A guide to the payroll process and compliance in Malaysia

payroll process and compliance regulations

A guide to the payroll process and compliance in Malaysia

Guide: The payroll process and compliance regulations in Malaysia

With Malaysia’s strategic location, market competitiveness, skilled multilingual talent pool and world-class technology capabilities, it’s easy to see why so many companies choose to establish operations there.

If your company is considering expanding into Malaysia, one of the keys to success is to understand the payroll process and compliance regulations from the outset. The last thing you want is for your newly established operation to attract the wrong kind of attention from government auditors.

That’s why we’ve prepared a helpful guide to the payroll process and compliance regulations your company needs to know when starting out in Malaysia.

Payroll process and compliance essentials in Malaysia

Before we examine some common payroll compliance challenges in Malaysia, it’s useful to understand the essentials of the payroll process and the main compliance considerations. Let’s start with a primer on the fundamentals of payroll in Malaysia.

Working conditions and wages
  • Working hours: Malaysia has an eight-hour workday with an average working week of no longer than 48 hours, and (most commonly) one day off per week. Government protection provisions prevent women from working in the industrial or agricultural sectors between the hours of 10pm and 5am. Women must also have at least 11 consecutive hours off work between each shift.
  • Pay cycles: salaries in Malaysia are typically paid monthly.
  • Minimum wages: Nationally, the minimum wage is RM1,100, except for areas under 56 city and municipal councils where the minimum wage is RM1,200. Our team of payroll experts here at BoardRoom can advise you on the relevant government guidelines that apply to your employees.
  • Overtime, rest day and holiday pay rates: Employees covered by the Employment Act 1955 (“EA 1955”) should be paid overtime at 1.5 times their hourly pay rate. Rest days are paid at two times, and public holidays at three times the hourly pay rate. However, the EA 1955 only applies to:
    • employees whose monthly salary does not exceed RM2,000;
    • employees within the private sector;
    • employees working in Peninsular Malaysia or the Federal Territory of Labuan; and
    • employees (irrespective of salary) involved in manual labour, operating or driving transport vehicles and domestic servants.

For non EA 1955 employees, employers can stipulate relevant provisions relating to overtime rates within their employment contracts.

Income tax
  • Withholding tax: Malaysia has a monthly tax deduction (MTD) system requiring employers to deduct withholding tax at source. Each month, employers must then send this tax to the Inland Revenue Board (IRB) of Malaysia on behalf of their employees.
  • Income tax rates: the maximum income tax rate in Malaysia is 30%, which applies to those with incomes greater than MYR 2,000,000 or ‘non-residents’. Employees who work between 60–182 days per year in Malaysia are considered ‘non-residents’, irrespective of their actual citizenship status.
  • Tax clearing and tax filing: employees must complete their tax clearing and filing at year-end before April. The financial year in Malaysia runs from 1 January to 31 December.
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Holidays and leave
  • Paid public holidays: Employees are entitled to be paid for 11 gazetted public holidays per year. Of these 11 days, five must be:

1. Hari Kebangsaan or National Day;
2. Birthday of Yang di-Pertuan Agong;
3. Birthday of the Ruler or Yang di-Pertua Negeri or Federal Territory day (varies per state);
4. Labour Day; and
5. Malaysia Day (16 September).

The remaining six paid public holidays are chosen at the discretion of the employer from the following list and these must be communicated to employees either via written notice or as stated in their employment contracts:

  • Birthday of the Prophet Muhammad (s.a.w);
  • Chinese New Year (2 days, except 1 day in the states of Terengganu and Kelantan);
  • Vesak Day;
  • Hari Raya Puasa (2 days);
  • Hari Raya Haji (1 day, except 2 days in the states of Terengganu and Kelantan);
  • Deepavali;
  • Christmas Day; and
  • Awal Muharam.

However, the government can declare additional ad hoc, paid public holidays throughout the year. If these days are declared at short notice, employers can nominate a replacement day.

In addition, there are a number of state based holidays observed around the country. However, employers are not required to pay employees for these holidays unless they have selected them to be included in their list of paid public holidays for their employees.

  • Compulsory annual leave entitlements: employees are typically entitled to between 8-16 days of paid annual leave, depending on their length of service with the company.
  • Compulsory sick leave entitlements: Employees are entitled to between 14-22 days of paid sick leave, depending on their length of service with the company.
  • Compulsory maternity leave entitlements: New mothers are entitled to 60 consecutive days of paid leave for each of their first five children.
  • Optional leave entitlements: employees can also apply for the following optional leave types, which are typically unpaid and subject to employer approval:
    • compassionate/bereavement leave;
    • marriage leave; and
    • study leave.
  • Paternity leave: most employers also offer 1-3 days of paid paternity leave, but this is not a statutory requirement.
Social security and statutory contributions
  • Employees’ Provident Fund (EPF): employers and most employees (Malaysian citizens or permanent residents only) must contribute to the EPF retirement benefits scheme. The EPF contribution rate for employees varies depending on their monthly salary, whereas the employer contribution is 12%.
  • Social Security Organisation (SOCSO): employers must contribute to Malaysia’s mandatory social insurance schemes, which are administered by SOCSO. There are two schemes:
    • The Employment Injury Insurance Scheme (EIIS) provides cover for employees who experience work-related injuries or diseases. The EIIS applies to all Malaysian citizens, permanent residents, and foreign workers (excluding domestic servants).
    • The Invalidity Pension Schemes (IPS) provides cover for employees who experience invalidity or die from causes unrelated to their work.

Employers must make a monthly contribution to SOCSO on behalf of each eligible employee.

  • Employment Insurance Scheme (EIS): employers are required to make monthly contributions for each employee. The EIS provides financial assistance to workers who have lost their job while they seek new employment.
  • Human Resources Development Fund (HRDF) Levy: this is a compulsory levy paid by employers with 10 or more employees (Malaysian citizens only) working in the manufacturing, services, mining and quarrying sectors. The levy rate is 1% of each eligible employee’s monthly wage. It allows companies registered with the HRDF to receive financial assistance when they participate in specific training and upskilling programs delivered by HRDF training providers.
  • Other contributions>: some employees may also be required to make student loan repayments to the National Higher Education Fund Corporation, or make donations known as Zakat to fulfil their religious obligations.
payroll Malaysia

Common payroll compliance issues to be aware of in Malaysia

Payroll errors can result in your company needing to pay expensive fines. They can also cause reputational damage and employee dissatisfaction. To help you avoid unpleasant situations, here are some common payroll compliance issues to be aware of in Malaysia:

  • Late MTD payments: the Inland Revenue Board (IRB) imposes penalties if employers fail to pay monthly employee income tax withholdings by the 15th of each month.
  • Failing to include perquisites, benefits-in-kind or equity incentives in compensation reporting: sometimes these benefits are not paid through payroll, which means they can be easily overlooked in compensation reporting.
  • Incorrect classification of employees: Foreign workers, non-residents and secondees are often classified incorrectly during payroll data system entry. As a result, your company might underpay these employees and deduct the wrong income tax amounts.
  • Failing to stay up-to-date with regulation changes impacting payroll: In Malaysia, there are four regulatory bodies that influence payroll processing rules which makes it more of a challenge staying up-to-date with payroll requirements.
  • Overlooking cultural norms: It’s common in Malaysian payroll processing to include ‘13th-month pay’ – a single annual payment on top of an employee’s total annual wage. This payment isn’t mandatory and would not be considered non-compliance if you did not adhere to it, but it is the cultural norm that could impact employee satisfaction.
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Want expert help in processing your company’s payroll in Malaysia?

Our team of payroll experts can guide you through the complexities of the payroll process in Malaysia to help make your business expansion more successful. We can set up your company’s payroll so that you get it right the first time, every time.

It doesn’t matter whether you are a large multinational corporation or a fast-growing SME. Outsourcing to an international payroll processing company like BoardRoom ensures your company has an efficient, accurate and compliant payroll process right from the start.

Speak to our team of specialists today about how outsourcing payroll can give you more time to focus on what really matters: your company’s growth and profitability.

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10 advantages of outsourcing your payroll services

advantages of outsourcing payroll services

10 advantages of outsourcing your payroll services

10 advantages of outsourcing your payroll services

Outsourcing is the key to making your payroll process seamless. It means everyone gets paid the right amount at the right time, every time.

All too often HR professionals find themselves spending far too much time processing pay runs at the expense of dedicating time to strategy and higher-value tasks.

Payroll is a time-intensive process – not just because you need to complete the necessary process tasks, but also because you need to ensure compliance with tax and legislative requirements.

The key advantage of outsourcing payroll services is that you can get back your time to focus on what really matters: the strategic business drivers that grow your company and culture.

Here are the top ten benefits your company stands to gain by outsourcing your payroll.

01 Save time

Outsourcing payroll is the low-hanging fruit for increasing company efficiency. Instead of spending hours every pay cycle on payroll processing, an administratively heavy task, HR teams can focus on achieving more strategic objectives, like increasing employee engagement to boost organisational productivity.

02 Reduce costs

Saving time also saves you money, which can come in the form of a lower wage bill. For example, as companies scale, they can save money by outsourcing payroll instead of spending it on expanding in-house HR teams purely  to manage a growing payroll. You may also see savings to your business from not needing to maintain cloud security for your payroll software or manage paperwork.

how to outsource payroll

03 Minimise compliance and regulatory risks

Regulatory changes that affect payroll happen at break-neck speeds, which can make staying compliant a challenging, time-consuming process. In Malaysia, four regulatory bodies develop payroll processing rules. They each issue notifications when a change to the law is made and your company needs to ensure that these changes are accurately translated into payroll formulas.

It is easy to make mistakes when updating payroll formulas, especially if they involve IF, AND, OR logical functions. If the formula is wrong, payroll is calculated incorrectly which can cause problems like under or over paying wages and tax. Chances are, you may not even realise that an error has occurred until after receiving an expensive non-compliance fine.

Outsourcing your payroll to a specialist service provider, like our team of experts here at BoardRoom, can minimise your exposure to these compliance and regulatory risks because we take care of it all for you, including updating payroll formulas correctly.

04 Gain access to specialised, local knowledge

Having a dedicated team of professionals with local knowledge of Malaysia’s labour laws is essential for your company. It means your business can take advantage of the team’s years of payroll experience without being exposed to the strict protocols and multi-level cross-checking that they’re subject to.

This is especially beneficial for companies that operate in different states or across multiple countries because an external partner will work with you to ensure compliance in each area, freeing up your in-house HR team.

05 Build payroll continuity

Some companies operate payroll systems that require staff to be on-site in order to process payroll. If the unexpected happens, as an example; your payroll staff can’t get to the office to perform their duties, or a key member of your team responsible for payroll approval resigns, how will your employees get paid? Outsourcing payroll to an expert provider guarantees payroll continuity so that your employees are paid on time, every time.

06 Enhance data security and protection

Data security is crucial for payroll processing because of the incredibly sensitive information involved such as employees’ personal data and compensation details. In Malaysia, HR departments must adhere to local laws such as the Personal Data Protection Act 2010 (“PDPA”).

If your company has limited time and budget resources, it can be challenging to maintain an appropriate level of data security and protection in-house. For one, in-house teams need to keep pace with ever-evolving cybersecurity threats. Secondly, your company is more exposed to payroll fraud when payroll is processed in-house. Third, in-house teams may not have the appropriate protocols to ensure that data is backed up regularly.

Quality payroll outsourcing providers store their data on highly secure cloud-based servers using state-of-the-art encryption. They perform regular backups to ensure that data is protected. Data protection and security are top priorities for us at BoardRoom, which is why our data centres have achieved ISO27001, and our cloud hosting has SOC 2 certification.

outsource-your-payroll

07 Reduce stress

Getting your employees paid accurately and on time is critical to the success of your company. And as every HR professional knows, there is no room for error when it comes to payroll. However, managing payroll effectively can be challenging for in-house teams when they are trying to keep up with local regulatory compliance while simultaneously managing the needs of a growing workforce. This is especially true if your company operates in  multiple countries across the APAC Region.

Our team of payroll experts here at BoardRoom will take care of payroll management for you, ensuring that pay runs are efficient, accurate and compliant. Our team has worked across multiple industries, countries and situations, so you can rest assured knowing that your payroll is in the best of hands. Ultimately, this means less stress for your HR teams.

08 Increase flexibility

Another advantage of outsourcing payroll services is that you can stay flexible in rapidly changing business environments. Outsourcing allows you to quickly scale your payroll service requirements as needed, instead of having to recruit, onboard, train and retain additional in-house staff.

09 Gain access to a pool of payroll knowledge experts

As the saying goes, ‘two heads are better than one’. Outsourcing to a professional payroll service provider gives your company access to a pool of payroll knowledge specialists without the expense of retaining them in-house. Our team of experienced payroll experts have managed payroll for businesses of all sizes, types and industries across the APAC Region. Take advantage of their vast experience and knowledge to really build your business so you can take it to the next level.

10 Integrate knowledge with value-add services

The best payroll outsourcing vendors are not only experts in all things payroll, but also offer a variety of integrated, value-add corporate services, including:

By consolidating all your back office functions into one vendor you stand to gain greater efficiencies and business productivity.

Outsourcing makes payroll easy

Spend less time sorting out pay runs and more time on your company’s growth and profitability by outsourcing your payroll function to our team of BoardRoom payroll experts.

Whether you are a large multinational corporation or a fast-growing SME, our team makes processing your payroll in Malaysia and across the APAC region easy.

So if you want efficient, accurate, compliant payroll processing, speak to our payroll specialists today about how to outsource your company’s payroll function.

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