di-Pertuan Agong;
  • the Birthday of the Ruler or the Yang di-Pertua Negeri, as the case may be, of the State in which the employee wholly or mainly works under his contract of service, or the Federal Territory Day, if the employee wholly or mainly works in the Federal Territory;
  • the Workers’ Day; and
  • Malaysia Day.

The Employment Act also provides that, if any of the public holidays falls on a rest day or another public holiday, the working day following immediately the rest day or the other public holiday shall be a paid holiday.

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

Annual leave

EA Employees are entitled to paid annual leave of —

  • 8 days for every 12 months of continuous service with the same employer if the employee has been employed by that employer for a period of less than two years;
  • 12 days for every 12 months of continuous service with the same employer if the employee has been employed by that employer for a period of two years or more but less than five years; and
  • 16 days for every 12 months of continuous service with the same employer if the employee has been employed by that employer for a period of five years or more,

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

It is common market practice for non-EA Employees to get at least the Employment Act entitlements. As a general guide, an annual leave entitlement of 14-24 days would not be unusual.

Sick leave

EA Employees are entitled to the following sick leave, where no hospitalisation is necessary:

  • 14 days in the aggregate in each calendar year if the employee has been employed for less than 2 years.
  • 18 days in the aggregate in each calendar year if the employee has been employed for 2 years or more but less than 5 years.
  • 22 days in the aggregate in each calendar year if the employee has been employed for 5 years or more.

Where hospitalisation is necessary, EA Employees are entitled to 60 days sick leave in the aggregate in each calendar year (provided that the total number of paid sick leave an employee will be entitled to in a calendar year is 60 days).

Maternity leave

All female employees (whether they are EA Employees or non-EA Employees) are entitled to paid maternity leave of not less than 60 days. The government has been promising to increase this to 90 days for a few years now, but the law has not been amended. However, some employers do provide up to 6 months paid maternity leave. Public sector employees are entitled to 90 days paid maternity leave.

Paternity leave

There is no statutory paternity leave in Malaysia.

Minimum retirement age

The minimum retirement age in Malaysia is 60.

Data privacy

The collection and processing of personal data is governed by the Personal Data Protection Act 2010 (PDPA). Employers must obtain employee consent before collecting and processing their personal data. Explicit/express consent is required if “sensitive personal data” is involved. Employers must notify their employees of the nature and purpose of information being collected, to whom it is being disclosed, and that the employees have the right to access such data. Consent is also required before this data is shared with third parties. A bilingual (in English and Bahasa Malaysia) employee consent/notice document is required.

Employee transfers in sale of assets/business transactions

There is no ARD/TUPE equivalent in Malaysia. There is no mechanism for the automatic transfer of employment in sale of assets/business transaction, and employees will by default remain employed by the seller in such transactions. Any “transfer” of employees in such transactions is effected by a termination (by the seller) and rehire (by the buyer), and the seller will be exempted from paying any statutory severance payment under the Employment (Termination and Lay-Off Benefits) Regulations 1980 if the new offer from the buyer is under terms and conditions of employment not less favourable than those under which the employee was employed by the seller. An employee will not be entitled to statutory severance payment if the employee unreasonably refuses the new offer.

Termination of employment

Termination must be with “just cause or excuse”. There is no fixed or comprehensive list of acceptable grounds for termination of employment by an employer, but the usual reasons would include misconduct, poor performance, redundancy, or closure of business.

All employees (EA Employees and non-EA Employees) are protected from unfair dismissal.

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Termination notice

EA Employees are entitled to the following minimum notice periods:

  • 4 weeks’ notice if the employee has been so employed for less than 2 years on the date on which the notice is given.
  • 6 weeks’ notice if the employee has been so employed for 2 years or more, but less than 5 years on such date.
  • 8 weeks’ notice if the employee has been so employed for 5 years or more on such date.

For non-EA Employees, the notice period is as stated in the employment contract, and if the contract is silent, a “reasonable” notice period will be implied.

Alternatively, a payment in lieu of notice can be made by either party.

Notice of termination is not required if there is a serious misconduct or a “wilful breach” of the employment contract.

Severance payments

EA Employees who have been employed for 12 months or more are entitled to the following minimum statutory severance payments pursuant to the Employment (Termination and Lay-Off Benefits) Regulations 1980:

  • 10 days’ wages for every year of employment under a continuous contract of service with the employer if he has been employed by that employer for a period of less than 2 years.
  • 15 days’ wages for every year of employment under a continuous contract of service with the employer if he has been employed by that employer for 2 years or more but less than 5 years.
  • 20 days’ wages for every year of employment under a continuous contract of service with the employer if he has been employed by that employer for 5 years or more.

For non-EA Employees, the entitlement to severance payments depends on the employment contract. If the contract is silent, there is a general expectation that a financially-able employer should pay reasonable severance compensation.

Retrenchment/redundancy

When carrying out a retrenchment exercise, employers must lodge a notification with the nearest Department of Labour, using the standard “Borang PK” form at least 30 days before the termination of employment.

Retrenchments can be justified by various reasons, such as redundancy, or for financial reasons. However, if challenged, employers must be able to prove that the retrenchment was carried out for genuine reasons. Employers must also use the “Last In, First Out” (LIFO) principle, or an alternative fair and objective selection criteria.

Employers are encouraged (but not required) to abide by the Code of Conduct for Industrial Harmony when implementing a retrenchment exercise.

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Poor performance dismissals

Poor performance is one of the acceptable reasons which constitute just cause for a unilateral termination. However, the employee has to be treated fairly. An employer who dismisses an employee for poor performance faces the risk of a successful unfair dismissal claim by the employee if the termination was not carried out fairly. Whether or not the termination was fair will be determined on a case-by-case basis.

Generally, to be deemed fair, a termination based on poor performance would require the following:

  • The standard of performance expected must be reasonable, clear, and measurable, and the employee must be aware of these standards.
  • The employer must have clearly communicated to the employee that his performance has not been meeting expectations.
  • The employer must have offered constructive feedback and guidance on how the employee can improve to meet expectations.
  • The employee must be given sufficient guidance or training if required, and afforded a reasonable timeframe in which to improve his performance.
  • There may need to be more than one round of feedback and opportunity to improve, and any feedback sessions should be documented.

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Mutually-agreed separations

Where an employer is uncertain as to whether the dismissal is fair (if the employee brings an unfair dismissal claim, the burden will be on the employer to show that the dismissal was fair), or wants the employee to agree to additional post-employment covenants, some employers opt to offer an ex gratia payment in return for the signing of a mutual separation agreement. This then would no longer be a termination of employment by the employer, but a mutually-agreed separation.

The benefit of a mutual separation agreement is it reduces the likelihood of an employee bringing an unfair dismissal claim. However, the release of claims cannot effectively bar an employee from making such a claim.

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Post-termination restrictions

Post termination non-compete restrictions are void and unenforceable pursuant to Section 28 of the Contracts Act, as they are a form of restraint of trade.

Post termination non-solicitation restrictions (of customers and employees) do not directly breach Section 28 of the Contracts Act, but are difficult to enforce and are typically only enforceable to the extent that there has been a breach of confidentiality, or misuse of confidential information or trade secrets.

Unfair dismissal claims

An employee can lodge an unfair dismissal complaint at the Industrial Relations Department within 60 days of his/her last employment date. This is a strict deadline.

Upon receiving a complaint, the Industrial Relations Department will arrange an informal conciliation meeting between the employer and employee to attempt to mediate a settlement. If the parties cannot reach a settlement, the matter will proceed to an Industrial Court trial.

The potential financial exposure for an employer in the event of a successful unfair dismissal claim is —

  • backwages of up to a maximum of 24 months; and
  • compensation in lieu of reinstatement, calculated at one month per year of service.

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Conclusion

This Guide to Malaysian Employment Law is intended to be a high-level introduction to Malaysian employment law. Please share the Guide with others who may find it useful. It will be continually updated. Please leave a comment below if you have any feedback, or requests or suggestions for other employment law issues that should be included in this guide. You may also want to browse articles on The Malaysian Lawyer using some of these tags: employment law / Industrial Court / retrenchment / unfair dismissal.

Marcus van Geyzel / [email protected]

Peter Ling & van Geyzel / plvg.my

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