Human resource management in Malaysia
Labor laws
Malaysia’s employment landscape is governed by a comprehensive framework of statutes that regulate employment relationships, protect worker rights, and ensure fair labour practices. The cornerstone of this framework is the Employment Act 1955, which sets out minimum employment standards, protections, and employer obligations. Recent reforms—particularly the 2023 amendments and the 2025 updates—reflect Malaysia’s adaptation to evolving work models, such as the gig economy, hybrid work, and digital labour platforms.
Key statutes forming the core of Malaysia’s labour law system include:
- Employment Act 1955 (Act 265) – Core legislation for Peninsular Malaysia and Labuan governing contracts, wages, working hours, leave, and termination.
- Industrial Relations Act 1967 (Act 177) – Regulates collective bargaining, dispute resolution, and unfair dismissal procedures.
- Trade Unions Act 1959 (Act 262) – Protects employees’ rights to form and join unions and governs collective representation.
- Occupational Safety and Health Act 1994 (Act 514) – Imposes duties on employers to maintain safe and healthy workplaces.
- Minimum Wages Order 2024 (P.U.(A) 376/2024) – Establishes a national minimum wage of RM 1,700 per month, effective nationwide by August 1, 2025.
- Social Security Legislation – Includes the EPF Act 1991, SOCSO Act 1969, and EIS Act 2017, which mandate employer and employee contributions for retirement, injury, and unemployment protection.
- Human Resources Development Fund (HRDF) Act 2001 – Requires training levies for workforce upskilling in specific industries.
- Children and Young Persons (Employment) Act 1966 (Act 350) – Regulates employment of minors and establishes minimum working age and conditions.
- Gig Workers Bill 2025 – A landmark law introducing formal protections, social security access, and dispute mechanisms for gig and platform workers.
Hiring employees
Hiring employees is one of the first major decisions a company will encounter when establishing or expanding operations in Malaysia. Before engaging a large workforce, companies should first consider the local hiring framework, employer responsibilities, and compliance requirements set by Malaysian labour and immigration laws.
An enterprise can hire employees in Malaysia through three main options:
- Direct Hiring (Setting up a Local Entity);
- Employer of Record (EOR); and
- HR or Payroll Outsourcing.
Direct hiring involves setting up a locally incorporated company (Sdn. Bhd.), registering for tax and social security, and directly employing staff under Malaysian labour laws. This option offers full operational control and long-term market presence but requires higher setup costs and longer processing time.
Employer of Record (EOR) allows foreign companies to hire Malaysian employees without establishing a legal entity. The EOR acts as the official employer, handling contracts, payroll, and compliance, while the company retains day-to-day management. This model enables faster market entry with full legal compliance.
HR and Payroll Outsourcing involve contracting third-party providers to manage administrative HR, payroll, and statutory contributions. It is a cost-effective solution suitable for temporary or non-core positions, though it provides less control over direct employee engagement.
Hiring foreign employees refers to employing non-Malaysian nationals to perform work in exchange for remuneration under approved work passes. Foreign workers must be hired in accordance with the Ministry of Human Resources (MOHR) and Immigration Department regulations.
To be eligible for employment in Malaysia, foreign employees must meet the following general requirements:
- Be at least 18 years old and medically fit;
- Possess the necessary qualifications, experience, and skills for the position;
- Have no criminal record or security restrictions;
- Have a confirmed job offer from a registered Malaysian employer; and
- Hold a valid passport and obtain an appropriate work permit or employment pass before commencing work.
Business visas and work permit
Foreign nationals planning to work, invest, or conduct business activities in Malaysia must obtain the appropriate visa or work permit before entering the country. Malaysia’s pro-business policies, skilled multilingual workforce, and strategic location in Southeast Asia continue to attract foreign professionals, entrepreneurs, and investors.
The administrative procedures for hiring foreign employees or conducting business depend on the purpose and duration of stay in Malaysia. Under the Expatriate Services Division (ESD) framework, the main procedures for foreigners seeking to work or operate in Malaysia typically include:
- Applying for Approval or Quota under the Expatriate Services Division (ESD);
- Applying for the appropriate Work Pass or Employment Pass;
- Applying for a Visa with Reference (VDR), if required; and
- Completing Immigration Endorsement and Residence Procedures upon arrival.
Malaysia offers several visa categories depending on the purpose of entry — employment, business, investment, or professional engagement.
Terminating employees
Employment termination in Malaysia is regulated by the Employment Act 1955 and the Industrial Relations Act 1967, which require all dismissals to be supported by just cause or excuse and carried out through fair procedures.
Employees may be terminated for reasons such as misconduct, poor performance, redundancy, or mutual agreement. For misconduct, employers must issue a show-cause letter, allow the employee to respond, and, if necessary, conduct a domestic inquiry before dismissal. In cases of redundancy or retrenchment, termination must be genuine and follow fair selection principles like Last In, First Out (LIFO), with employees entitled to notice pay and statutory severance compensation based on years of service.
Under the law, minimum notice periods range from four to eight weeks depending on the length of service, and final payments must be made within seven days of termination. Employees earning RM 4,000 or less per month are entitled to termination and layoff benefits, typically 10–20 days’ wages per year of service. Foreign employees’ work permits must be canceled upon termination, and they are required to leave the country unless a new permit is obtained.
If an employee believes they were unfairly dismissed, they can file a claim under Section 20 of the Industrial Relations Act for reinstatement or compensation, with the Industrial Court empowered to order remedies such as back pay or damages. Overall, Malaysian law emphasizes both procedural fairness and valid justification in all termination decisions.
Payroll in Malaysia
Businesses in Malaysia have a diverse array of payroll needs whether they are traditional manufacturers employing workers in factories, or young tech startups experimenting with innovative new products and services. An employee’s salary package includes base salary, allowances, bonuses, non-monetary pension plans, and employer’s portion of social security contribution.
Salary and wages
In Malaysia, salaries and wages are distinct under the Employment Act 1955.
A salary refers to a fixed monthly payment given to employees such as professionals and managers, offering stability and predictable income.
A wage, on the other hand, is paid based on hourly, daily, or piece-rate work, typically for roles in manufacturing, construction, and services.
While salaries are fixed regardless of hours worked, wages fluctuate with productivity and overtime, but both forms of pay receive the same statutory benefits, including EPF, SOCSO, and EIS coverage.
The Minimum Wage Order 2025 increased Malaysia’s minimum wage to RM 1,700 per month (RM8.72/hour), effective February 1, 2025 for most employers and extended to all by August 1, 2025. Employers must pay within seven days after the wage period ends, primarily via bank transfer. Mandatory deductions include contributions to EPF (12–13%), SOCSO (1.25–1.75%), EIS (0.2%), and income tax (PCB) based on progressive tax brackets.
As of 2024–2025, Malaysia’s average monthly salary is projected at RM5,200, with higher pay in Kuala Lumpur (RM 6,700) and Selangor (RM 6,300) compared to smaller states. Salary growth averages 5 percent annually, outpacing inflation, though gender and regional pay gaps persist—women earn around 7.9 percent less than men on average. A “good” income varies by location: RM6,000+ in Kuala Lumpur provides comfortable living, while RM 4,500–5,500 suffices in secondary cities.
Social security system
Malaysia’s integrated social protection system not only strengthens employee welfare but also supports national economic stability by preventing poverty and maintaining consumer spending during downturns. The table below summarizes Malaysia’s key social security and insurance schemes:
|
Scheme |
Primary function |
Employer contribution |
Employee contribution |
|
Employees Provident Fund |
Retirement savings and long-term financial security |
12–13% (4% if aged 60+) |
11% (0% if aged 60+) |
|
Social Security Organization |
Employment injury, invalidity, and death protection |
1.75% |
0.5% |
|
Employment Insurance System |
Income replacement during unemployment and retraining |
0.2% |
0.2% |
|
Human Resource Development Fund |
Workforce training and skill enhancement |
0.5–1% (based on employee count) |
N/A |
|
Pension Fund (Civil Service) |
Defined-benefit pension for civil servants |
Govt: 17.5% |
Employee: 5% |
|
Takaful (Islamic Insurance) |
Shariah-compliant mutual insurance for all residents |
Voluntary |
Voluntary |
Public holiday and leaves
Under Section 60E of the Employment Act, employees earning RM 2,000 or less per month or engaged in manual labour are entitled to paid annual leave ranging from 8 to 16 days per year, depending on years of service. Non-Employment Act (non-EA) employees—such as professionals or executives earning above RM 2,000—are not strictly bound by these provisions, but typically receive 12–20 days of annual leave based on contractual agreements. The law also provides sick leave (14–22 days) and up to 60 days of hospitalization leave, with maternity leave extended to 98 days and paternity leave to 7 days of paid leave.
Malaysia observes at least 11 federal public holidays annually, with additional state-specific holidays that vary by region, bringing the total to around 14–16 holidays per year. When public holidays fall on weekends, employers must designate a replacement holiday to ensure employees receive their full entitlement. Employees working on public holidays must be compensated at three times their ordinary hourly rate, reflecting the premium for sacrificing rest days. Public holiday and leave entitlements apply equally to foreign employees with valid work permits.
Many employers go beyond statutory minimums by offering additional benefits such as marriage leave, compassionate leave, and emergency leave, though these are not legally mandated.
Personal income tax
Malaysia’s personal income tax system operates on a territorial basis, taxing only income earned within Malaysia. Tax residents—defined primarily by physical presence of 182 days or more—are subject to progressive tax rates (0–30%), while non-residents pay a flat 30 percent with no reliefs or rebates. Residents enjoy various tax reliefs (e.g., RM 9,000 individual, RM 10,000 medical, RM 8,000 education) and rebates (up to RM 800 for lower-income earners). Foreign-sourced income remains exempt until 31 December 2036, provided it is taxed abroad.
Individuals must file taxes if annual income exceeds RM 34,000 after EPF deductions or if they earn from multiple sources, businesses, or gig work. The Inland Revenue Board (LHDN) requires all filings through the MyTax portal starting YA 2024, with progressive tax brackets unchanged for 2024 (up to 30% for income exceeding RM2 million). Non-residents face specific flat rates on income types (e.g., 10–15% on royalties, interest, or entertainers).
