Hire and pay employees in Malaysia quickly and compliantly

Complying with labor and employment laws in Malaysia

Malaysia is known in Southeast Asia for its robust labor protections, which are firmly rooted in the nation’s legal framework. At the heart of Malaysia’s employment regulations is the Employment Act 1955, which outlines key provisions for matters such as working hours, wages, and employee welfare. 

Employers seeking to hire in Malaysia must become familiar with the country’s employment and labor laws. By partnering with a reliable EOR, you can receive continuous HR expertise and compliance support tailored to the local laws in every country where you hire.

Employment contracts in Malaysia

In Malaysia, the standard employment contract is open-ended, or “permanent.” Employers must cement open-ended contracts in writing to avoid any potential legal disputes down the line, according to the Employment Act (EA) 1955. The EA also requires each written contract of service to include a detailed termination clause. Companies typically draft employment agreements in English.

If you intend to provide a written employment agreement, here are a few key details you’ll want to include:

• Employer’s and employee’s names
• Job title and description
• Employment type
• Salary
• Benefits and leave 
• Working hours
• Probation period
• Termination clause
• Confidentiality and non-disclosure

Labor unions in Malaysia

The Trade Unions Act 1959 and the Industrial Relations Act 1967 set forth union regulations that entitle all formal employees to join and form a union—unless they operate in a managerial, executive, security, or confidential capacity. Despite this framework, unionization is quite low in Malaysia, with only 2% of workers covered by collective agreements. 

Typically, Malaysian law only permits the formation of unions based on the same occupation, sector, or industry. This means that employees from different sectors, industries, or roles may not join the same unions. And many workers—both public and private— are still prevented from joining common unions.

Mitigating permanent establishment risk in Malaysia

A permanent establishment (PE) is a concept used in tax treaties to decide when a foreign company needs to pay taxes in a country. If a foreign company earns money from doing business in Malaysia, it generally only has to pay Malaysian income tax if it has a PE in the country.

A PE usually exists when the company has a physical place of business in Malaysia, like an office or a factory, where it conducts its activities. In some cases, a PE might still be created even without a fixed location if:

• A person acting on the company’s behalf regularly finalizes contracts for the company or plays a key role in getting contracts completed without major changes. It can also happen if this person frequently uses their authority to make deals, keeps a supply of goods in Malaysia for delivery purposes, or regularly fulfills orders for the company.
• The company continues to oversee construction, installation, or assembly work within the country.

To mitigate PE risk in Malaysia (and beyond), global companies should implement these best practices:

• Minimize presence: Limit the duration and scope of in-person activities employees perform.
• Set up a local entity: For long-term operations, creating a separate legal entity can help protect your global business from complex tax obligations.
• Get professional advice: Consulting with local tax experts can provide clarity on Malaysia’s PE rules, tax agreements, and other important regulations.
• Keep detailed records: Maintain thorough documentation of employees’ roles and work locations to demonstrate the absence of a fixed place of business in Malaysia.

Protecting company IP in Malaysia

Malaysia has robust intellectual property (IP) protections for trademarks, copyrights, patents, trade secrets, and industrial designs. In addition to being a member of the World Intellectual Property Organization (WIPO), Malaysia has several national regulations, such as the Trademarks Act 2019, The Patents Act 1983, and the Copyright Act 1987, to name a few. The Intellectual Property Corporation of Malaysia oversees and administers these laws.

Here’s a closer look at the primary types of IP protection in Malaysia:

• Patents: Patents require an inventive step. Protection is valid for up to 20 years. Under the Patents Act, a utility innovation certificate offers an additional 10 years, renewable for two consecutive five-year terms.
• Trademarks: Trademarks protect logos, distinctive signs, and symbols and are renewable every 10 years indefinitely.
• Industrial designs: Industrial designs cover the aesthetic appearance of products. Registered industrial designs are valid for a five-year period initially, with the option to extend for four consecutive terms—totaling 25 years.
• Copyrights: Copyright protection applies to literary, artistic, and musical works, lasting for the duration of the author’s life plus 50 years.
• Geographical indications (GI): GIs protect goods with the same name as the place where they are produced. These goods have a certain quality or characteristic that is a result of their geographical origin. GIs are renewable every 10 years indefinitely.

Local laws in Malaysia

Malaysia’s Employment Act 1955 lays the foundation for most employment and labor laws, such as working hours, overtime pay, and employment contracts, while the Employees Provident Fund Act 1991 (EPFA) mandates employer and employee contributions to the national pension fund. First-time employers in Malaysia will need to understand local regulations before making a hire. Here’s what employers should know: 

• Working hours: A standard workday in Malaysia is eight hours. However, if an employee is only required to work five days a week, the employer can request they work up to nine hours per day.  If an employee is asked to work more than 45 hours in a given week, they are entitled to overtime pay.
• EPF contributions: Employers contribute between 12% to 13% to the Employees Provident Fund (EPF), with the exact amount depending on the employee’s age, resident status, and monthly salary. The contribution rate is 4% to 6% for employees over the age of 60. 
• Pay cycles: Employees typically receive their payments on a monthly basis. And employers must ensure that employees get their wages within seven days of the end of the wage period.
• Overtime regulations: Overtime is triggered after the 45-hour mark in a given week. Any additional hours must be paid at 1.5 times the employee’s regular hourly rate. Employees earn two times their hourly rate on public holidays for normal working hours and three times for overtime hours.

Worker classification and misclassification in Malaysia: Contractors vs. employees

Proper worker classification can be the difference between a smooth working relationship and significant legal setbacks for employers. Distinguishing between employees and independent contractors in Malaysia is critical, as it affects every aspect of the arrangement—from tax responsibilities to benefits and workplace rights.

While there is no set formula for classifying workers in Malaysia, the Industrial Court reviews several factors, such as contract terms, work periods, and employer control. Here are a few key differences to keep in mind when deciding which working relationship is right for your business.

Worker classification in Malaysia: Key differences between contractors and employees

Consequences of misclassification in Malaysia

Misclassifying workers in Malaysia may expose employers to financial and legal penalties. These penalties may include back pay for benefits and taxes—including Employees Provident Fund, Social Security, and Employment Insurance System contributions—fines from courts, and potential imprisonment (if the case is severe enough). Companies may also be subject to unjust dismissal claims from misclassified workers.

Wages and payroll in Malaysia

Malaysia’s wage and payroll practices highlight the country’s commitment to fair labor standards and economic development. The primary legislation governing wage laws is the Employment Act 1955, which lays out minimum wage guidelines. Additionally, while not mandatory, offering a 13th month bonus is a common practice that many employers choose to adopt as part of their compensation strategy.

Minimum wage in Malaysia

As of February 1, 2025, Malaysia’s national minimum wage is RM 1,700 per month. Employers with fewer than five employees have a six-month extension, meaning the updated minimum wage goes into effect for them on August 1, 2025. The minimum wage applies to all workers except for those in domestic work or under apprenticeships.

Payroll frequency in Malaysia

The standard payroll frequency in Malaysia is monthly—though some companies may use weekly or bi-weekly cycles, especially for hourly and part-time employees. Regardless of the industry, employers must ensure that employees receive payment within seven days following the end of their wage period.

13th month pay in Malaysia

While not legally required, it is common to offer 13th month pay in Malaysia. Employers typically make this payment at the end of the year. If you offer a 13th month payment to employees, be sure to stipulate it in their employment contract.

Run payroll compliantly in Malaysia

Managing global payroll and compliance can be more straightforward with an EOR. When hiring employees in Malaysia, an EOR can take care of key responsibilities such as processing deductions, ensuring compliance with wage laws, and delivering salaries on time. With Rippling EOR, you can streamline the process of hiring and paying global talent with unmatched efficiency.

Employer and employee taxes in Malaysia

Complying with payroll tax regulations is crucial for employers in Malaysia. Typically, employers pay into the Employment Insurance System, the Employees Provident Fund, and the Human Resources Development Fund (mandatory for employers with 10 or more employees). Employees pay income tax, in addition to social security contributions. Here are a few of the most important things to know about taxes in Malaysia, including contribution rates and penalties for noncompliance. 

Employer taxes in Malaysia

Here are the mandatory contributions for employers in Malaysia:

Employee taxes in Malaysia

The following contributions must be deducted from employees’ paychecks as a percentage of their income:

Employees must also pay income tax, which is deducted by their employer from their paychecks. Malaysia has a progressive income tax rate, ranging from 1% to 30%, depending on the employee’s monthly salary, marital status, and number of dependents.

Penalties for not paying taxes in Malaysia

Failing to comply with Malaysian tax codes can land employers in hot water with Lembaga Hasil Dalam Negeri Malaysia (LHDN), the tax revenue board. There are several types of penalties and fines employers may incur, depending on the type of infraction. Here are a few to keep in mind:

• Incorrect tax information: If the incorrect information affects the tax liability of a taxpayer, the responsible party must pay a fine between RM 1,000 and RM 10,000, plus 200% of the undercharged amount.
• Late income tax payment: Paying taxes after June 30th can result in a 10% increase on the tax payable for businesses.
• Failure to invoice or submit an income tax return: Companies who don’t issue an invoice or present an income tax return form may have to pay a fine between RM 200 and RM 20,000 and/or face imprisonment for up to six months.

Simplify your tax compliance challenges by working with an EOR to manage global employment obligations. An EOR can handle tasks like deducting and withholding payroll taxes from employee wages and ensuring accurate, timely tax payments across various regions.

Employee benefits in Malaysia

Offering a competitive employee benefits package not only ensures compliance with legal requirements but also demonstrates your company’s commitment to local values such as fairness and employee well-being. Some benefits, like contributions to the Employees Provident Fund (EPF) and Social Security Organization (SOCSO), are mandatory. Others, such as private medical insurance or transportation allowances, are optional but often provided by employers aiming to attract and retain top talent. Below is an overview of both required and commonly offered benefits in Malaysia.

Mandatory benefits in Malaysia

The Malaysian government mandates several benefits that employers must offer to employees:

• EPF contributions: The Employees Provident Fund is a mandatory savings scheme that both employers and employees contribute to. The employer rate ranges from 12%-13%, depending on the employee’s monthly salary. The employee contributes 11%.
• Social Security: The Social Security Organization is a social insurance scheme that provides medical, disability, and work-related injury benefits. Employers contribute a maximum of 1.75% while employees contribute 0.5%.
• Employment insurance (EI): Employers must also provide employment insurance to support employees who lose their jobs due to layoffs or similar reasons. Both employers and employees contribute to the EIS at a 0.2% rate.

Optional benefits in Malaysia

Optional and fringe benefits are an effective way for companies in Malaysia to attract top talent and boost employee satisfaction. Here are some examples of common supplementary benefits provided by employers in Malaysia:

• Comprehensive medical insurance: Though Malaysia has a low-cost universal healthcare system, many employers offer supplemental coverage with private health insurance. This covers inpatient and outpatient services while offering more convenient access than public healthcare.
• Mobile phone allowance: Malaysian employers typically pay for and provide company phones to employees. This is especially common for employees in client-facing positions.
• Life and disability insurance: Employers usually give this benefit as a lump-sum payment to the employee’s beneficiary in the case of death or disability—this can be a fixed sum or based on multiples of salary.
• Flexible work arrangements: It’s common to offer flexible or hybrid work policies, granting employees more autonomy over their work conditions. Hiring remote workers is a popular option in Malaysia and can help employers attract high-quality candidates.

Working hours, overtime, and leave in Malaysia

In Malaysia, the Employment Act 1955 lays out regulations regarding working hours, overtime, rest periods, and leave laws. Familiarizing yourself with these rules is essential for fostering a compliant and supportive workplace culture.

Standard working hours in Malaysia

According to the Employment Act 1955, the standard workweek in Malaysia is 45 hours—a reduction from the previous 48-hour workweek. Employees typically work for a maximum of eight hours per day. However, some employees may work up to nine hours per their employer’s request.

Overtime laws in Malaysia

Malaysia’s overtime laws state that employees are entitled to receive 1.5 times their normal hourly rate if they work more than 45 hours per week. According to the Employment (Limitation of Overtime Work) Regulations 1980, employees may only work up to 104 overtime hours per month.

If employees work on rest days, they’re entitled to their regular pay rate. However, if they work more than their normal hours, the overtime rate is equal to two times their hourly rate. Employees also earn two times their typical pay for normal working hours on public holidays and three times for overtime hours.

Rest period and break laws in Malaysia

The Employment Act 1955 also stipulates rest period regulations. Employees who work five consecutive hours or more must receive an unpaid 30-minute break. Each week, employees also receive one full rest day, determined by the employer.

Leave laws in Malaysia

In Malaysia, employees are entitled to the following types of leave:

• Annual leave: In Malaysia, annual leave depends on the length of service:

• Sick leave: Sick leave in Malaysia works similarly to annual leave, based on the employee’s length of service. Employees requiring hospitalization can receive up to 60 additional days of leave.

• Maternity leave: Pregnant employees are entitled to 98 days of paid maternity leave. They can start their leave up to 30 days before their expected due date. 
• Paternity leave: Male employees who’ve been employed by the same employer for 12 or more months receive seven consecutive days of paid leave for each childbirth, available immediately after the birth of the child.
• Public holidays: Malaysia has 11 public holidays, during which employers must provide leave to employees. If employers can’t grant a holiday off, they must offer the employee a paid substitute day or overtime payment for working that day.

Employee onboarding in Malaysia

A well-structured onboarding process is crucial for setting new employees up for success. Along with clarifying job duties and workplace policies, employers should prioritize verifying qualifications and complying with relevant legal obligations. Building trust during onboarding lays the foundation for a positive and productive long-term working relationship.

Utilizing a checklist can be an effective way to streamline the onboarding process and ensure all necessary steps are completed efficiently.

How to onboard employees in Malaysia: A simple checklist

Our new hire onboarding checklist can set your new employee up for success on their first day:

Running background checks in Malaysia

Are background checks legal in Malaysia?

Background checks are legal in Malaysia as long as employers comply with the Personal Data Protection Act (PDPA) of 2010. The law indicates that employers must issue a data collection notice to the candidate, asking for their explicit consent and clearly informing them how their data will be used. 

What types of background checks are illegal in Malaysia?

Malaysia does not have any laws on the books that explicitly prohibit background checks. But employers must ensure they comply with the PDPA and obtain consent when collecting any applicant data.

Types of Malaysian background checks

Offer letters in Malaysia

While not required, many employers choose to extend an offer letter before sending an official employment contract. An offer letter typically includes similar information, such as:

• Employer’s and employee’s names
• Job title and description
• Employment type
• Salary
• Benefits and leave entitlements 
• Working hours
• Probation period
• Termination policy

NDAs and confidentiality agreements in Malaysia

Malaysian companies frequently use NDAs, or confidentiality agreements, to protect sensitive information, such as trade secrets and proprietary knowledge. While there is no specific law governing NDAs, they are still protected under general contract law. A valid NDA typically contains:

• Defined confidential information
• Obligations of parties involved
• Agreement duration
• Exclusions
• Consequences

Businesses can include NDAs as part of employment contracts or as separate agreements.

Probationary period in Malaysia

Probationary periods are not legally required in Malaysia, though they are widely implemented. Many employers set a probation period of three to six months for a new employee. During this period, the employee is entitled to all the same benefits and rights as other full-time employees.

Work permits in Malaysia

Before your new team member can begin working in Malaysia, you must ensure they have the legal right to do so. Foreign nationals typically require a valid work visa, such as the Employment Pass or Temporary Employment Pass, depending on the nature and duration of their employment. Employers are responsible for sponsoring these work permits and ensuring compliance with immigration laws. It’s essential to verify that all required permits are obtained before the employee starts work to avoid legal complications.

Who needs a work visa in Malaysia?

Any employee who is not a resident or citizen of Malaysia must obtain a work permit before they can legally work in the country. Expatriates typically need an Employment Pass, as it is the most common type of work visa. Employers must apply for and secure the work visa for their employee.

How long does it take to get a work visa in Malaysia?

The processing time for work visas varies and can take up to 12 weeks, depending on the visa type, company industry, candidate background, and application completion. Employment Passes, for instance, typically take only five working days to process, but high application volume can delay the processing time.

Types of work visas in Malaysia

Malaysia offers several types of work visas, including:

• Employment Pass: This visa is for highly skilled foreign workers in technical or managerial roles. A job offer from a Malaysian company is required to obtain this visa, and it’s typically valid for one to five years, depending on the employee’s salary.
• Temporary Employment Pass: The Temporary Employment Pass lasts up to two years and is usually issued to semi-skilled workers in the manufacturing, agriculture, and construction industries.

Termination and redundancy in Malaysia

When hiring your first employees in Malaysia, termination might not be your immediate concern. However, Malaysia’s labor laws, particularly the Employment Act 1955 and Industrial Relations Act 1967, provide strong protections for employees that employers should know. Understanding the legal framework and the rights of both employees and employers is essential to ensure compliance and avoid potential disputes or penalties.

Does at-will employment exist in Malaysia?

At-will employment, a common employment model in the United States, permits either the employer or employee to end a working relationship for any reason and at any time, as long as it is legal. 

Malaysia does not recognize at-will employment, meaning employers must present a valid reason and follow certain procedures when terminating an employee. Legitimate grounds for dismissal include redundancy, breach of contract, poor performance, and misconduct.

Notice periods in Malaysia

When terminating an employee, employers must give notice, the amount of which varies based on the length of employment. Section 12 of Malaysia’s Employment Act lays out the minimum notice periods:

Severance pay in Malaysia

If an employer terminates an employee in Malaysia, they must pay them severance—as long as the reason for the termination is not misconduct. The severance pay amounts are as follows:

How to terminate employees compliantly in Malaysia

Managing a diverse global team comes with challenges, especially when dealing with varying termination regulations across different countries. In Malaysia, employers must navigate local labor laws, including notice periods, severance requirements, providing notice to local authorities, and just-cause standards, all of which can be complex and time-consuming.

Partnering with an employer of record (EOR) in Malaysia can help simplify terminations and other compliance-related tasks, from onboarding to offboarding. By handling these administrative burdens, an EOR allows you to focus on achieving your core business objectives while ensuring compliance with Malaysian labor laws.

FAQs about hiring in Malaysia

Can I hire in Malaysia without my own entity? 

Yes, you can hire employees in Malaysia without establishing your own legal entity by partnering with an employer of record (EOR). Employer of record services in Malaysia have existing legal entities and can legally employ workers on your behalf, allowing you to bypass the lengthy and resource-intensive process of setting up a local entity. An EOR acts as the official employer, handling critical HR tasks such as payroll processing, tax withholding, compliance with the Employment Act 1955, and other local labor regulations, so you can focus on your business operations.

What is the difference between an independent contractor and an employee in Malaysia?

In Malaysia, employees work under the employer's direct supervision, follow set working hours, and receive statutory benefits and protections outlined in the Employment Act 1955, such as leave entitlements and contributions to EPF and SOCSO. In contrast, independent contractors manage their own work schedules, are responsible for paying their own taxes, and do not receive the same benefits or legal protections as employees.

What does a company need to hire employees in Malaysia?

A company intending to hire in Malaysia must first decide between setting up a local entity or partnering with an employer or record. Establishing an entity can be more costly and time-consuming, while an EOR offers a quicker solution with less upfront investment—as well as expert compliance support. Then, employers can formally begin the hiring process, which includes creating a compliant employment contract, acquiring work permits (if necessary), and onboarding new hires.

What is the annual leave entitlement in Malaysia?

Annual leave depends on the length of an employee’s service. The leave entitlements in Malaysia are:

• Eight days annually for one to two years of service
• 12 days annually for two to five years of service
• 16 days for more than five years of service

What is the employer cost in Malaysia?

The cost of hiring in Malaysia involves more than just paying an employee’s salary. Employers must also make the correct contributions to the Employees Provident Fund (EPF), Social Security Organization (SOCSO), Employment Insurance System (EIS), and Human Resource Development Fund (if they have 10 or more employees). Keep in mind that EPF, SOCSO, and EIS contribution rates depend on the employee’s salary.

What are the requirements for work permits in Malaysia?

Foreign nationals intending to work and live in Malaysia need to obtain a work permit. First, they will need a valid job offer from a Malaysian employer. Then, they’ll usually need to submit mandatory documents, including a valid passport, proof of education and work experience, three passport-sized photos, an employment contract, and proof of medical insurance. The application process may vary depending on the type of visa they apply for. 

What is always required when an employer terminates an employee in Malaysia?

When terminating employees, employers must have just cause (e.g., misconduct, poor performance, or redundancy), provide proper notice, and pay severance to employees. Both notice and severance amounts are determined by an employee’s length of service. If employers fail to comply with these standards, they may face claims of unfair dismissal.

Disclaimer: Rippling and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any related activities or transactions.