Minimum statutory terms
Termination of employment
Discrimination and harassment
Occupational health and safety
Regulation of outsourcing and contracting
Industrial relations

Acknowledgment

This Guide was prepared by the Employee Relations – Asia practice of Freehills International Lawyers, with assistance from the following firms:

Key Contacts:

Celia Yuen
Practice Leader
+65 6236 9941
celia.yuen@freehills.com

Lucy Twomey
Senior Legal Associate
+65 6236 9944
lucy.twomey@freehills.com

Note:     This Guide:

• is current to 31 March 2011;
• contains general introductory information only, without an assumption of a duty of care by Freehills or the other firms listed;
• does not contain legal advice; and
• is not intended to be, nor should it be relied on as, a substitute for legal or other professional advice.

If employers have workplace relations issues or requirements in particular jurisdictions, then Freehills Employee Relations - Asia can assist, working with local counsel.

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Minimum statutory terms

Key statutes
The two key statutes governing employment law in peninsular Malaysia and the Federal Territory of Labuan are the Employment Act 1955 (Employment Act), which deals with minimum terms and conditions for manual workers and for non-manual work employees whose wages do not exceed RM1,500 per month, and the Industrial Relations Act 1967 (Industrial Relations Act), which deals with the relations between employers, employees and trade unions. Employment relationships in Sabah and Sarawak are governed by their respective Labour Ordinances.

Other major pieces of legislation include the:
•      Workmen’s Compensation Act 1952
•      Trade Unions Act 1959
•      Employees’ Social Security Act 1969, and
•      laws pertaining to welfare, health and safety of employees, for example, the Factories and Machinery Act 1967 and the Occupational Safety and Health Act 1994.

Employer work rules
There is no legal requirement in Malaysia for an employer to establish work rules. An employer may choose to formulate work rules, company policies, employee handbooks, or similar documents. An employer may choose to incorporate some or all of its company policies into employee contracts of employment, though in doing so the employer should be aware that employee consent may be required in order to amend such policies. For this reason, many employers establish policies or handbooks that are expressed not to form part of the contract of employment, but with which employees are nevertheless required to comply.

Forms of employment
The Malaysian common law recognises that employment may take the form of an ongoing or a fixed/limited-term employment contract, and may be full-time or part-time.
For employees covered by the Employment Act, part-time employment is recognised and entitlements are specifically regulated by the Employment (Part-Time Employees) Regulations. A part-time employee is defined as an employee whose average hours of work as agreed with their employer do not exceed 70% of the normal hours of work of a full-time employee employed in a similar capacity in the same enterprise.

The following categories of employees are however excluded from the application of the part-time regulations:

•      casual employees, being employees who are engaged occasionally or on an irregular basis, as and when needed, and whose weekly working hours do not exceed 30% of the weekly working hours of a full-time employee, and
•      home working employees, being employees who perform work for an employer within the employee’s residence, irrespective
of occupation.

Probationary period
There are no specific regulations governing probationary period in Malaysia. However, this provision is a common practice in employment contracts. The duration can be agreed by the parties. In practice, a three-month period is common for non-executive employees whilst longer periods, say six months or possibly longer, are common for executive/management employees.

Minimum wage
territories (West Malaysia, Sarawak and Sabah) and only if the Minister is of the opinion that no adequate machinery exists for the effective regulation of the remuneration or conditions of employment. Therefore, for many employees there is no minimum wage rate and pay rates may be negotiated by the parties on an individual basis and included in the contract of employment, subject to compliance with any applicable collective agreement.

However, this position is likely to change as the parliament has passed the National Wages Consultative Council Bill 2011 (the Bill) which seeks to replace Act 195 and to establish a National Wages Consultative Council which will have power to make recommendations to the government in respect of making minimum wage orders for different sectors, types of employment and regional areas, and for related matters. The Bill also seeks to provide greater enforcement powers to ensure employers comply with minimum wage orders.

Remuneration structure
For the purposes of the Employment Act, ‘wages’ means all remuneration paid to the employee for work done. However, the Employment Act expressly excludes certain payments from the definition of wages (for example, costs for housing/accommodation, travelling allowances, contribution to pension funds, gratuity payable on retirement, annual bonuses etc).

While there is no statutory provision, bonuses may be provided as an entitlement under the employment contract.

Working hours
The Employment Act provides minimum standards on hours of work, overtime and rest periods applicable to employees falling under the purview of the Act (see ‘Key statutes’ above). For those employees not covered by the Employment Act, terms and conditions of working hours and rest periods may be negotiated and agreed upon by the parties.

Hours of work—According to the Employment Act, the employer cannot require employees covered by the Act to work more than:

• five consecutive hours without a period of rest of at least 30 minutes
• eight hours per day
• 10 hours spread over the course of a single day, or
• 48 hours per week.

These limits may be exceeded only in specified cases such as:

(a)   accident, actual or threatened, in respect of the employee’s place of work

(b)   work that is essential to the wellbeing of the community

(c)   work that is essential for the defence or security of the country

(d)   urgent work to be done to machinery or plant

(e)   an unforeseeable interruption of work, or

(f)    work to be performed by employees in any industrial undertaking essential to the economy of Malaysia or any essential service (as defined in the Industrial Relations Act).

The maximum daily/weekly hours do not apply to work that involves inactive/stand-by employment.
Specific limits also apply under the Employment Act in relation to female workers in industrial and agricultural undertakings.

Rest periods—Under the Employment Act, employees are entitled to one whole rest day each week. The rest day is usually on Sunday or Friday (or any other day fixed by the employer at its discretion) depending on the state of Malaysia in which the employee is based.

Overtime—Under the Employment Act, any work done in excess of the normal hours of work is considered overtime. In addition, the Employment (Limitation of Overtime) Regulations fix a limit of 104 hours of overtime work per month. An employer can apply to the Director General for Industrial Relations for approval if it proposes that its workers work in excess of this limit. Overtime hours must be paid as follows:

• at least 150% of the basic hourly rate of pay in case of overtime during an ordinary working day
• at least 200% of the basic hourly rate of pay in case of overtime during rest days, and
• at least 300% of the basic hourly rate of pay in case of overtime during public holidays.

Public holidays
Employees are entitled to a paid rest day on public holidays. Currently there are 10 gazetted public holidays per year, four of which are mandatory, while the remaining six can be decided by the employer and must be notified to employees at the commencement of each calendar year.

Paid annual leave
Under the Employment Act, the minimum number of days of paid annual leave ranges from eight to 16 depending on the employee’s length of service, as follows:

• eight days if the length of service is less than two years
• 12 days if the length of service is more than two years but less than five years, and
• 16 days if the length of service is more than five years.

However, these minimum standards are commonly built upon by collective agreements or employment contracts which usually grant to all employees (including those not covered by the Employment Act) between two and four weeks annual leave per year. It is common practice to provide an annual leave entitlement that increases each year to reward employee loyalty.

Other types of leave
Sick leave—Under the Employment Act, an employee is, after examination by a registered medical practitioner or dental surgeon appointed by the employer, entitled to paid sick leave depending on the employee’s length of service, as follows:

• 14 days if the length of service is less than two years
• 18 days if the length of service is more than two years but less than five years, and
• 22 days if the length of service is more than five years.

Where hospitalisation is necessary, the periods above can be extended to a maximum of 60 days per year.

Maternity leave—Female employees covered by the Employment Act are entitled to 60 consecutive days of maternity leave which cannot commence earlier than 30 days before confinement, or later than the day after confinement. However, for certified medical reasons, an employer may require maternity leave to be taken up to 14 days before the expected date of confinement. Maternity allowance is payable for the first five children if the employee has worked for the same employer at any time during the four months preceding confinement and she has been employed by the same employer for not less than 90 days during the nine months preceding confinement. The allowance is set at normal pay rates, or at the rate prescribed by the Minister of Human Resources, whichever is the greater. A female employee who is not entitled to maternity allowance can return to work early, provided that she obtains a medical certification that she is able to work. There are no statutory maternity benefits for female employees who are outside the scope of the Employment Act, however most employers do usually provide maternity benefits for these employees as well.

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Termination of employment

Legal requirements
At common law, either party may terminate an employment contract at any time by giving the required period of notice to the other party (see below in ‘Notice periods’).

An employer may also, in certain circumstances, terminate the employment contract with immediate effect and without notice (that is, ‘summary dismissal’). Under the common law, this will be justified where the employee engages in serious misconduct or commits a serious breach of the employment contract.

However, an employee, whether covered by the Employment Act or not, whose employment has been unilaterally terminated (with or without notice) may lodge a complaint of dismissal ‘without just cause or excuse’ under the Industrial Relations Act (see below in ‘Restrictions on the ability to terminate employment’). Hence, in practice, there is a restriction on the ability of the employer to terminate by notice.

Notice periods
The length of notice period is usually fixed by the parties in the employment contract.
The Employment Act (which only applies to covered employees) provides that the following minimum notice periods apply:

• four weeks if the length of service is less than two years
• six weeks if the length of service is between two years and five years, and
• eight weeks if the length of service is five years or more.

The parties may provide in the contract of employment for a notice period longer than the minimum periods prescribed, provided that the length of notice is the same for both employer and employee. Payment in lieu of notice (or part thereof) is allowed under the Employment Act.

For an employee without an express contractual notice period, to whom the Employment Act does not apply, the courts will imply a term of ‘reasonable notice’ according to the common law. What is seen by a court as ‘reasonable’ will depend on factors such as the nature of the employment and the length of service the employee has with the employer.

Restrictions on the ability to terminate employment
The ability of employees to lodge a complaint of dismissal ‘without just cause or excuse’ has led to a body of case law on circumstances in which termination of employment will be justified. For example, termination with notice would normally be justified in the event of genuine redundancy or misconduct, and summary dismissal without notice may be justified in the event of a serious failure to follow the employer’s lawful and reasonable directions or serious misconduct such as fraud, dishonesty or habitual neglect of duties. The courts will examine the fairness of the termination and in particular will subject any summary dismissal to a high degree of scrutiny.
The Employment Act provides that no employer shall terminate the contract of service of a local employee for the purpose of employing a foreign employee. In the case of redundancy, all contracts with foreign employees employed by the employer in a capacity similar to that of the local employees must be terminated before any contracts with local employees are terminated.

In addition, there are also specific statutory restrictions on the termination of an employee:

• on the basis of trade union membership or activities
• on the basis of certain occupational health and safety activities (such as making a complaint about a safety matter)
• who is on maternity leave, or
• who has made a disclosure to a government agency in accordance with the Whistleblower Protection Act 2010, which is expected to come into force sometime in 2011.

Remedies
Under the Industrial Relations Act, any employee who considers themselves dismissed without ‘just cause or excuse’ is entitled to make a representation for reinstatement to the Director General for Industrial Relations. If the Director General is not able to settle the matter, they must notify the Minister who may refer the case to the Industrial Court for an award. The primary remedy in the event of a successful claim is reinstatement and back pay, which may be substantial as it can take a long time for cases to be decided.

Severance payments
Employees covered by the Employment Act, who have been employed for at least 12 months prior to the date of termination, are also entitled to payment of minimum termination benefits as prescribed by the Employment (Termination and Lay-Off Benefits) Regulations 1980.

The quantum of benefits payable is set out below:

These termination benefits will apply in respect of an employee covered by the Employment Act unless their contract of employment or a collective agreement applicable to them provides for a more generous quantum of termination benefit.

Any employees falling outside the scope of the Employment Act will not be expressly entitled to payment of termination benefits, unless they are provided for in their contract of employment or in any collective agreement applicable to them. Nevertheless, severance payments are often made to such employees in a redundancy situation, to mitigate the risks of a claim of dismissal ‘without just cause and excuse’, as discussed below.

Specific requirements applicable to redundancy
An employee who has been retrenched may lodge a complaint of dismissal ‘without just cause and excuse’. If such a claim proceeds to hearing before the Industrial Court, the court will examine in detail whether the retrenchment was bona fide as well as whether the selection criteria that were applied were fair and reasonable in all of the circumstances. The court may also consider whether a severance payment has been made and the quantum of any such payment.

The court may also have regard more broadly to other matters set out in the Code of Conduct of Industrial Harmony (Code). The Code is a document agreed between the Ministry of Human Resources (then known as the Ministry of Labour and Manpower), the Malaysian Council of Employers’ Organisation and the Malaysian Trade Unions Congress. Though strictly the Code is not legally binding, the Industrial Relations Act recognises that the Industrial Court may take into account the content of documents such as the Code in reaching its decisions. For example, the Code recommends that an information and consultation procedure should be undertaken with the workforce and trade unions before retrenchments are implemented, in order to explore different solutions (for example, schemes for voluntary separation and retirement). The Code also provides that retrenched employees should as far as possible be given priority for re-engagement if the employer subsequently hires employees.

There are also specific requirements under Malaysian law in relation to the selection of workers for retrenchment. Among categories of employees covered by the Employment Act, there is a statutory requirement that foreign employees must be retrenched before local employees. In large part, the Malaysian courts also require the employer to strictly comply with the principle of ‘last in, first out’ (LIFO) in each employment category. That is, the most recently hired employee in the category must be the first to be selected for retrenchment.

Departures from the LIFO rule are allowed by the Industrial Court only sparingly. In such cases, the employer must show sound and valid reasons for departing from the rule, for example, adoption of another objective criteria or special circumstances warranting the retention of the recently hired employee in preference to the longer-standing employee.

In implementing retrenchments, an employer should also be aware of the specific prohibition in the Industrial Relations Act on discriminating against employees on the ground of trade union membership or participation. Accordingly, retrenchment procedures and criteria must not have the effect of discriminating in this regard.
Employers who intend to carry out a retrenchment exercise are required to give prescribed notices to the Director General of Labour. The prescribed notification form is in six parts. Parts I to IV must be submitted 30 days prior to the retrenchments, Part V must be submitted within 14 days after the retrenchment exercise, and Part VI must be submitted within 30 days after the retrenchment exercise. Although this requirement comes from the Employment Act, it applies in respect of all employees (that is, not just those to whom the Employment Act generally applies).

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Discrimination and harassment
Discrimination in employment on the ground of trade union membership is prohibited.

Sexual harassment is dealt with in detail by the Code of Practice on the Prevention and Eradication of Sexual Harassment in the Workplace 1999 (which does not have force of law but provides non-binding guidelines for employers). This Code of Practice prohibits any forms of sexual conduct that might be perceived as an offense, humiliation or threat, despite having no direct link to employment.

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Occupational health and safety
An employer has an obligation at common law to provide employees with a safe place of work.

In addition, there are certain specific statutory obligations imposed by legislation such as the:

• Factories and Machinery Act 1967, which contains specific provisions relating to the proper control and maintenance of ‘factories’. The Act contains provisions regarding the health, safety and welfare of workers at ‘factories’ as defined, as well as workers operating ‘machinery’ as defined.
• Occupational Safety and Health Act 1994, which is intended to secure the safety and health of persons at work (both employees and self-employed), protect against hazards, promote a healthy working environment and provide a means of creating subordinate regulations (including codes of practice) dealing with occupational safety and health. The Occupational Safety and Health Act 1994 only applies to particular industries as specified in the First Schedule of the Act, including manufacturing, mining and quarrying, construction, wholesale and retail trade, finance, business services and public services. The Occupational Safety and Health Act 1994 provides for the establishment of a safety and health committee at any workplace with 40 or more employees or where directed by the Director General. The principal function of the safety and health committee is to monitor and review measures taken to ensure health and safety in the workplace.

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Regulation of outsourcing and contracting

Outsourcing—There are no specific provisions on outsourcing under Malaysian legislation.
Note however that the Employment Act provides some rules with reference to contractors, in particular stating that the principal and the contractor and any subcontractor are jointly liable to pay employees (as defined in the Act) of the contractor or the subcontractor the salary for work supplied in the execution of the contract, subject to certain limitations.

Contracting—In general, Malaysian employment legislation does not apply to true independent contractors (or self-employed persons). Note that tests apply at common law to determine whether or not a person is a contractor or an employee, and the characterisation of the relationship by the parties is not determinative.

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Industrial relations

Legislation in brief
The key industrial relations statutes are the Trade Unions Act 1959 (which recognises freedom of association and representation for all employees) and the Industrial Relations Act (which regulates the relations between employers and employees and their trade unions).

Role of trade unions
The major function of trade unions in Malaysia is to negotiate terms for collective agreements. The conduct and affairs of trade unions are highly regulated, and trade unions must be properly registered in order to enjoy the rights, immunities and privileges conferred under the Trade Unions Act 1959.

Collective agreements
In Malaysia, collective bargaining is voluntary and applies only in the private sector. Every collective agreement must be jointly deposited by the parties with the Registrar of the Industrial Court within one month of the date on which it was entered into. A collective agreement binds the parties once it has been recognised by the Industrial Court.

Industrial action and disputes
In general, industrial action is dealt with under the Industrial Relations Act, which provides for a variety of dispute resolution procedures. The Department of Industrial Relations operates a conciliation mechanism which is successful in resolving most disputes. Where conciliation is not successful, matters are referred to the Industrial Court.

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