Labor Laws and Regulations

Contract

There are two main types of employment contracts

Common to both Fixed-Term Employment and Permanent Employment contracts

Language

No explicit mandate for a specific language for employment contracts.
Best practices and legal interpretations suggest that contracts should be in Bahasa Malaysia (Malay) and preferably also in English. If there are discrepancies between the two versions, the Bahasa Malaysia version may take precedence in legal interpretations.

Mandatory terms

Employment Act 1955 does not explicitly list out “mandatory terms” but implies certain terms that are essential and legally required to be addressed in an employment contract to ensure it complies with the law and protects employee rights.

Probation

Probation is allowed, no limits of maximum duration of probation period. The typical duration for probation is generally between 3 to 6 months. For technical, specialized or management positions, probation periods may extend up to 12 months or even longer in some cases.

There are no strict mandated legal requirements for a specific procedure to confirm an employee after probation.

Best practices are:

• Contractual Terms are Key
  • Probation Clause: The employment contract should clearly state the probation period’s duration and the conditions for confirmation. It should specify whether confirmation is automatic upon satisfactory completion of probation or if a formal confirmation is required.
    • Confirmation Clause: Ideally, the contract should include a clause detailing the confirmation process. This might state that upon satisfactory completion of probation, the employee will be confirmed in their position, often with a formal letter.
• Implied Confirmation vs. Formal Confirmation
  • No Automatic Confirmation: In Malaysia, it’s generally understood that confirmation is not automatic even if an employee completes the probation period. Unless the contract explicitly states automatic confirmation, the employee remains a probationer until formally confirmed.
    • Importance of Formal Confirmation: It is highly recommended for employers to issue a formal confirmation letter in writing to employees who have successfully completed their probation. This letter serves as official documentation of the change in employment status from probationer to confirmed employee.

Specific for Fixed-Term Employment contracts

Minimum contract duration

Not specified

Maximum contract duration

Not specified.
Also no legal limit on the number of times a fixed-term contract can be renewed.

Type of work

No explicit legal restrictions.
Spirit and practical application of fixed-term contracts in Malaysia are guided by the understanding that these contracts are intended for genuinely temporary or project-based work.

Minimum wage

Malaysia has a national minimum wage, which is periodically reviewed and adjusted by the government. Wages typically include basic salary and various allowances. It’s important to ensure the basic wage component meets or exceeds the minimum wage.

As of February 1, 2025, the minimum wage in Malaysia’s labour law has been set at RM1,700 per month for most employers. This new minimum wage is being implemented in two phases:

Phase 1 (February 1, 2025)

The RM1,700 minimum monthly wage applies to:

• Employers with five or more employees
• Employers in professional sectors (professional activities under the Malaysia Standard Classification of Occupations 2020 (MASCO Employers)), regardless of the number of employees

Phase 2 (August 1, 2025)

The RM1,700 minimum monthly wage will apply to all employers, regardless of the number of employees.

Breakdown of Minimum Wage Rates

The minimum wage rates are as follows:

Working hours

Normal working hours

Standard working week is 45 hours, not exceeding 9 hours per day and 5 days a week, according to recent amendments. Prior to the amendment, it was 48 hours.

Rest Days

Employees are entitled to at least one rest day per week, typically Sunday, but this can be another day as specified in the contract.

Overtime

Work exceeding the standard working hours is considered overtime and must be compensated at a rate of at least 1.5 times the ordinary rate of pay. There are limits on mandatory overtime.

How to Calculate Hourly Ordinary Rate of Pay

To calculate overtime pay, you first need to determine the employee’s “hourly ordinary rate of pay.” This is generally calculated as follows:

• Monthly Salary Basis: Monthly Salary / Normal Monthly Working Hours
  • Normal Monthly Working Hours are usually derived from the weekly working hours (e.g., 45 hours per week) and the number of working days in a month.
  • A common approach is to use: (45 hours/week / 6 working days/week) x average number of working days in a month (approx. 26 days) = approximately 195 hours per month. However, some companies may use a different method to derive the normal monthly working hours, as long as it is reasonable and compliant with the Employment Act.

Example

Let’s say an employee’s monthly ordinary rate of pay is RM 3,000 and their normal working hours are 8 hours per day.

• Hourly Ordinary Rate of Pay: RM 3000 / (Approx. 195 hours/month) = RM 15.38 per hour (approximately).
• Overtime on Normal Working Day (2 hours): RM 15.38 x 1.5 x 2 = RM 46.14
• Rest Day Work (Full Day, 8 hours): (RM 3000 / 26 days) + (RM 15.38 x 2 x (8-8, assuming worked exactly normal hours)) = One day’s ordinary pay + RM 0 = RM 115.38 (approximately, based on 26 working days per month assumption for daily rate).
• Public Holiday Work (8 hours): RM 15.38 x 3 x 8 = RM 369.12

Public holidays and annual leaves

Official public holidays

Malaysia has gazetted public holidays, and employees are entitled to paid holidays on these days. If required to work on a public holiday, they are entitled to holiday pay, often at double or triple rates depending on whether it’s a rest day.

Number of Public Holidays:

• 11 gazetted public holidays per year, of which 5 are mandatory and must be paid holidays.
• The 5 mandatory public holidays are:

• The remaining 6 public holidays are selected from a list gazetted annually by each state. These can vary slightly from state to state.

State vs. Federal Holidays: Public holidays can be federal (nationwide) or state-specific. Employees are entitled to public holidays gazetted for their specific state or the Federal Territory (Kuala Lumpur, Labuan, Putrajaya) where they work.

Substitution of Public Holidays:

• Employers have the option to substitute any non-mandatory public holiday for another day.
• Substitution must be done by notifying the employee before the public holiday in question. If no substitution is made, the employee is expected to work on that non-mandatory public holiday as a normal working day.
• Mandatory public holidays cannot be substituted.

If a public holiday falls on a rest day, the following working day is granted as a paid holiday in substitution.

Working on Public Holidays:

• If an employee is required to work on a public holiday (including substituted holidays), it is considered holiday work and must be paid at a rate of 3 times their hourly ordinary rate of pay for each hour worked.

Annual paid leave

The minimum annual leave entitlement depends on the length of service.

Under the Employment Act 1955, there is no legal requirement to encash or carry forward unused annual leave. However, some companies may have policies that allow for encashment or carry forward of a limited number of unused leave days, but this is at the employer’s discretion and not mandated by law.

Sick leave

Paid sick leave is also mandated, and the entitlement increases with years of service.

Eligibility and Requirements:

• To be entitled to paid sick leave, an employee must:
  • Be certified sick by a registered medical practitioner duly appointed by the company or another registered medical practitioner or a government medical officer.
  • Have informed or attempted to inform their employer of their absence within 48 hours of the commencement of the sick leave.

For outpatient sick leave, medical certificates are generally required for absences of 2 or more consecutive days, or for absences before and after a public holiday or weekend. Companies may have their own policies on this, and some may require medical certificates even for 1-day sick leave, although this is not explicitly mandated by the Employment Act for outpatient cases. For hospitalization leave, a medical certificate is always required.

Maternity / paternity leave

Paid maternity leave

Female employees are entitled to 98 days of consecutive paid maternity leave. This is a significant increase from the previous 60 days under the Employment (Amendment) Act 2022.

Eligibility: Applies to employees who have worked for at least 90 days in the nine months preceding confinement or at any time during the four months immediately before confinement.

Maternity leave pay is at the ordinary rate of pay. Allowance: Full pay during the leave period for the first five children.

Paternity leave

Fathers are now entitled to 7 days of consecutive paid paternity leave for each confinement. This is a new provision introduced.

Eligibility: Applies to employees who have been employed by the same employer for at least 12 months immediately before the commencement of paternity leave by the Employment (Amendment) Act 2022 and is limited to the first 5 confinements.

Restriction: Limited to the first five births, regardless of the number of spouses.

Family leave

There is no mandated family leave.

Termination

Payroll and Statutory Contributions

Payroll

Payment

Wages must be paid in legal tender (Malaysian Ringgit). Payment can be made via cash, cheque, or bank transfer. Bank transfer is the most common and recommended method for record-keeping.

Wages must be paid within 7 days after the last day of the wage period. The wage period is usually monthly.

Wage calculation includes basic salary, overtime pay, allowances, and deductions.

Payslip

Employers are legally obligated to provide employees with itemized pay slips detailing gross salary, deductions (EPF, SOCSO, EIS, PCB/MTD), and net salary.

Record Keeping

Employers must maintain accurate payroll records for at least 6 years for compliance and audit purposes.

Wage deduction

Permissible deductions are limited and regulated by the Employment Act.

Common deductions include:

Late payment

In Malaysia, employers are required to pay salaries within 7 days after the last day of any wage period. If salary is paid at least 15 days late, the employer must pay compensation to the employee equal to the interest on the late amount at the latest 1-month interest rate of the bank where the employee’s salary account is opened.

13th month bonus

There is no legal requirement for a 13th month bonus. Many employers do offer an annual bonus, but it isn’t mandated by law.

Income tax obligations from employers

Employee Income Tax (PCB/MTD - Potongan Cukai Bulanan/Monthly Tax Deduction)

Withholding tax on employee income, deducted directly from monthly salary by the employer and remitted to the Inland Revenue Board of Malaysia (LHDN).

Calculation based on Taxable Income

PCB/MTD is calculated based on the employee’s estimated taxable income for the year, considering:

• Gross Monthly Salary: Including wages and allowances.
• Estimated Annual Income: Projected based on monthly salary and expected bonuses/additional income.
• Tax Reliefs and Deductions: Employees can claim various tax reliefs (e.g., personal relief, EPF contributions, life insurance premiums, etc.) to reduce their taxable income. These reliefs are declared by the employee to the employer using Form TP3.
• Tax Rates: Malaysia uses a progressive income tax rate system. Rates range from 0% to 30% depending on the taxable income band.

Tax Calculation Methods: LHDN provides tax calculation methods and tables (Schedule of Monthly Tax Deductions) to assist employers in calculating PCB/MTD accurately. Employers can also use LHDN’s online PCB calculator or payroll software.

Employer’s Role as Deductor: Employers act as deductors, responsible for calculating, deducting, and remitting PCB/MTD to LHDN on a monthly basis.

Payment date

PCB/MTD Payment and Reporting (Form CP39): Pay PCB/MTD and submit Form CP39 to LHDN monthly. Payment and submission can be done online via LHDN’s e-PCB system or through banks. The deadline is generally the 15th of the following month.

EA Form (Annual Income Statement for Employees): Employers must prepare and provide Form EA to each employee annually by the last day of February of the following year. EA form summarizes the employee’s annual income and tax deductions for the previous year, for employee’s income tax filing purposes.

Retention Period

Generally, employers in Malaysia are advised to keep payroll and HR records for at least 7 years for statutory compliance and audit purposes.

Mandatory benefits and social security

Employees Provident Fund (EPF) or Kumpulan Wang Simpanan Pekerja (KWSP)

Both employers and employees are legally required to contribute to the EPF. EPF is a retirement savings and social security system. Contribution rates are currently set as:

Employees below age 60

• Employer: 13% (or 12% for employees earning over RM5,000/month)
• Employee: 11%

Employees aged 60–75 Years

Lower rates apply for both employee and employer contributions, focusing on medical and withdrawal benefits.

Malaysian citizens:

• Employees: 0% contribution
• Employers: 4% of wages

Permanent residents:

• Employees: 5.5% of wages
• Employers: 6.5% (≤RM5,000) or 6% (>RM5,000)

Above 75 Years

Contributions cease entirely for both parties

Salary Base:
EPF contributions are calculated on the employee’s monthly salary, which includes basic salary, allowances, bonuses, commissions, incentives, payment arrears, and compensation for unused leave. However, certain payments remain exempt from EPF contributions, including service charges, overtime payments, gratuity, retirement benefits, termination benefits, and traveling allowances.

Salary Ceiling: There is no salary ceiling for EPF contributions for employees.

Employers must register new employees with the EPF within seven days of employment commencement, ensuring immediate coverage under the retirement savings scheme. The contribution system operates on a monthly cycle, with payments due by the 15th of each month.

Example: For an employee below 60 earning RM 4,000 monthly:

• Employee EPF contribution: RM 4,000 x 11% = RM 440
• Employer EPF contribution: RM 4,000 x 13% = RM 520

Social Security Organisation (SOCSO) or Pertubuhan Keselamatan Sosial (PERKESO)

Employers are required to register and contribute to SOCSO for employees’ social security protection, covering:

• Employment Injury Scheme: For work-related accidents and diseases.
• Invalidity Scheme: For employees suffering from invalidity and unable to work.

Contributions are shared, with employers contributing a larger portion.
Category 1: Employment Injury and Invalidity Schemes

• Applicability: Employees aged <60 (including foreign workers from 1 July 2024)
• Rates:
  • Employer: 1.75% of wages (capped at RM104.15/month at RM6,000)
  • Employee: 0.5% of wages (capped at RM29.75/month at RM6,000)
  • Total: 2.25% of wages (max RM133.90/month)

Category 2: Employment Injury Scheme Only

• Applicability: Employees aged ≥60, foreign workers aged ≥55
• Rates:
  • Employer: 1.25% of wages (capped at RM61.90/month at RM6,000)
  • Employee: 0%

Salary Ceiling: For employees earning above RM6,000 per month, contributions are capped at a salary of RM6,000. This means the maximum monthly contribution is fixed even if the salary exceeds RM6,000.

Example: For an employee earning RM 7,000 monthly, SOCSO contribution is calculated on RM 6,000 (due to salary cap):

• Employee SOCSO contribution: RM 6,000 x 0.5% = RM 30
• Employer SOCSO contribution: RM 6,000 x 1.25% = RM 75

Employment Insurance System (EIS)

EIS provides financial assistance and job search support to employees who lose their jobs. Both employers and employees contribute to EIS.

Employer’s share: 0.2%
Employee’s share: 0.2%
Salary Ceiling: Contributions are capped at a monthly salary of RM6,000. If the salary exceeds RM6,000, the contribution is still calculated on RM6,000.
Example: For an employee earning RM 7,000 monthly, EIS contribution is calculated on RM 6,000 (due to salary cap):

• Employee EIS contribution: RM 6,000 x 0.2% = RM 12
• Employer EIS contribution: RM 6,000 x 0.2% = RM 12

Payment and Reporting

• EPF Payment and Reporting (Form A): Pay EPF contributions and submit Form A to EPF monthly. Payment and submission can be done online via EPF’s portal, through banks, or EPF kiosks. The deadline is generally the 15th of the following month.
• SOCSO and EIS Payment and Reporting (Form 90 & Borang 8): Pay SOCSO and EIS contributions and submit Form 90 (SOCSO) and Borang 8 (EIS) to SOCSO monthly. Payment and submission can be done online via SOCSO’s portal, through banks, or SOCSO counters. The deadline is generally the last day of the following month.

Retention Period

Generally, employers in Malaysia are advised to keep payroll and HR records for at least 7 years for statutory compliance and audit purposes.