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What global businesses need to know about payroll in Malaysia
The Petronas Towers are excellent symbols of modern Malaysia: a forward-thinking, positive country that is an economic powerhouse in south-east Asia. What is perhaps even more surprising is that these twin skyscrapers, officially the tallest buildings in the world at the turn of the millennium, aren’t even the tallest in Kuala Lumpur anymore. Merdeka 118, second only to the Burj Khalifa in Dubai at 679 meters tall, is being officially opened throughout 2024.
Malaysia stands at the bridge of East and West. It’s a Commonwealth country that gained independence from the United Kingdom in 1957, but also has strong cultural and economic links to China and Japan. English is widely spoken in Malaysia, especially in Kuala Lumpur, and the mix of services, industry, and agriculture in its economy makes it a good-value proposition for international expansion.
If you want to know where to start with doing business and running payroll in Malaysia, then you’ve come to the right place. This guide covers all the key bases from payroll and employment perspectives.
Getting Started
Foreign companies setting up in Malaysia can register either as a locally-owned company or as a foreign-owned one. In either case, private limited companies or representative offices are the most popular options (different rules apply for companies setting up in Malaysia’s tax haven territory of Labuan).
There are a number of registrations and processes to go through in the setup process:
- Company name reservation with the Companies Commission of Malaysia (SSM)
- Submission of incorporation documents for company registration, a process that usually takes 1-3 days
- Payment of a registration fee, variable between RM 1000 (approx. £170; $210; €195) to RM 3000 (approx. £505; $630; €590).
- Minor payments for stamp fees and post-incorporation package fees
- Obtaining business licenses and permits as appropriate
- Registering for Goods and Services Tax, income tax, PAYE, Employees Provident Fund, and with the Social Security Organisation (all of which are free)
Employment Considerations
It’s worth familiarizing yourself with the key information within the Employment Act 1955, which enshrines many of Malaysia’s employment rights within law. Strictly speaking, it only enforces legislation for manual employees and those on relatively low wages, but the guiding principles of it tend to be followed for employment of all types and salary levels.
The most common working arrangement in Malaysia is to work five eight-hour shifts for a total of 40 hours, although the statutory maximum is 45 hours per week. Anything above this counts as overtime, which is paid at 150% of the normal rate, rising to 200% for work on rest days and at weekends, and 300% on public holidays.
All foreign workers must obtain a work permit from the government before being allowed to work in the country.
Notice periods for termination are four weeks for employees with less than two years’ service, rising to six weeks at two years, and eight weeks at five years. Payments in lieu of notice are permitted. Probation periods normally run for between one and three months, and the Employment Act makes clear that employees on probation are entitled to the same rights as employees who have already passed their probationary period.
Compensation, Bonuses and Severance
The topic of minimum wage levels is in the spotlight in Malaysia at present. From May 1 2022, the rate has been RM 1500 per month (approx. £250; $315; €295). However, the Malaysian authorities are currently exploring the ‘Progressive Wage Model’, which is expected to be implemented in 2024. The basic concept is that while the standard minimum wage will remain in place for unskilled and migrant workers, the wages of skilled workers will substantially ramp up over time, in line with global economic growth. The PWM is optional for businesses, but the government intends to offer tax incentives to employers who choose to take part.
Awarding the ‘13th-month bonus’, which is popular in many Asian countries, is fairly commonplace but is not required by law.
Severance pay is ten days’ pay per year of service, increasing to 15 days per year after two years of service, and 20 days per year after five years of service. These payments should be prorated to the nearest month of service.
Tax Requirements, Collection & Withholding
Companies in Malaysia should withhold income tax payments at source from employees under a Pay-As-You-Earn (PAYE) system, although employees are still required to complete self-assessments each year. Malaysia currently has ten progressively increasing bands of income tax rates. The first RM 5000 (approx. £840; $1050; €980) made each year is fully exempt, although the next three bands above this are only 1%, 3%, and 6%. The highest band of 30% is applied to all earnings in excess of RM 2 million (approx. £335,000; $420,000; €390,000). Non-residents are taxed at a flat rate of 30% on all their earnings in Malaysia.
The general corporate income tax rate is 24%. Malaysia also has a standard Sales Tax of 10% and Service Tax of 6%.
There are four different types of social security contribution in Malaysia, for which the following rates apply:
- Provident Fund: 12-13% employer, 11% employee (once an employee reaches the age of 60, these rates reduce to 4-6.5% employer, 0-5.5% employee). The higher rates apply to employees who earn more than RM 5000 per month (approx. £840; $1050; €980)
- Social Security (SOSCO): 1.75% employer, 0.5% employee – contributions by employees under 60 are capped at RM 24.75 per month (approx. £4.20; $5.20; €4.90)
- Employment insurance: 0.2% employer, 0.2% employee – these contributions are only made if an employee earns less than RM 5000 a month (approx. £840; $1050; €980)
- Human Resource Development Fund: 1% employer
Holidays and Leave
Malaysian workers are paid for 11 days of public holidays each year. Five are the main official ones: Malaysia Day, National Day, Federal Territory Day, Workers’ Day and Birthday of the Yang Dipertuan Agong. Employers can choose which other six national or state-level holidays their employees can have paid time off for. Public holidays that fall at the weekends are generally moved to a working day instead.
Initial paid leave entitlement is eight days per year, rising to 12 days after two years of service and 16 days after five years. However, offering more than the statutory minimum is common, and many employees receive at least 12 days right from the start of their employment. The same three lengths of service are used as the bandings for paid sick leave, with 14, 18, and 22 days permitted per year for each band respectively. In any case requiring hospitalization, the paid entitlement increases to 60 days.
Paid maternity leave entitlement has steadily increased in Malaysia in recent years, and has now reached 98 days on full pay. The leave can commence at any time in the 30 days prior to the due date. Social security covers the payment, but only for the mother’s first five children. Paid paternity leave has now been established in Malaysia for the first time: as of the start of 2023, fathers with at least a year of service can take seven consecutive days off, following the birth.
In Summary
There have been plenty of changes in Malaysia’s payroll and employment regulations of late, and with measures like the Progressive Wage Model, there are plenty more on the way. If you want to keep track of all the goings on and ensure your Malaysian operation is compliant right from the start, then you’ll need country-specific expertise that leaves no stone unturned. Partnering with a global payroll solution provider can help you in this endeavor.
This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.