Hire employees in Malaysia using an Employer of Record

You've been interviewing for weeks. Finally found the right person in Malaysia. Now you need to actually hire them legally. This is where most companies hit a wall.

Malaysia's employment laws look straightforward until you dig into the details. You'll need to handle EPF contributions, manage annual leave calculations, and deal with mandatory bonuses. Miss something like the 13th-month payment requirement, and you'll owe back payments plus penalties when employees find out.

The reality? You've got three ways to hire in Malaysia, each with different costs and headaches.

Option 1: Set up your own entity

• Cost: €15,000-35,000 upfront, €8,000-12,000 annual maintenance
• Timeline: 4-6 months minimum
• Complexity: SSM registration, EPF/SOCSO setup, tax registration, payroll infrastructure
• Makes sense when: Hiring 15+ people long-term, permanent market presence

Option 2: Hire contractors

• Cost: None upfront, but limited control
• Timeline: Immediate
• Risks: Misclassification fines (up to €5,000), back taxes, EPF penalties
• Makes sense when: Short projects (< 6 months), specialized skills
• Note: Hire with Columbus also handles contractor agreements and payments

Option 3: Use an employer of record (Recommended for most)

• Cost: $179/month per employee
• Timeline: 2-3 days to hire
• Complexity: None - we handle everything
• Makes sense when: 1-50 employees, testing markets, multi-country teams

If you're hiring 1-8 people, entity setup costs more than 4-5 years of EOR fees ($179/month = $2,148/year per employee). An EOR like Hire with Columbus handles employment contracts, EPF/SOCSO contributions, income tax calculations, and compliance updates. You get to hire quickly, stay compliant, and focus on managing your team instead of Malaysian labor law.

Ready to hire in Malaysia without the headaches? Get started with Hire with Columbus.

What employment types can you use?

You've got three ways to bring someone onboard in Malaysia. Here's how the costs and risks compare – and why most companies pick option three.

How can you hire in Malaysia?

Setting up your own entity

Malaysia requires a minimum paid-up capital of RM 500,000 for foreign companies, plus incorporation fees around RM 10,000-15,000. You'll need a local registered office, company secretary, and at least two directors (one Malaysian resident).

The real costs hit after incorporation. Monthly accounting runs RM 3,000-5,000, legal compliance another RM 2,000-4,000, plus payroll system setup and HR infrastructure. You're looking at RM 15,000+ monthly before you pay a single employee.

Timeline? Four to six months if everything goes smoothly. It rarely does.

Hiring contractors and freelancers

Malaysia's Employment Act is strict about worker classification. If your "contractor" works set hours, uses your equipment, or follows your processes, they're legally an employee – regardless of what your contract says.

Misclassification penalties include back taxes, EPF contributions (up to 13% of total payments), and potential claims for employee benefits dating back years. One misclassified contractor earning RM 8,000 monthly could cost you RM 15,000+ in back payments alone.

Contractors work for short-term projects where you need specific deliverables, not ongoing work integration. Think website development, not customer success management.

Using an employer of record (recommended)

Here's how it works: Hire with Columbus becomes the legal employer in Malaysia while you manage the employee's day-to-day work and performance. We handle employment contracts, payroll processing, tax compliance, EPF contributions, and SOCSO registration.

Cost comparison for five employees: Entity setup (RM 80,000 upfront + RM 15,000 monthly) versus EOR ($895 monthly, no setup fees). The EOR pays for itself in month one and saves you six months of setup time.

We also handle compliant contractor agreements if you need genuine freelance work done.

Employment contract types in Malaysia

Once you've decided on your hiring approach, you'll need to pick the right contract type. Malaysia recognizes four main employment arrangements.

Permanent employment contracts

This is your standard full-time hire with no end date. Use permanent contracts for core team members you plan to keep long-term – think developers, marketers, sales reps.

Permanent employees get full benefits including annual leave (8-16 days based on tenure), sick leave (14-60 days), and maternity leave (98 days). They're also entitled to EPF contributions and SOCSO coverage.

Notice periods range from four weeks for monthly-paid employees to two weeks for weekly-paid staff. Severance pay applies after 12 months of service.

Fixed-term contracts

These contracts have specific end dates, typically 12-24 months. Malaysia allows renewals, but be careful – if you renew multiple times or the role becomes permanent in nature, courts may treat it as permanent employment.

Fixed-term employees get the same benefits as permanent staff, including pro-rated annual leave and EPF contributions. The contract simply ends on the specified date without severance obligations.

Use fixed-term contracts for project-based work, maternity cover, or when testing new market segments before committing to permanent hires.

Part-time employment

Part-time employees work fewer than 30 hours per week but still qualify for most statutory benefits on a pro-rated basis. They get annual leave, sick leave, and public holiday pay proportional to their working hours.

EPF and SOCSO contributions apply if monthly earnings exceed RM 5,000 and RM 30 respectively. Most part-time professional roles hit these thresholds.

Part-time contracts work well for specialized consultants, customer support coverage, or roles that genuinely don't require full-time hours.

Probationary periods

All employment contracts can include probationary periods up to six months (extendable to 12 months with employee consent). During probation, notice periods drop to one day per week worked, with a minimum of one week.

Probationary employees still get statutory benefits including EPF, SOCSO, and pro-rated leave entitlements. You can't use probation to avoid benefit obligations.

Most companies use 3-6 month probationary periods to assess cultural fit and performance before confirming permanent employment.

How Hire with Columbus handles contracts

We draft compliant employment contracts for any of these arrangements based on your specific needs. Our legal team ensures proper classification, benefit calculations, and termination clauses that protect both you and your employee.

For permanent hires, we typically recommend starting with a three-month probationary period, then converting to full permanent status. This gives you flexibility while maintaining compliance with Malaysian employment law.

How does payroll and taxation work?

Your €60,000 employee actually costs €77,400 per year in Malaysia. Here's the breakdown.

Malaysia's payroll system has multiple layers: income tax, Employees Provident Fund (EPF), Social Security Organisation (SOCSO), and Employment Insurance Scheme (EIS). Each has different rates and caps that change throughout the year.

The good news? Malaysia's tax rates are pretty moderate compared to Europe. The bad news? The compliance requirements are strict, and missing deadlines means immediate penalties starting at RM 1,000 (€200).

Income tax brackets

Malaysia uses a progressive tax system with rates from 0% to 30%. This is what your employees pay in 2025:

Non-resident employees get hit harder with a flat 30% tax rate on all income. If you're hiring expats who haven't established Malaysian tax residency, budget for the higher rate.

Social security contributions

Malaysia's social security system splits costs between employer and employee. You'll pay more than your employee does:

SOCSO has two categories. Category 1 covers employees earning up to MYR 4,000 monthly and includes disability benefits. Category 2 covers higher earners but only provides employment injury protection.

The EPF contribution is the big one since there's no salary cap. Your €60,000 employee costs you an extra €7,200 annually just for EPF contributions.

Payment schedule and bonuses

Malaysian employees expect monthly salary payments by the 7th of the following month. Most companies pay on the last working day of the month to stay safe.

You're not legally required to pay a 13th-month bonus, but it's standard practice in most industries. Budget an extra month's salary for year-end bonuses unless your employment contract explicitly states otherwise.

Festival bonuses are also common. Many companies pay additional bonuses during Hari Raya, Chinese New Year, and Deepavali. While not mandatory, skipping these can hurt retention in competitive markets.

Total employment cost breakdown

This is what a €60,000 annual salary actually costs you in Malaysia:

Base salary: €60,000 EPF (employer 12%): €7,200 SOCSO Category 2: €120 (capped) EIS: €24 (capped) Total annual cost: €67,344

Add in typical bonuses and benefits: 13th month bonus: €5,000 Festival bonuses: €2,000 Medical insurance: €1,200 Other benefits: €1,856

True total cost: €77,400

That's a 29% multiplier on base salary. Most companies underestimate this when budgeting their first Malaysian hires.

Payroll cycle and deadlines

Malaysia's payroll deadlines are non-negotiable. Your monthly schedule looks like this:

By 7th of month: Pay previous month's salaries By 15th of month: Submit EPF contributions online By 30th of month: Pay EPF, SOCSO, and EIS contributions

Income tax works differently. You'll deduct monthly tax from employee salaries, but the big deadline is March 31st for annual tax filing. Employees must file their own returns by April 30th.

Miss the EPF deadline and you'll pay 6% annual interest on late contributions. SOCSO penalties start at 10% of the contribution amount. These aren't warnings, they're automatic.

Common payroll mistakes

The biggest mistake? Assuming SOCSO contributions work like European social security. The MYR 4,000 monthly cap means high earners pay the same absolute amount as mid-level employees.

Many companies also mess up the EPF calculation for partial months. If someone starts mid-month, you calculate contributions on actual salary paid, not pro-rated annual salary.

Another common error is forgetting that bonuses count toward EPF contributions. That €5,000 year-end bonus adds another €600 in EPF costs.

Tax residency status trips up most international companies. An employee becomes tax resident after 182 days in Malaysia, dropping from 30% flat tax to progressive rates. Track this carefully or you'll over-withhold tax for months.

Setting up payroll in Malaysia yourself:

• Local accounting firm: €800-1,200/month
• Payroll software: €150-300/month
• Compliance risk: Fines up to €2,000 for errors
• HR expertise needed: €45,000+ salary

With Hire with Columbus: $179/month per employee, fully compliant, zero risk. We handle all EPF, SOCSO, and tax filings automatically, plus provide English-language support for your team.

What benefits and leave are required?

Malaysia employees get 8 days minimum vacation, but it jumps to 12 days after five years of service. Here's the catch – unused vacation must be paid out when employees leave, so you can't just let it disappear.

The leave system builds gradually, which is actually pretty employee-friendly compared to some countries. You'll also be dealing with 14 salary payments per year thanks to mandatory bonuses, not the usual 12.

Annual vacation leave

New employees start with 8 days of annual leave, increasing to 12 days after five years with the same employer. The accrual happens monthly – employees earn about 0.67 days per month in their first five years.

Here's what gets expensive: unused vacation days must be paid out in cash when employment ends. No "use it or lose it" policies allowed. If someone quits with 10 unused vacation days, you're writing a check for 10 days of salary.

Employees can carry forward up to 10 unused days to the following year, but anything beyond that must be paid out by December 31st.

Sick leave

Employees get between 14-60 sick days per year depending on tenure, but there's a sliding scale for who pays what:

After 60 days, employees can claim disability benefits through SOCSO (Social Security Organisation), but your salary obligations end.

The two-day grace period for medical certificates saves everyone headaches for minor illnesses. After that, you'll need proper documentation from registered medical practitioners.

Parental leave

Maternity leave: 98 consecutive days (about 14 weeks) at full pay. This applies to all female employees regardless of tenure, and it's entirely employer-funded – no social insurance help here.

Paternity leave: 7 consecutive days at full pay within 30 days of the child's birth. Again, you're covering the full cost.

Malaysia doesn't offer shared parental leave options like some European countries. The days are fixed and non-transferable between parents.

Adoptive parents get the same entitlements if the child is under 5 years old when adopted.

Public holidays 2025

Malaysia has 11 national public holidays, plus additional state-specific holidays depending on location:

Each state adds 2-4 additional holidays based on local customs and the Sultan's birthday. Employees who work on public holidays get double pay – their regular salary plus 100% overtime.

Mandatory benefits

Three benefits are non-negotiable in Malaysia:

Employees Provident Fund (EPF):

• Employee contributes 11% of salary
• Employer contributes 12% of salary
• Applied to monthly salary up to RM7,000
• This is Malaysia's retirement savings system

Social Security (SOCSO):

• Employment Injury Scheme: 1.75% employer, 0.5% employee
• Employment Insurance System: 0.2% employer, 0.2% employee
• Covers workplace accidents and unemployment benefits

Employment Insurance System (EIS):

• 0.2% from employer, 0.2% from employee
• Provides job search assistance and temporary income support
• Maximum monthly salary covered: RM4,000

Additional mandatory payments

Annual bonus: All employees must receive at least one month's salary as a bonus if the company is profitable. This is typically paid during major festivals.

Overtime pay: 1.5x regular hourly rate for hours beyond 8 per day or 48 per week. Weekend work gets 2x pay, public holidays get 3x pay.

Optional competitive benefits

Most international companies offer these to stay competitive:

• Private medical insurance (government healthcare is available but limited)
• Life insurance coverage
• Flexible working arrangements
• Additional vacation days beyond the 8-day minimum
• Professional development allowances
• Transportation allowances (especially in Kuala Lumpur traffic)

Common benefit mistakes

Miscalculating EPF contributions: The 12%/11% split applies only to salaries up to RM7,000 monthly. Many payroll systems mess this up for higher earners.

Forgetting state holidays: Each state has different additional holidays. Your Penang employees get different days off than your Johor employees.

Bonus calculation errors: The annual bonus must be based on basic salary, not total compensation. Including allowances inflates your costs unnecessarily.

Overtime miscalculation: Malaysia's overtime rules are strict. Working beyond 8 hours in a day triggers overtime, even if weekly hours are under 48.

Penalties for benefit non-compliance start at RM10,000 per violation, and EPF audits are getting more frequent in 2025.

Administering these benefits correctly requires local HR expertise (RM180,000+ annual salary), benefits software (RM2,000/month), legal review (RM15,000/year), plus risk of errors (RM50,000+ in potential fines). Hire with Columbus handles all benefit administration for $179/month per employee, including EPF registration, SOCSO compliance, and automatic holiday calculations across all Malaysian states.

What are the compliance requirements?

Written contracts are mandatory in Malaysia within 30 days of employment start date. Skip this and you're looking at invalid employment relationships plus potential back-payment claims from employees.

You need to get this right from day one.

Employment contract requirements

Every employment contract in Malaysia must be in writing and include specific mandatory clauses. The contract needs to be in Bahasa Malaysia or English, and both parties must sign within 30 days of the employment start date.

Required contract clauses:

• Employee's full name, IC number, and address
• Job title, duties, and reporting structure
• Salary amount and payment schedule
• Working hours and rest days
• Annual leave entitlement
• Termination notice periods
• Probation period (if applicable)

Miss any of these clauses and you can void the entire contract. Malaysian courts have ruled that incomplete contracts give employees the right to claim additional compensation and benefits.

Probation periods

Standard probation in Malaysia is 3 months, with a maximum of 6 months allowed under the Employment Act. During probation, either party can terminate with just 1 day's notice.

After probation ends, full employment protections kick in immediately. This means longer notice periods, severance requirements, and just-cause termination rules apply.

You can't extend probation beyond 6 months or restart it for the same employee. Courts treat extended probations as permanent employment with full benefits owed.

Working time regulations

Malaysian law caps working hours at 8 hours per day and 48 hours per week. Overtime kicks in after these limits and must be paid at 1.5x regular hourly rate.

Key working time rules:

• Maximum 104 overtime hours per month
• Mandatory 30-minute break for shifts over 5 hours
• One full rest day per week (24 consecutive hours)
• Detailed time records required for all employees

Violating overtime limits results in RM 10,000 fines per employee plus back-payment of unpaid overtime wages.

Notice periods

Notice requirements depend on length of service and apply to both employee resignations and employer terminations.

Payment in lieu of notice is allowed, but you must pay the full salary amount for the notice period. Partial payments or pro-rated calculations aren't valid.

Termination process

You can't fire someone in Malaysia without proper cause and process. Just-cause termination requires documented misconduct, poor performance with warnings, or redundancy with consultation.

Termination steps:

1. Document performance issues with written warnings
2. Provide opportunity for employee response
3. Conduct proper investigation for misconduct
4. Issue termination letter with specific reasons
5. Pay all outstanding wages and benefits immediately

Skip these steps and face wrongful dismissal claims worth 2-24 months salary plus legal fees. Malaysian labor courts favor employees in disputed terminations.

Severance pay

Severance is required for terminations due to redundancy, contract expiry, or employer convenience. It's not required for just-cause dismissals or employee resignations.

Severance calculations use basic salary only, not including allowances or bonuses. Payment must be made within 7 days of termination.

Data protection

Malaysia's Personal Data Protection Act (PDPA) applies to all employee data. You need written consent to collect, use, and store personal information beyond basic employment requirements.

PDPA compliance requirements:

• Data protection notice during hiring
• Employee consent for background checks
• Secure storage of personnel files
• Right to access and correct personal data
• Data breach notification within 72 hours

PDPA violations carry fines up to RM 500,000 for companies. Individual officers can face RM 100,000 fines plus 2 years imprisonment.

Common compliance mistakes

Invalid employment contracts: Using templates from other countries or missing mandatory clauses voids the entire agreement. Employees can claim additional benefits and compensation.

Wrong termination process: Firing without proper cause or documentation leads to wrongful dismissal claims. Average settlements range from RM 50,000-200,000 depending on seniority.

Overtime violations: Not tracking working hours or paying incorrect overtime rates triggers labor department investigations and back-payment orders.

Missing work permits: Hiring foreign employees without valid work permits results in RM 10,000-50,000 fines plus deportation costs.

Penalties for violations

Common compliance failures in Malaysia carry specific penalties:

• Invalid employment contract: RM 10,000 fine + contract void + back payments owed
• Wrong termination process: 2-24 months salary compensation + legal fees + potential reinstatement order
• Missing mandatory clauses: Contract deemed invalid, full benefits owed from start date
• Overtime violations: RM 10,000 per employee + double back-payment of unpaid wages
• Work permit violations: RM 10,000-50,000 fine + deportation costs + potential business license suspension

Hire with Columbus ensures every contract and termination follows Malaysian law exactly. Our legal team handles all compliance requirements, from contract drafting to termination procedures, so you never face these penalties. At $179/month per employee, it's much cheaper than dealing with one compliance violation.

What has changed recently?

Malaysia's employment rules got a major overhaul in 2025, with several changes that'll directly impact how you hire and manage employees there.

The biggest shake-up came in January 2025 when Malaysia ditched its flat RM1,500 monthly minimum wage for a tiered system based on state development. Kuala Lumpur and Selangor employees need at least RM1,700 monthly now, while less developed states like Kelantan and Perlis stick to RM1,500. This affects about 2.3 million workers nationwide, so budget extra if you're hiring in the major economic centers.

New minimum wage structure (effective January 2025):

The Employment Insurance System (EIS) contribution rates also changed in March 2025. Both employer and employee contributions dropped from 0.2% each to 0.15% each, capped at RM7.40 monthly per person. It's a small saving, but it adds up when you're growing your team.

Malaysia's new Remote Work Guidelines became mandatory in July 2025 for companies with hybrid or remote arrangements. You'll need written remote work policies covering cybersecurity protocols, equipment provision, and performance metrics. The penalty for non-compliance is RM10,000 per violation, and labor inspectors are actually checking.

The government extended the Malaysia My Second Home (MM2H) program changes to employment visas in 2025. Foreign workers now need higher salary thresholds: RM8,000 monthly for professional roles (up from RM5,000) and RM15,000 for senior management positions. This particularly hits tech and finance hiring where you're competing for international talent.

Personal income tax brackets got a minor adjustment in 2025, with the top rate dropping from 30% to 28% for income above RM600,000. Your high earners will appreciate the extra cash, though it only affects about 1% of Malaysian taxpayers.

The most annoying change? Malaysia's new digital payslip requirements kicked in September 2025. All payslips must be issued through approved digital platforms with specific security standards. Paper payslips are now illegal, and the fine is RM5,000 per employee per month if you're caught still printing them.

When you're dealing with these constant regulatory shifts, an EOR like Hire with Columbus handles all the compliance updates automatically. We adjusted our Malaysian operations for every single one of these changes, so your employees stay compliant while you focus on actually running your business.