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 Workplace Law & Advisory – Asia practice of Freehills International Lawyers, with assistance from the following firms:

Contacts:

George Cooper
Practice Leader
+65 6236 9941 begin_of_the_skype_highlighting              +65 6236 9941 
george.cooper@freehills.com

Celia Yuen
Senior Associate
+65 6236 9972 begin_of_the_skype_highlighting              +65 6236 9972 
celia.yuen@freehills.com

Note:     This Guide:

• is current to 31 March 2010;
• 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 Workplace Law & Advisory - Asia can assist, working with local counsel.

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Minimum statutory terms

Key statutes
The two key statutes governing employment law in Malaysia 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. 

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 the employer should be aware that in doing so 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.

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 freely 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
Minimum wages are provided for under the Wages Council Act 1947 only for certain sectors and industries and in fixed territories (West Malaysia, Sarawak and Sabah). 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.

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 are negotiated and agreed upon by the parties.

Hours of work—According to the Employment Act, the employer cannot require employees to work:

• more than five consecutive hours without a period of rest of not less than 30 minutes
• more than eight hours per day
• more than 10 hours spread over the course of a single day, or
• more than 48 hours per week.

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. This limit may be exceeded only in specified cases that is: (a) accident, actual or threatened, in respect of the employee’s place of work; (b) the performance of work which is essential to the wellbeing of the community; (c) work essential for the defence or security of the country; (d) urgent work to be done to machinery or plant; (e) an interruption of work which it was impossible to foresee; 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)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 all the employees at the commencement of each calendar year.

Paid annual leave
According to 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 the 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 up to 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 probable 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
In theory, 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 some 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, for employees covered by ‘permanent contracts’, there is a restriction on the power of the employer to terminate by notice. The employer can only do so for ‘cause’ such as misconduct, retrenchment etc.

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 Industrial Relations Act specifically provides that it is unlawful to dismiss an employee for trade union membership or activities.

More generally, 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 in different circumstances. 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.

Remedies
Under the Industrial Relations Act, any employee who considers him/herself 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, he/she 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 favourable 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 and/or 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’. Should such a claim proceed 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 Malaysia Council of Employers’ Organisation and the Malaysian Trades Union Congress, with the approval of the Minister of Labour and Manpower. 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 a prior information and consultation procedure should be undertaken with workforce and trade union 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 under 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 Act, including manufacturing, mining and quarrying, construction, wholesale and retail trade, finance, business services and public services.

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Regulation of outsourcing and contracting

Outsourcing—There are no specific provisions on outsourcing under Malaysian legislation.

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.

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.

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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 actions are 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 arbitration.

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