Latest Malaysia Payroll Guidance for Global Companies
Malaysia is a fast-developing country that has become a popular destination within south-east Asia for international business. Its population of around 31 million people enjoy strong links with both East and West: China is its major trading partner, while the country is also a member of the Commonwealth where English is widely spoken. Its economy has stagnated in recent years (largely in line with China), but it may be poised for an upturn as it was relatively unaffected by the initial outbreak of COVID-19.
Malaysia has a high-tech infrastructure, produces many raw materials including tin, rubber and palm oil, and has relatively open visa regulations that encourage foreign investment. This guide covers the basics of doing business in Malaysia from a payroll guidance perspective, including the key factors in getting up and running.
Multinational companies starting business in Malaysia are required to register as an employer for tax, Employees’ Provident Funds (EPF), Social Security Funds and HRDF (Human Resources Development Fund), if applicable. Employers must register with the Social Security Organization (SOCSO or Perkeso) within 30-days when the new employee begins at the company. Employers must also make sure that they are compliant with all workplace compensation and benefits requirements.
Foreign workers in Malaysia are required to obtain government approval, visas, and employment passes in order to work legally there. Foreign workers are not covered by Malaysia’s social security system and nonresidents are charged income taxes at a flat rate. However, they are generally covered by all other labor provisions. The Employment Act 1955 is the main legislation on labour matters in Malaysia.
Payroll processing in Malaysia normally takes place on a monthly basis. There are currently no specific legal data protection requirements with regards to payroll data. For the time being, companies with a payroll guidance function in Malaysia (in-house or outsourced) will have to rely on internal or external company policies to ensure data protection principles are upheld. Payroll guidance calculations, payments and filings can all be outsourced to the payroll provider.
Payroll Guidance for Tax and Social Security Considerations
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 has 12 progressively increasing bands of income tax rates. Only the first RM5000 made each year is fully exempt, although the next three bands above this are only 1%, 3% and 8%. The highest band of 30% is applied to all earnings in excess of RM2 million. The general corporate income tax rate is 24%.
Social security contributions are made in two areas. The first is for SOSCO, which covers employment injury and invalidity insurance, with the employer contributing 1.75% of salary and the employee 0.5%. The second is the Employment Provident Fund (EPF), which covers retirement insurance, with contributions of 12% from the employer and 11% from the employee. Importantly, contributions to both these schemes stop when an employee reaches the age of 55.
Both employers and employees make statutory social security contributions to the EPF retirement and SOCSO social security scheme. Employees may also be required to make PTPTN repayments (Malaysia’s student funding scheme) or Zakat donations (for Muslim employees only).
- Employee Social Security– Total social security rate for employees: 11.70%
- Employer Social Security- Total social security rate for companies: 15.95%.
The employer contributes 1.75% of an employee’s remuneration to social security. In addition, the employer must contribute 13% to the national social security organization through an employee’s provident fund (EPF) scheme. The EPF provides retirement benefits to Malaysian employees.
Payroll Guidance for Compensation, Bonuses and Severance
Minimum wage levels in Malaysia were only introduced in 2013 and vary between different and municipality councils. In February 2020, the rate was raised for 56 areas, including the capital Kuala Lumpur, to RM1200 per month or RM5.77 per hour. Awarding of the ‘13th-month bonus’, which is popular in many Asian countries, is fairly commonplace but is not required by law.
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. Severance pay rates are ten, 15 or 20 days per year of service, applied across the same three bands of service length. Severance pay should be pro-rated to the nearest month of service, however.
Minimum wage: From February 1st 2020, the minimum wage for all employees in Malaysia is MYR 1,200 per month.
Wage payment: Wages must be paid monthly. Payments must be made by the 7th of each month to an individual’s bank account using cash, cheques or credit. Payslips should be available monthly on website, PDF or paper. It is only common practice in the manufacturing industry to pay salaries in 13 installments.
Hours of work: The normal work day is 8 hours per day and 48 hours in a week.
Overtime: Overtime must be paid at 1.5 times normal wages on normal working days, 2 times normal wages on rest days and 3 times normal wages on holidays.
Holidays: There are 6 compulsory public holidays and 10 optional public holidays. Additional paid holidays are mandated by individual states.
Payroll Guidance for 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.
Initial paid leave entitlement is eight days per year, rising to 12 days after two years of service and 16 days after five years. 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 is set to increase from 60 days to 90 as of January 1 2021. This can start at any time from 22 weeks into the pregnancy through to the day after the birth. There is no legal requirement to provide paternity leave, although many companies voluntarily provide a few days’ leave to new fathers. Furthermore, the possibility of a legal entitlement has been discussed publicly in Malaysia, and so may be introduced in years to come.
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