In review: entering the employment relationship in Malaysia

An extract from The Employment Law Review, 13th edition

Basics of entering an employment relationship

A contract of employment may be made in writing or orally. However, for employment positions governed under the EA, a contract must be in writing if it is for a service for a specified period exceeding one month or for the performance of a specified piece of work where the time reasonably required for completion of the work exceeds one month.¹⁴ A written contract must include a clause setting out the manner in which the contract may be terminated by either party.¹⁵ It must be signed by both parties and may be altered only by mutual consent.

Not all terms of employment are found in an employment contract. Some may be found in an employment handbook, which is usually incorporated by reference in the employment contract.

An employment contract can be for a fixed term, and a genuine fixed-term contract is recognised in Malaysia. However, a court will look at the substance rather than the form of the fixed-term arrangement. A fixed-term contract that has been repeatedly renewed may be regarded as a sham arrangement and may be treated as a permanent contract of employment.

Under the Minimum Retirement Age Act 2012 (MRAA), a fixed-term contract that exceeds the period stipulated in the Schedule to the MRAA can end only when the employee reaches retirement age.¹⁶ Therefore, a fixed-term contract loses its efficacy if it is for a fixed term (inclusive of any extension) that is longer than the period permitted under the MRAA.¹⁷ In these circumstances, the fixed-term contract in substance becomes a permanent contract, whereby it will only end when the employee reaches retirement age (which is 60 years).

The law in Malaysia recognises probationary periods. There is no statutory minimum notice of dismissal for a probationer and, as such, termination is a matter of contractual right. Nevertheless, for employees governed under the EA, when the reason for dismissal falls within certain categories, such as redundancy or closure of business, there are minimum periods of notice that must be given to the employee.¹⁸ A probationer has a right to lodge a complaint for unfair dismissal under the IRA.

There is no legislation that prohibits a foreign company from hiring employees without being officially registered to conduct business in Malaysia. However, the foreign company itself must not conduct business in Malaysia.¹⁹ Merely hiring an employee may not by itself be regarded as conducting business in Malaysia. If, however, these employees are actively soliciting business in Malaysia, and concluding contracts in Malaysia, there is a risk that the foreign company may be regarded as conducting business in Malaysia.

There is also no legislation that prohibits a foreign company from engaging an independent contractor without registering in Malaysia. However, the foreign company must consider whether engaging an independent contractor or an employee may give rise to the foreign company having a permanent establishment (PE) in Malaysia. A foreign company is regarded as having a PE in Malaysia if the independent contractor or employee:

1. continues supervisory activities in Malaysia in connection with a building or work site or a construction, an installation or an assembly project;
2. acts on behalf of the foreign company in Malaysia and has the authority to conclude contracts on its behalf and habitually does so, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification; or
3. maintains a stock of goods in a place in Malaysia from which the independent contractor or employee delivers goods, or regularly fills orders on the company's behalf.

The consequence of having a PE in Malaysia is that income generated by the business will be subject to Malaysian income tax.

If a company hires employees in Malaysia, the employer is obliged to pay benefits due under the following:

Income tax will be deducted at source as a monthly tax deduction. In practice, it would be difficult for a foreign company to comply with the above requirements without a locally registered company. Typically, payroll companies will be employed by foreign companies to perform payments of the above statutory contributions and deductions.