Guide to Malaysian Employment Law - The Malaysian Lawyer (2023)

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 11 January 2023, and takes into account changes as a result of the Employment (Amendment) Act 2022 and Employment (Amendment of First Schedule) Order 2022 effective 1 January 2023.

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. From 1 January 2023, the Employment Act applies to all employees (“any person who has entered into a contract of service”), with the exception of the sections in relation to overtime payments and termination benefits, which will not apply to employees whose wages exceed RM4,000/month.

Related articles:

Employees earning up to RM4,000/month will be entitled to overtime payments. Here’s what employers need to know
Malaysia Employment Act amendments: 7 key changes for employers to note
Employment Act to apply to all employees from 1 January 2023, some sections subject to increased salary threshold of RM4,000/month
Employment law: 2021 review and 2022 forecast
What Malaysian employers need to know about employment law

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.

Related articles:

Case Update: Factors considered by the Industrial Court in determining the identity of the employer in a multi-jurisdictional employment relationship
Case Update: Potential pitfalls where an employee is engaged by a Malaysian service provider for a foreign employer

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.

Related articles:

Case Update: What can an employer do upon discovering that an employee lied in a job application?

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

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.

Related articles:

Legal considerations when hiring employees in Malaysia
Ensuring proper employee management from a legal perspective
Case Update: Is a clause in an employee handbook effective if an employee claims not to have read it?

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.

Related articles:

Minimum wage

From 1 May 2022, the monthly minimum wage was increased to RM1,500 nationwide.

There is a temporary exemption until 1 July 2023 for employers with less than five employees. However, this exemption does not apply to employers who carry out professional activities (as classified under the Malaysia Standard Classification of Occupations published by the Ministry of Human Resources), regardless of number of employees.

Related articles:

Confirmed: New Minimum Wages Order effective 1 May 2022; employers with less than 5 employees exempted

Minimum employment rights, and standard terms and conditions

The Employment Act provides statutory minimum employment rights and terms and conditions for employees. We list some of the entitlements under the Employment Act in this section.

Hours of work

An 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 45 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 45 hours in one week.

Overtime payments

Employees with wages of up to RM4,000/month 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, eligible employees 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.

(Read more here: Employees earning up to RM4,000/month will be entitled to overtime payments. Here’s what employers need to know.)

Public holidays

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

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.

Sick leave

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, employees are entitled to 60 days sick leave in the aggregate in each calendar year.

Maternity leave

Female employees are entitled to paid maternity leave of not less than 98 consecutive days.

Paternity leave

Male employees are entitled to paid paternity leave of not less than 7 consecutive days.

Minimum retirement age

The minimum retirement age in Malaysia is 60.

Flexible working arrangement

The Employment (Amendment) Act 2022 entitles employees to apply to their employment for a flexible working arrangement to vary the hours, days, or place of work.

An employer must approve or refuse the application within 60 days, stating the grounds for any refusal.

It is not mandatory to have a Flexible Working Policy, but it is a recommended best practice.

(Read more here: Flexible Working Arrangements: What employers should include in a Flexible Working Policy and other recommended documents)

Data privacy

The collection and processing of personal data is governed by the Personal Data Protection Act 2010. 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 are protected from unfair dismissal.

Related articles:

Handing employee dismissals properly under Malaysian law
Case Update: Can an employee be dismissed for misconduct off-the-job and outside office hours?
Case Update: Factors considered when determining whether a resignation is forced or voluntary
Case Update: Court of Appeal considers whether an employer can dismiss an employee for insubordination
Case Update: Federal Court decides whether punishable misconduct in employment law is distinguishable from criminal conduct
Employee poor performance: Some recent cases

Termination notice

Termination notice must be the same for both employer and employee, and the length of the notice can be determined by the contract. If the contract is silent, the following statutory termination notice periods apply:

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.

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

Employees with wages of up to RM4,000/month 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 employees with wages of more than RM4,000/month, the entitlement to severance payments depends on the employment contract. If the contract is silent, there is no statutory right to termination benefits, but in some circumstances 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.

Related articles:

What you need to know about the law on retrenchment of employees
Case Update: Relevant issues when an employer uses financial difficulties as a reason for retrenchment
Retrenchments in Malaysia — some recent cases
Case Update: Court of Appeal sets out key legal principles for retrenchments
Case Update: Industrial Court finds retrenchment due to effects of COVID-19/MCO was unfair
Case Update: Another company’s retrenchment of employees due to COVID-19/MCO deemed unfair by Industrial Court
Case Update: Justifying a retrenchment and departure from LIFO

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.

Related articles:

Employee poor performance: Some recent cases

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.

Related articles:

Case Update: Can an employee bring an unfair dismissal claim after accepting a severance payment?
Case Update: Insufficient justification and improper handling of Voluntary Separation Scheme may give rise to unfair dismissal
Case Update: Unfair dismissal due to poor handling of mutual separation agreement

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.

Related articles:

Case Update: High Court rules entitlement to back wages limited to unexpired duration of fixed-term contract
Case Update: When an employee transfer can amount to a constructive dismissal
Case Update: Employer’s poor handling of workplace assault and harassment complaints amounts to constructive dismissal
Case Update: Can an employee bring an unfair dismissal claim after accepting a severance payment?
Case Update: Insufficient justification and improper handling of Voluntary Separation Scheme may give rise to unfair dismissal
Case Update: Unfair dismissal due to poor handling of mutual separation agreement
Changes to the Industrial Relations Act from January 2021: Highlights and practical impact on employee exits
Case Update: Court of Appeal rules that employee demotion amounts to constructive dismissal
Case Update: Federal Court rules that an employer cannot use reasons discovered post-dismissal to justify an employee dismissal

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 / [emailprotected]

Peter Ling & van Geyzel / plvg.my