Malaysia

A. Hiring of employees (onboarding)
 

1. Mandatory employer requirements
 

The Companies Act 2016 of Malaysia requires foreign companies to be registered as a foreign company in Malaysia before “carrying on business in Malaysia”. There is also express legal requirement for employers carrying on business in Malaysia to make social security contributions to the Employees‘ Provident Fund (“EPF”) (retirement saving scheme), Social Security Organization (“SOCSO”) (protection against occupational accidents or diseases) and Employment Insurance System (“EIS”) (protection during period of unemployment) for employees in Malaysia. Contribution to EPF, SOCSO and EIS is mandatory for all employees of Malaysian nationality. For foreign employees, EPF contribution is on a voluntary basis (if elected by the employee), SOSCO contribution is mandatory, while EIS contribution is not required.

There is no express legal requirement for a foreign company to incorporate a local company just to engage employees in Malaysia per se, but in practice, a foreign company will typically either incorporate a local company or register itself with the Companies Commission of Malaysia as a foreign company to engage employees in Malaysia so as to be allowed to make the statutory contribution of EPF and SOCSO. A foreign company must also take into account administrative, accounting, tax and permanent establishment considerations in considering whether to engage  employees in Malaysia.

2. Probation periods
 

While the law in Malaysia recognises probationary periods, the Employment Act (“EA”) does not stipulate a minimum or maximum probationary period. The duration of a probation period depends on the terms of the employment contract.

Further, the EA does not differentiate between probationers and non-probationers. As such, regardless of whether the employee is a probationer, the employee is entitled to the minimum entitlements mandated under the EA.

3. Hiring checks
 

Medical examination
 

There is no express legal requirement to or prohibition against conducting a medical examination upon or prior to hiring.

Criminal background check
 

There is no express legal requirement to or prohibition against conducting a criminal background check upon or prior to hiring. However, the cooperation and assistance of the police would be required.

Reference and education checks
 

There is no express legal requirement to or prohibition against conducting reference and education checks upon or prior to hiring.

Further, an employer may carry out credit checks on an employee through a licensed credit reporting agency in Malaysia. However, credit reporting agencies usually require the consent of employees before divulging any information. An employee should also obtain the employee’s consent for the processing of any personal data in accordance with the Personal Data Protection Act 2012 (“PDPA”).

4. Diversity & inclusion
 

There is currently no legal requirement pertaining to diversity and inclusion in the EA. However, the EA does provide that the Director General of Labour may inquire and decide upon any dispute between an employee and his/her employer in respect of any matter relating to discrimination in employment, and the Director General may, pursuant to such decision, make an order which the employer would have to comply with.

5. Types of employment contracts
 

Broadly, there are 3 types of employment in Malaysia:

• full-time employment – where the employment is for an indefinite period of time until the employee’s employment is terminated or until the employee reaches the age of retirement;
• fixed-term employment – where the employment contract terminates when the period of time for which such contract was made has expired or when the piece of work specified in such contract has been completed; and
• part-time employment – where the employee’s average hours of work per week are more than 30% but does not exceed 70% of the normal working hours per week of a full-time employee employed in a similar capacity in the same enterprise.

A contract of employment may be made in writing or orally. However, a contract of service for a specified period of time exceeding 1 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 1 month, must be in writing.

6. Specific rules for executives
 

The EA covers all employees who have entered into a contract of service irrespective of their monthly wages or work types save for certain sections which are not applicable to domestic employees or employees earning more than RM4,000 per month, unless the employees are engaged in specific occupations regardless of their wages (such as manual labourers, supervisors of manual labourers and operators of mechanically propelled vehicles) (“Specified Employees”).

The provisions which will not apply to employees earning more than RM4,000 per month or those not falling within the ambit of Specified Employees include provisions relating to additional payment for work done on rest day, overtime payments, shift work allowances, additional payments for work done on a public holiday and statutory termination, lay-off and retirement benefits.

The EA also includes specific provisions pertaining to foreign employees. For instance, if the employer wishes to employ a foreign employee, prior approval has to be obtained from the Director General of Labour. The employer must also obtain a valid work permit / employment pass for employment of foreign employees or expatriates.

7. Language requirements
 

There are no statutory language requirements for an employment contract other than the requirement for the data privacy consent/notice document pursuant to the PDPA to be in both English and Bahasa Malaysia.

8. Equal Pay
 

There is currently no legal mandate of equal remuneration for work of equal value. While the EA generally treats women and men equally, it does not explicitly mandate equal pay for the same work.

9. Remote Work
 

An employee may apply to an employer for a flexible working arrangement to vary the hours of work, days of work or place of work in relation to his employment. The employer may approve or refuse such application. In the case of a refusal, the employer must state the ground of such refusal.

B. Termination of employees (offboarding)

1. Kinds of dismissal

Termination of employment in Malaysia must be for “just cause or excuse”, regardless of the type of employment (i.e., whether full-time, fixed-term, or part-time)The commonly recognised categories for termination of a contract of employment in Malaysia include misconduct, retrenchment, poor performance, retirement, expiry of a genuine fixed-term contract, resignation and mutual agreement.

2. Dismissal motivation

As mentioned above, termination of employment must be for “just cause or excuse”, which is not defined under the EA or other legislation. Employment law in Malaysia does not recognise an employer’s right to exercise a termination simpliciter, which is to terminate an employment contract by merely giving sufficient notice pursuant to the employment contract.

Employers should inform the employee of the reason for termination, and it should be stated in the termination letter.

If an employee believes he/she has been unfairly dismissed without just cause or excuse, he/she may make a representation to the Director General of Labour within 60 days from the date of dismissal.

3. Notice period

When terminating the employment of an employee (except in the case of misconduct), the employer must comply with the termination notice period as stipulated in the employment contract which parties are free to agree on the duration of. In absence of such termination notice period in the employment contract, the following statutory minimum notice period will apply:

However, if the employee is being terminated for any of the following reasons, the employer must give to the employee the notice of termination of service with the above-mentioned length:

• the employer has ceased, or intends to cease to carry on the business for the purposes of which the employee was employed;
• the employer has ceased or intends to cease to carry on the business in the place at which the employee was contracted to work;
• the requirements of that business for the employee to carry out the work of a particular kind have ceased or diminished or are expected to cease or diminish;
• the requirements of that business for the employee to carry out work of a particular kind in the place at which he was contracted to work have ceased or diminished or are expected to cease or diminish;
• the employee has refused to accept his transfer to any other place of employment, unless his contract of service requires him to accept such transfer; or
• a change has occurred in the ownership of the business, regardless of whether the change occurs by virtue of a sale or other disposition or by operation of law.

Either party to a contract of employment can pay an indemnity to the other in lieu of notice. The amount of indemnity must be the same as the wages which would have been earned during the notice period.

4. Severance pay
 

If the employment contracts are to be terminated for any reason other than retirement, misconduct or resignation, employees earning RM4,000 a month or below, or those who fall within the ambit of the Specified Employees, with not less than 12 months of continuous service are entitled to termination benefits. The amount of termination benefits depends on the length of service. The minimum statutory requirement is as follows:

Notwithstanding the above, if the employee is entitled to more favourable termination benefits under the employment contract, the more favourable terms shall prevail.

For employees with monthly wages of more than RM4,000 not falling within the ambit of the Specified Employees, 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.

5. Dismissal formalities
 

Approval of a government agency is not required before a dismissal. The procedural requirements for termination would depend on the ground of termination. For example:

• for termination on the ground of poor performance, there must be at least prior verbal and written warnings given to the employee about his poor performance. The employee should also be given time to improve and be placed on performance improvement plan prior to termination;
• for termination on the ground of misconduct, the employer should issue a show cause letter, notice of charge and inquiry and conduct a domestic inquiry prior to the dismissal;
• for termination on the ground of redundancy, the employer must be able to justify the redundancy and also take steps to reduce costs, e.g., freeze hiring or offering a voluntary separation scheme before proceeding with retrenchment. The employer must also notify the Labour Department on the impending retrenchment exercise.

For termination of the service of a foreign employee, an employer must, within 30 days of the termination of service, inform the Director General of Labour of the termination in the manner as may be determined by the Director General of Labour.

6. Special dismissal protection
 

There are no categories of employees which are given special protection against dismissal under the EA.

7. Legal means of employees
 

Employees (regardless of wage and designation) can bring an unfair dismissal claim against the former employer within 60 days from the date of dismissal and seek for reinstatement if they believe that they have been dismissed without just cause or excuse.

In a successful unfair dismissal claim, the Industrial Court may award back wages up to 24 months’ last drawn salary and reinstatement or back wages up to 24 months’ last drawn salary and compensation in lieu of reinstatement computed on the basis of 1 month’s last drawn salary for each year of service. Post-dismissal earnings may be deducted from the back wages but there is no set formula for the deduction.

8. Specific rules for executives
 

The EA applies to all employees save for save for certain sections which are not applicable to domestic employees or employees earning more than RM4,000 per month, unless the employees fall with the ambit of Specified Employees as set out in paragraph A.6 above.

9. Collective dismissals
 

Mass or collective dismissals are subject to the same rules as those that apply to individual dismissals. The employer must also give prior notice to the Labour Department at least 30 days before the termination date if the termination is owing to redundancy or business closure.

Get in touch
 

Wei Lih Ho
Malaysia
wlho@weilihho.com | +60 3 7610 8484

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