Employment in Malaysia: Deciphering Malaysia’s Employment Legal Landscape

ADCO Law

Employment law in Malaysia revolves around the Employment Act 1955 (“EA”) and the Industrial Relations Act 1967 (“IRA”), supplemented by secondary legislation and case law jurisprudence.

Fundamental principles include the right to livelihood, as upheld by the Federal Court, requiring just cause for termination. Freedom of association is also protected, preventing discrimination against workers for union involvement, according to both the Federal Constitution and IRA.

Discrimination in the workplace is prohibited under Article 8(2) of the Federal Constitution, which mandates equal treatment regardless of religion, race, descent, place of birth, or gender. Employees facing discrimination have recourse to the Labour Department for dispute resolution, with legal avenues available for claiming damages.

Moreover, ensuring a safe and healthy working environment is a cornerstone of Malaysian employment law, as stipulated in the Occupational Safety and Health Act 1994 (OSHA). Employers are obligated to provide a safe workplace, with legal precedents such as Mazuna Begum binti Kadir Mira v Malaysia Airlines Berhad [2024] 1 ILR 389 highlighting the importance of maintaining workplace safety standards.

Regarding flexible work arrangements, amendments to the EA in 2022 introduced provisions allowing employees to apply for variations in working hours, days, or locations. Employers must respond to such requests within 60 days, justifying any refusal. However, some roles, like drivers or doctors, may not be suited for flexible work arrangements, requiring employers to establish clear policies.

Employment contracts in Malaysia serve as legal agreements between employers and employees, outlining rights, obligations, and terms of employment. These contracts should be tailored to suit the specific needs of the employer, employee, and job role, covering key aspects such as:

1. Job position and job description;
2. Place of work;
3. Working days and hours;
4. Duration of service (in fixed-term employment contract);
5. Remuneration/salary;
6. Statutory contributions/deductions;
7. Allocation and terms for annual leave, public holidays, sick leaves, and maternity/paternity leaves;
8. Duty of non-disclosure, non-competition and confidentiality;
9. Terms of termination;
10. Terms of retirement;
11. Variation of the contract;
12. Whole agreement clause or reference to any other document that is applicable i.e., employee handbook or policies;

While the EA sets minimum standards for employment contracts, parties are free to negotiate terms that are more favorable to the employee, as permitted by Section 7A of the EA. However, any terms that are less favorable than those prescribed by the EA are void and unenforceable, as per Section 7.

Terminating an employee in Malaysia requires adherence to lawful grounds and procedural fairness. Common grounds for dismissal include misconduct, poor performance, health issues, redundancy, retirement, or contract expiry. However, mere disagreements or minor issues are insufficient grounds for dismissal, as highlighted by legal precedents emphasizing the right to livelihood.

Before terminating an employee, an employer must conduct due inquiry and provide the employee with an opportunity to respond, ensuring procedural fairness. For instance, Section 14 of the EA requires employers to punish misconduct “after due inquiry” although the exact process is not explicitly described.

Performance-related dismissals necessitate fair warnings and improvement opportunities, with employers required to support employees in enhancing their performance. Similarly, retrenchment exercises must be justified by genuine redundancy situations, adhering to the Code of Conduct for Industrial Harmony.

Consultation with industrial relations specialists and gathering sufficient evidence are recommended steps for employers considering termination. Disputes over termination may arise before the Industrial Court, where parties must substantiate their positions with oral and documentary evidence.

Severance packages commonly consist of a Voluntary Separation Scheme (“VSS”) or a mutual separation agreement. In a VSS, employers offer a compensation package in exchange for voluntary termination of employment. This allows employers to assess which employees are willing to leave in exchange for the offered compensation, helping to manage headcount.

Mutual separation agreements require voluntary agreement from both parties. The Industrial Court will not enforce agreements obtained through compulsion or unfair labor practices. So, absent evidence of compulsion, the Court will uphold mutually agreed terminations.

In Malaysia, there are no specific legislations governing severance packages, leaving the structure to the parties involved. Typically, these packages cover employer obligations, employee obligations & undertakings, settlement packages, release of claims, timeline, confidentiality, whole agreement, governing law, and severability.

Non-compliance with employment laws in Malaysia may result in penalties and sanctions, depending on the nature of the offense. General penalties under Section 99A of the EA include fines not exceeding RM50,000 for offenses without specific penalties.

Specific offenses such as forced labor, discrimination, wage non-payment, or unauthorized foreign employment carry penalties ranging from fines to imprisonment. For instance, employers convicted of forced labor may face fines of up to RM100,000 or imprisonment.

Under the Occupational Safety and Health Act 1994, employers failing to provide a safe working environment may face fines of up to RM50,000 or imprisonment.

Since the 2022 amendments to the EA, most employers have rushed to update their contracts and policies for compliance. Businesses yet to do so should promptly seek professional advice and review their frameworks.

When adjusting contract terms, engaging stakeholders like employees or their union representatives (if applicable) before finalizing changes is crucial. This ensures open dialogue and protection of all interests.

With increased employee awareness of their rights, employers should regularly seek external assistance to navigate potential disputes. Treating all communication and conduct as potentially scrutinized by a judge is prudent.

Additionally, businesses implementing lengthy fixed-term contracts may need to reconsider such contracts as they could be deemed ingenuine. The Industrial Court often investigates such contracts and may deem them a cover for permanent employment.

Lastly, staying updated on Malaysia’s labor laws, including case law and legislation, is vital. With ongoing improvements in labor standards, employers must remain vigilant in adapting to these changes.