Malaysia, with its robust economy and strategic location, offers a thriving environment for businesses. For companies looking to expand their operations in Malaysia, understanding the local employment laws is essential. This guide provides an overview of the key considerations for hiring
and terminating employees in Malaysia.
1. Hiring Employees in Malaysia
Hiring in Malaysia involves several legal requirements that employers must follow to ensure compliance with the Employment Act 1955 and other relevant regulations. Here are the main points to consider:
A. Employment Contracts
In Malaysia, employment contracts are essential to formalize the relationship between employers and employees. Although verbal agreements are recognized, written contracts are strongly recommended to avoid disputes.
Employment contracts should include:
- Job title and description
- Salary and payment terms
- Working hours and overtime
- Duration of employment (if applicable)
- Probation period (if applicable)
- Termination and notice requirements
- Other benefits such as leave entitlements and medical benefits
Contracts must comply with the Employment Act 1955 (for Peninsular Malaysia) or Sabah and Sarawak’s labor ordinances, which set out minimum standards for employment terms.
B. Probation Periods
Employers in Malaysia often use probation periods to assess the suitability of new hires. Probation periods typically last between three to six months. During this time, either party can terminate the employment with shorter notice periods than those required for confirmed employees, as
specified in the employment contract.
C. Minimum Wages and Employee Benefits
Malaysia has a minimum wage system that is periodically reviewed and varies by region. Employers must adhere to the minimum wage rates set by the government. In addition to minimum wages, employers must provide various benefits, including:
- EPF (Employees Provident Fund): A mandatory retirement savings scheme where both employer and employee contribute a percentage of the employee’s salary.
- SOCSO (Social Security Organization): Provides social security protection for employees against workplace injuries and invalidity.
- EIS (Employment Insurance System): Offers financial assistance to employees who have lost their jobs.
- Leave Entitlements: Employees are entitled to annual leave, sick leave, and public holidays as stipulated in the Employment Act 1955.
D. Work Permits and Visas for Foreign Employees
Foreign nationals wishing to work in Malaysia must obtain a work permit. There are different types of work permits depending on the nature and duration of employment:
- Employment Pass: For skilled workers with a salary above a certain threshold, valid for one to five years.
- Professional Visit Pass: For foreign professionals on a short-term contract or assignment, usually valid for up to 12 months.
- Temporary Employment Pass: For unskilled or semi-skilled workers in specific sectors, typically valid for up to two years.
Employers must apply for the appropriate work permit and ensure compliance with immigration regulations.
2. Terminating Employees in Malaysia
Terminating employees in Malaysia requires adherence to local labor laws, which are designed to protect employee rights. Employers must understand the lawful grounds for termination and follow proper procedures to avoid legal disputes.
A. Lawful Grounds for Termination
Under Malaysian labor law, employers can terminate employees based on the following grounds:
- Mutual Agreement: Both employer and employee agree to end the employment relationship.
- Voluntary Resignation: Employees may resign by providing the notice specified in the employment contract.
- Retirement: Upon reaching the stipulated retirement age, typically 60 years.
- Completion of Contract: Applicable for fixed-term contracts that reach their end date.
- Misconduct: Termination due to serious misconduct, such as dishonesty, theft, or violation of company policies. Employers must conduct a fair inquiry and allow the employee to defend themselves before termination.
- Redundancy or Retrenchment: Due to economic reasons, business restructuring, or downsizing, employers may need to reduce their workforce. Retrenchment must be conducted fairly and with due consideration to the last-in, first-out (LIFO) principle.
B. Notice Periods
The notice period for termination varies depending on the employment contract and the length of service. The Employment Act 1955 stipulates the following minimum notice periods:
- Less than 2 years of service: At least 4 weeks’ notice
- 2 to 5 years of service: At least 6 weeks’ notice
- More than 5 years of service: At least 8 weeks’ notice
C. Severance Pay
Severance pay, also known as termination benefits, is required for employees who are terminated due to redundancy or retrenchment. The Employment Act 1955 provides guidelines for severance pay based on the employee’s length of service:
- Less than 2 years of service: 10 days’ wages for each year of service
- 2 to 5 years of service: 15 days’ wages for each year of service
- More than 5 years of service: 20 days’ wages for each year of service
D. Unlawful Termination and Dispute Resolution
Termination without valid grounds or failure to follow proper procedures can lead to claims of unfair dismissal. Employees have the right to file a complaint with the Industrial Relations Department, which can lead to mediation, conciliation, or referral to the Industrial Court. The court
may order reinstatement or compensation for wrongful termination.
3. Conclusion
Understanding and complying with Malaysia’s labor laws is essential for businesses to manage their workforce effectively and avoid legal disputes. Employers must ensure that employment contracts are in place, follow lawful procedures for hiring and termination, and respect employees' rights. By
adhering to these regulations, businesses can maintain a positive work environment and operate successfully in Malaysia.