Guide to Employment Laws in Malaysia

As an employer in Malaysia, you’re responsible for ensuring every hire, local or foreign, complies with the Employment Act 1955 (Amendment 2022). The Act sets out key obligations on working hours, wages, leave entitlements, and termination procedures.

If your workforce includes foreign professionals, you’ll also need to obtain quota approvals, expatriate post authorisations, and work passes before they can legally begin employment.

This guide breaks down the core employment laws that govern hiring in Malaysia, helping you understand who’s protected under the Act, how to issue compliant contracts, and what to prepare when hiring foreign staff.

Understanding Employment Laws in Malaysia

Who is covered by the Malaysian Employment Law?

When hiring in Malaysia, one of your first compliance checks is understanding who falls under the Employment Act 1955 (Amendment 2022). The Act now fundamentally protects all employees under a contract of service, regardless of salary. The scope of premium protection, however, still relies on the RM4,000 salary threshold:

• Fully Covered (Entitled to All Statutory Benefits): Employees earning RM4,000 or below per month. This group includes junior and operational staff who are fully entitled to overtime pay, rest day compensation, and termination benefits.
• Partially Covered (Core Provisions Only): Those earning above RM4,000, such as department managers or senior executives. They are protected by the Act’s core provisions, such as paid annual and sick leave, maternity protection, and discrimination protection. However, their overtime, shift allowances, and termination benefits are typically governed solely by their individual employment contract.
• Job Category Coverage: Roles classified as manual labourers, drivers, and certain vessels staff are fully covered under the Act even if their salaries exceed RM4,000, as their protection is based on job category rather than income.

In short, the RM4,000 threshold and the nature of the role determine how far the Act’s protections extend. Understanding these distinctions, therefore, will help you set fair terms, structure compliant contracts, and prevent disputes over overtime, benefits, or termination rights later on.

The Essential Role of Written Employment Contracts

In Malaysia, every employee engaged for more than one month must have a written contract that clearly defines their rights and obligations. The contract should include:

• Job title, scope of duties, and reporting structure
• Salary, payment frequency, and applicable allowances
• Working hours, rest days, and overtime eligibility
• Leave entitlements
• Probation and termination terms
• Conduct, confidentiality, and non-compete clauses

As the employer, you have a strict obligation to keep complete and accurate employment records, including signed contracts, attendance logs, and payroll registers, for inspections by the Department of Labour. You must retain these records for a minimum period of six years following the termination of the employee’s contract.

The critical risk for most employers lies in the legal uncertainty created by vague agreements or an absence of one. If a dispute arises over wages or dismissal, the Act shifts the legal burden of proof onto you, as their employer. Furthermore, a failure to maintain mandatory employee registers or to comply with a Director General’s order is subject to the General Penalty of up to RM50,000.

Emerhub experts can help you draft clear, detailed contracts that protect you from these risks. It ensures both parties understand their rights and obligations from the start, giving you legal certainty, operational consistency, and a stronger defence should employment issues ever arise.

Hiring Foreign Talent According to Malaysian Regulations

If you plan to hire foreign professionals in Malaysia, you’ll need to comply with both labour and immigration requirements before your employee can legally begin work. The process follows a strict sequence– miss any and you risk delaying onboarding or invalidating their work pass application. Generally, you’ll need to complete the following:

• Obtain DGL Approval: Secure mandatory prior approval from the Director General of Labour (DGL) before hiring the foreign employee (EA 1955 Amendment).
• Quota Approval: Obtain foreign quota approval from the Ministry of Home Affairs (MOHA) or a relevant industry regulator.
• Post Authorisation: Apply for expatriate post authorisation with the Expatriate Services Division (ESD), demonstrating the role cannot be filled by a Malaysian.
• Secure Work Pass: Obtain a valid work pass, such as an Employment Pass (EP) or Professional Visit Pass (PVP) for short-term or project-based roles.

Each stage requires supporting documentation such as your company’s registration certificate, financial records, and the candidate’s qualifications. Most applications are submitted online via the ESD portal, though certain sectors (e.g. manufacturing, education, IT) use their respective systems.

💡 If your company is still in the process of incorporating or testing the market, you can also start immediate hiring through an Employer of Record (EOR). The EOR then becomes the legal employer of your Malaysian team, managing payroll, work pass applications, and statutory contributions on your behalf while you retain full operational control.

Emerhub’s payroll team can help you navigate these approvals, manage expatriate documentation, and set up fully compliant management systems. We can also connect you with a licensed EOR partner in Malaysia to onboard both local and foreign talents without establishing a local entity.

Key Provisions of Malaysia’s Employment Act 1995 (Amendment 2022)

The 2022 amendment to Malaysia’s Employment Act 1955 defines how employers must manage working conditions, wages, leave, and termination. These provisions form the minimum statutory standards and apply even when company policies or contracts differ.

Below are the key areas of compliance that every employer operating in Malaysia should understand and implement correctly.

Working Hours, Rest Days, and Overtime Pay Calculations

The Act sets clear limits on working hours and overtime to protect employee welfare and ensure fair compensation. Under Section 60A, employees can work up to 45 hours per week, which is a reduction from the previous 48-hour limit. Any work beyond this threshold counts as overtime and must be paid at regulated rates for employees earning RM4,000 or below per month.

Most companies operate on a 5- or 6-day workweek, with standard hours of 8 hours per day. Every employee is entitled to at least one full rest day per week, typically on Sunday or a mutually agreed day off. This is where it’s crucial to establish clear scheduling practices in your work policy and roster management to prevent excessive workloads or confusion over rest-day compensation.

Overtime pay is calculated based on the employee’s hourly rate, derived from their monthly salary:

Hourly rate = Monthly salary ÷ 26 days ÷ normal daily working hours

For instance, if your employee earns RM2,600 per month and works 8 hours daily:

• RM2,600 ÷ 26 ÷ 8 = RM12.50 per hour
• Overtime on a normal workday would therefore be RM12.50 × 1.5 = RM18.75 per hour.

You’ll have to apply the following rates for eligible employees:

• 1.5× the hourly rate for work beyond normal hours on regular workdays
• 2× for work performed on rest days
• 3× for work performed on public holidays

Overtime hours are capped at 104 hours per month, unless an extension is approved by the Director General of Labour. While employees earning above RM4,000 are not automatically covered by these provisions, many companies choose to offer time-off-in-lieu or fixed overtime allowances to stay competitive.

Mandatory Leave Entitlements: Annual, Sick, Maternity, and Paternity

As an employer in Malaysia, you’re required under Part IX of the Employment Act 1955 to provide minimum paid leave benefits to your employees. These are statutory rights, meaning they apply to all eligible employees regardless of company size, industry, or contract type. You can always offer more generous benefits, but never less than the legal minimum.

1. Annual Leave

Annual Leaves are based on how long an employee has been with your company. The entitlement increases with tenure:

• 8 days per year for employees with 1–2 years of service
• 12 days per year for those with 2–5 years of service
• 16 days per year for employees with more than 5 years of service

Unused annual leave can typically be carried forward with your approval or converted to cash when the employee resigns, depending on your internal policy.

2. Sick Leave and Hospitalization Leave

Sick Leave works similarly: the longer the employee’s service, the more paid days they receive. All medical leave must be supported by a medical certificate from a registered practitioner.

• 14 days per year for employees with less than 2 years of service
• 18 days per year for those with 2–5 years of service
• 22 days per year for employees with more than 5 years of service

In addition to the sick leave above, employees are entitled to up to 60 days of paid hospitalisation leave per year.

3. Maternity and Paternity Leave

Maternity Leave entitles female employees to 98 consecutive days of paid leave, fully covered by the employer. This applies regardless of salary level or marital status. However, maternity benefits are only guaranteed if the employee has worked with your company for at least 90 days in the nine months before confinement and has fewer than five surviving children.

Paternity Leave grants 7 consecutive days of paid leave to married male employees for the birth of each child, applicable for up to five surviving children. To qualify, the employee must have worked with your company for at least 12 months and given 30 days’ notice before the expected delivery date.

Payroll Compliance: Social Security Funds and Withholding Taxes 

When you start hiring in Malaysia, payroll compliance becomes a strict legal obligation. Every employer must make monthly statutory contributions to protect their employees’ welfare, covering retirement savings, social security, and income tax obligations. Here’s what you’ll need to account for in every payroll cycle, from the moment you onboard your employee:

• Employees Provident Fund (EPF): Malaysia’s mandatory retirement savings scheme for citizens and permanent residents. Employers contribute 12–13%, while employees contribute 11% of monthly wages (as listed below)
• SOCSO (Social Security Organisation): Provides protection against workplace injuries, invalidity, and dependents’ benefits. Employer: 1.75%, Employee: 0.5%.
• EIS (Employment Insurance System): Offers short-term financial assistance and job search support for retrenched employees. Employer: 0.2%, Employee: 0.2%.
• HRDF (Human Resources Development Fund): A training levy that funds workforce upskilling. Employer: 1%, applicable to registered employers with 10 or more Malaysian employees.
• MTD/PCB (Monthly Tax Deduction): You must withhold and remit each employee’s income tax to the Inland Revenue Board (LHDN) under the Pay-As-You-Earn system.

Among these, the EPF carries the most weight. It safeguards your employees’ retirement savings, and any late or incorrect submission can lead to fines reaching RM10,000 per employee.

EPF Contribution Rates for Employees and Employers Per Salary Threshold

Monthly Salary	RM 5,000 and Below		More than RM 5,000
Employee’s Status	Employer’s Contribution Rate	Employee’s Contribution Rate	Employer’s Contribution Rate	Employee’s Contribution Rate
Residents ages below 60	13%	11%	12%	11%
Residents ages 60 and above	4%	0%	4%	0%
Permanent residents ages below 60	13%	11%	12%	11%
Permanent residents ages 60 and above	6.5%	5.5%	6%	5.5%
Foreign employees (non-Malaysian, valid work pass holder)	2%	2%	2%	2%

Important Note: 

• Effective October 2025, EPF contributions will also apply to non-Malaysian employees (excluding domestic workers) at 2% each from employer and employee. 

Emerhub’s payroll specialists help you stay compliant with every aspect of Malaysia’s labour and tax framework, from ensuring accurate salary calculations to timely WHT deductions and submissions. 

Managing Employment Contracts and Termination in Malaysia

Employment termination in Malaysia must follow strict due process under Part XII of the Employment Act. Whether an employee leaves voluntarily, is terminated for misconduct, or faces retrenchment, you must ensure that notice, documentation, and payments align with your statutory obligations as an employer. Here’s how this works in practice: 

Termination of Employment: Notice Periods and Just Cause

Under Section 12 of the Employment Act 1955, every termination must follow due process, with proper notice and valid grounds. The required notice period varies by the employee’s length of service or follows the terms set in their contract, whichever offers greater protection.

• 4 weeks: employment of less than 2 years
• 6 weeks: employment of 2 to 5 years
• 8 weeks: employment exceeding 5 years

If you need an employee to leave immediately, you can choose to pay their salary in lieu of notice. However, dismissing someone without notice requires what Malaysian law calls “just cause and excuse,” meaning you must have a clear, lawful reason for doing so. This may include:

• Proven misconduct (e.g., theft, insubordination, harassment)
• Poor performance after due warning and evaluation
• Retrenchment or restructuring backed by fair selection and compensation procedures

Malaysian labour courts take unfair dismissal claims seriously. If an employee challenges their termination, the Industrial Court can order reinstatement or award up to 24 months’ back pay. To protect yourself, you’ll have to conduct a Domestic Inquiry (DI), which is a formal internal hearing that allows the employee to respond to allegations. This also serves as your best defence against claims that the dismissal was arbitrary or procedurally unfair.

Understanding Severance and Termination Benefits

Termination benefits in Malaysia apply only when employment ends for reasons beyond the employee’s control, such as redundancy, restructuring, or business closure. They ensure that eligible employees receive fair compensation when let go through no fault of their own.

The statutory minimum payments depend on the employee’s last drawn salary and length of continuous service:

• 10 days’ wages for every year of service (less than 2 years)
• 15 days’ wages for every year of service (2–5 years)
• 20 days’ wages for every year of service (more than 5 years)

Only employees with at least 12 consecutive months of service qualify. However, these benefits don’t apply if the employee resigns voluntarily, is dismissed for misconduct, or refuses a suitable re-employment offer within your company.

But if retrenchment becomes necessary, you’ll have to notify the Department of Labour (JTKSM) using the PK Form at least 30 days before the termination takes effect. This step is mandatory and helps demonstrate that the process was transparent and compliant.

Expert Support for All Your HR Needs in Malaysia

Our experience stems from supporting numerous foreign companies through every stage of their expansion in Malaysia. Our experts find that in most cases, compliance issues don’t come from negligence, but from overlooked details such as a clause left out of a contract, missed payroll filings, or incorrect statutory contributions.

Emerhub experts help you prevent these errors well before they surface. Our on-ground specialists turn Malaysia’s employment and payroll regulations into clear, workable systems that keep your operations compliant and your records audit-ready.

• Drafting and localising employment contracts for compliance and enforceability
• Managing payroll, statutory contributions, and tax submissions
• Handling expatriate documentation and work pass renewals

Looking to simplify your HR compliance in Malaysia? Reach out to our on-ground team for a free consultation today!