Managing employees in Malaysia requires more than good business sense — it demands a solid understanding of employment law. With the significant amendments to the Employment Act 1955 that came into force on 1 January 2023, many employers find themselves navigating unfamiliar legal terrain. This guide covers the most common mistakes Malaysian employers make and how to avoid them.
Understanding the Scope of the Employment Act 1955
One of the first mistakes employers make is assuming the Employment Act 1955 does not apply to their workforce. Following the 2022 amendments, the Act now covers all employees regardless of wages, though certain provisions (particularly Part XII relating to rest days, hours of work, holidays and overtime) only apply to employees earning RM4,000 or less per month and those engaged in manual labour.
This expanded coverage means employers must ensure compliance for a broader range of employees than before. Failing to recognise this change has led to numerous compliance failures, particularly regarding maternity leave entitlements, termination procedures, and anti-discrimination provisions which now apply across the board.
Employment Contracts: Getting the Foundation Right
Section 10 of the Employment Act 1955 requires that contracts of service exceeding one month must be in writing and include provisions for termination. Despite this clear requirement, many employers still operate on verbal agreements or use poorly drafted contracts.
Essential Contract Elements
A compliant employment contract should clearly specify the job title and description, commencement date, remuneration details, working hours, probation period terms, termination provisions including notice periods, and any benefits beyond statutory minimums. The contract should also address confidentiality and, where relevant, restraint of trade provisions.
Common Contract Mistakes
Employers frequently include clauses that contradict statutory minimums, which are automatically void under Section 7 of the Act. For instance, a clause providing less than 98 days of maternity leave or notice periods shorter than the statutory minimums will be unenforceable, with the statutory provisions applying instead.
Termination Procedures: Where Most Employers Fail
Improper termination remains the single largest source of employment disputes in Malaysia. The Industrial Court consistently reinstates employees and awards back wages where employers fail to follow proper procedures.
The Two Requirements for Lawful Dismissal
Malaysian law requires both substantive justification and procedural fairness for a lawful dismissal. Substantive justification means there must be just cause or excuse for the termination — whether misconduct, poor performance, or genuine redundancy. Procedural fairness requires that the employee be informed of the allegations against them and given a reasonable opportunity to respond before any decision is made.
The Domestic Inquiry
For dismissals based on misconduct, conducting a domestic inquiry is strongly advisable. While not strictly mandatory in all cases, the absence of a proper domestic inquiry often leads the Industrial Court to find unfair dismissal even where misconduct actually occurred. The inquiry should be fair, with the employee given notice of the charges, an opportunity to present their defence, and the chance to cross-examine witnesses.
Notice Requirements Under Section 12
Unless terminating for misconduct under Section 14, employers must provide notice or payment in lieu of notice. The statutory minimum notice periods are four weeks for employment under two years, six weeks for employment between two and five years, and eight weeks for employment of five years or more. Many employers mistakenly believe a one-month notice period is always sufficient.
Constructive Dismissal: The Hidden Risk
Under Section 15 of the Employment Act 1955, a contract is deemed broken by the employer if they fail to pay wages within seven days of the due date. More broadly, the Industrial Court recognises constructive dismissal where an employer's conduct fundamentally breaches the employment contract, effectively forcing the employee to resign.
Actions that may constitute constructive dismissal include unilateral pay cuts, significant changes to job scope without consent, creating a hostile work environment, and failure to address harassment complaints. Employers should be cautious about making substantial changes to employment terms without proper consultation and agreement.
Industrial Relations: Union Recognition and Collective Bargaining
The Industrial Relations (Amendment) Act 2020 brought significant changes to union recognition procedures. Under the amended Section 9, the Director General of Industrial Relations now has greater authority to determine recognition claims, and the process has been streamlined.
Employers cannot refuse to recognise a trade union simply because they prefer to deal with employees individually. Where a union makes a recognition claim, employers must respond within the prescribed timeframe and, if recognition is disputed, cooperate with the determination process including any secret ballot ordered by the Director General.
Collective Agreements
Once a collective agreement is concluded, its terms are binding and override individual contracts where they provide better terms for employees. Employers should approach collective bargaining in good faith, as unreasonable refusal to negotiate can lead to intervention by the Industrial Relations Department.
Statutory Compliance Checklist
Minimum Retirement Age
The Minimum Retirement Age Act 2012 sets the minimum retirement age at 60 years. Any contract term or policy requiring retirement before age 60 is void, and premature retirement constitutes a dismissal that may be challenged at the Industrial Court.
Employment Insurance System (EIS)
Under the Employment Insurance System Act 2017, employers must register with PERKESO and make monthly contributions for all employees. The contribution rate is shared between employer and employee, with each paying 0.2% of the employee's monthly wages. Failure to register or contribute is an offence.
Maternity and Paternity Leave
Female employees are entitled to 98 consecutive days of maternity leave for each confinement. The 2022 amendments also introduced seven consecutive days of paid paternity leave for married male employees, applicable from 1 January 2023.
Sexual Harassment
Part XVa of the Employment Act now requires employers to display a notice regarding sexual harassment in a conspicuous place at the workplace. Employers must also take appropriate action when receiving complaints, and failure to do so is an offence.
Flexible Working Arrangements
The new Part XIIc introduced in 2023 allows employees to apply for flexible working arrangements. While employers may refuse such applications, they must do so in writing and state the grounds for refusal within 60 days of the application.
Record Keeping Obligations
Section 61 of the Employment Act requires employers to maintain registers containing particulars of all employees including their wages, deductions, and leave records. These records must be kept for at least six years after the relevant entries were made. Poor record keeping often disadvantages employers in disputes, as they cannot prove compliance with wage and leave entitlements.
Practical Steps for Compliance
Employers should conduct regular audits of their employment practices against current legal requirements. This includes reviewing all employment contracts for compliance with 2023 amendments, ensuring termination procedures are properly documented, training HR personnel on domestic inquiry procedures, verifying that PERKESO and EIS contributions are current, displaying required notices on sexual harassment, and maintaining proper employee records.
Engaging qualified HR professionals or legal counsel to review your employment practices can prevent costly disputes. The cost of a compliance review is minimal compared to the potential liability from unfair dismissal claims, which can include back wages for the entire period from dismissal to the Industrial Court decision — often several years.
Conclusion
Malaysian employment law provides robust protection for employees, and employers who fail to understand and comply with these requirements expose themselves to significant legal and financial risk. By investing time in understanding the law and implementing proper procedures, employers can maintain productive workplace relationships while protecting their businesses from liability.
Disclaimer: This article provides general information about Malaysian employment law and does not constitute legal advice. Employment law is complex and fact-sensitive, and the application of legal principles varies depending on specific circumstances. Employers should consult qualified legal counsel for advice on their particular situation. This content is accurate as of the date of publication but may not reflect subsequent legislative amendments or judicial decisions.