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Malaysia & The Philippines Labor Law

A whopping 97% of employees would like to work remotely for at least some time for the rest of their careers, as reported by Buffer's 2022 state of remote work report.

Hence, technological advancement has enabled companies to hire remote employees according to the popular demand and preference of the employees.

However, are companies that hire remote workers from anywhere possess higher risk in disguised employment? Learn more about disguised employment vs disguised unemployment and check your risk whether you are hiring "fake freelancers" as full-time remote employees.

Definition of Employee

In Malaysia, the Employment Act (EA 1955) is the fundamental employment legislation for the country in terms and conditions of employment.

The Employment (Amendment) Act 2022 clearly defines the employees protected by the Act. Under the new section 101c, 44:

The manner of the employee's work is subject to the control or direction of the employer.
Employee work hours are subject to the employer's control or direction.
The employers will provide all the necessary tools, materials, or equipment to the hired employees for work execution.
Employee work is integral to the employer's business operations.
The employee's work is performed solely for the benefit of the hiring company.
"Employee monthly salary" is a payment made to the employee in return for the work done at a regular interval. Such payment constitutes the majority of the employee's income.
The employer will need to pay the employees employed on time, regardless of whether the employee has met the work timeline every month.

Under the Amended EA, the person hired is presumed to be an "employee" with the above criteria stated even when a written contract of service is absent between the employer and employee.

Definition of Independent Contractor

On the other hand, what is a contractor, and in what way does the independent contractor work differently from an employed employee?

According to the Department order no. 174 from the department of labour and employment in the Philippines, the term "contractor" refers to any person or entity engaged in a legitimate contracting or subcontracting work arrangement for a specific job.

Such services are undertaken and outlined under a "Service Agreement".

Similar to the definition of the employment act in Malaysia, the definition of a contractor in the Philippines is:

The employees recruited under the contractor will perform activities directly related to the contractor's primary business operation instead of the company (or client) that hires the contractor.
The contractor does not exercise the right to control the employee's work performance.
The contractor acts as a distinct and independent business and will perform the job according to its method, manner, and responsibilities.
The contractor has substantial capital to carry out the job by their account, method and manner, including the investment of the tools, equipment, supervision and machinery.
During the work period, the contractor is free from the control and direction of the principles related to the work performance, apart from the results indicated in the service agreement.
The service agreement will state the specific description of the work being carried out, including its term or duration.
The service agreement will clearly state the agreed amount of the contracted job and related terms and conditions.
A standard administrative fee is charged to the hiring company. For instance, it is NOT less than or at least ten (10%) of the total contract cost in the Philippines.

Employee or Independent Contractor? 10 Differences You Should Know

1. Contract

An employment contract is signed between the employer and the employee.
A service agreement is issued with a mutually agreed timeline or duration.

2. Working Relationship

Employees work solely full-time for the employer and must devote 100% of their work time during their work.
Contractors work on a project basis for the hiring company as their client, and they usually are the business owners who serve multiple clients.

3. Payment

The employees will receive regular monthly salaries with a fixed payment according to the number of hours worked, including overtime pay benefits.
There is no monthly, daily or hourly rate payment for a contractor. The hiring company will pay the contractors the agreed sum according to the deadline, schedule and goal set in the agreement.

4. Resources

The company supplies the tools, materials, and equipment. If the employees need to pay to purchase specific tools required, it shall be claimable from the employer.
The contractor should use their resources and are not eligible to claim from the client or the hiring company.

5. Expenses

All expenses are claimable for an employee of the company, including travelling expenses if the work requires travel.
The contractor shall bear all the expenses if they need to visit the client's office unless stated in the service agreement.

6. Work Autonomy

The employees work under the control and direction of the employer. The main objective is to work according to the company's vision, mission and targets.
Contractors work according to their own will and are not controlled and directed by the company's business objectives.

7. Business Relationship

The employer will conduct quarterly, half-yearly, or annual appraisals to evaluate the employee's work performance as it is a long-term working relationship.
The contractor has a short-term relationship with the client and will end the relationship stated according to the service agreement duration.

8. Job Delegation

Employees must work personally for the employer and cannot delegate tasks to other parties.
Contractors can delegate tasks freely or collaborate with a subcontractor as long as the project can complete on time.

9. Income Tax

Using Singapore as an example, employment tax is fully or partially borne by the employer according to the employee's annual salary.
A contractor is considered a self-employed person who works with multiple clients. Therefore, the contractor is responsible for filing its company tax according to the company's annual earnings.

10. Employee Benefits

Employers are required to pay employees social contributions, annual leaves, medical leaves and paid Public holidays time-off or overtime claims legally.
Under the service agreement, contractors have no right to receive any benefits or workers' compensation the company gives its regular employees. Contractors must also self-register and pay government contributions, such as the social security system.

Expand Confidently and Compliantly: Avoid Disguised Employment

Avoid-Misclassification-or-Disguised-Employment-AYP-Blog

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Frequently Asked Questions (FAQs)

What is the legal difference between an employee and an independent contractor?

An employee works under an employment contract, under the direction and control of the employer, and is entitled to statutory benefits (social insurance, paid leave, overtime, severance). An independent contractor is engaged under a services contract, controls how and when work is delivered, and is generally not entitled to statutory employment benefits. The distinction is determined by the substance of the working arrangement — not the label on the contract — and is assessed differently in each country.

What is worker misclassification and what are the consequences?

Worker misclassification occurs when a company engages a worker as an independent contractor when the actual working arrangement meets the legal criteria for employment. Consequences include: back-payment of statutory contributions, income tax underpayments, fines and penalties, and potential reinstatement claims. For the legal consequences in detail, see how EOR services protect companies from legal risks. In the Philippines, misclassified workers can petition DOLE for regularization. Misclassification audits are increasing across APAC.

How do companies determine whether to hire an employee or a contractor?

The decision depends on the nature of the engagement, the level of control required, duration, and risk tolerance. Contractors are appropriate for: project-based work with defined deliverables, specialized skills needed for a limited period, and situations where the worker genuinely operates independently with multiple clients. Employees are appropriate for: ongoing roles integral to the business, situations requiring direction and control over how work is performed, and markets where the regularity and duration of the engagement would trigger employment protections.

What tests do labor authorities in Asia use to determine employment status?

Tests vary by country but commonly assess: control (does the company control how the work is performed?), integration (is the worker integrated into the company's operations and using company equipment?), economic dependence (is the contractor economically dependent on this single client?), and mutuality of obligation. For a practical framework on how to structure these assessments, see our guide to employee classification for HR compliance. Singapore's MOM uses a control test; the Philippines' DOLE applies economic reality; Malaysia and Indonesia look at the substance of the relationship.

Do independent contractors receive any mandatory benefits in Southeast Asia?

Genuine independent contractors are not entitled to statutory employment benefits — no mandatory social insurance contributions, no paid leave, no overtime premiums, and no severance. However, some countries are extending protections. Singapore's Employment Act excludes most contractors but courts have found employment relationships in gig economy cases. The Philippines' DOLE has issued guidelines on likely employment relationships in platform-based work. Vietnam requires platform companies to make certain contributions for gig workers. This area of law is evolving rapidly across the region.

How does an Employer of Record help convert contractors to employees?

Converting a contractor to an employee via an EOR involves ending the contractor agreement, onboarding the worker under the EOR as the legal employer, and ensuring statutory registrations (social security, health, tax) are in place from day one. The EOR type you use matters — regional APAC-focused providers handle country-specific nuances better than global platforms. See key differences between APAC-focused EORs and global EOR models.

What are the tax implications of hiring a contractor vs. an employee in Asia?

For employees, the employer withholds income tax from salary (pay-as-you-earn) and remits statutory contributions. For contractors, no tax withholding or social insurance contributions are typically required by the engaging company — the contractor is responsible for their own taxes. However, if the contractor is later reclassified as an employee, the company may owe the employee's withheld tax and all statutory contribution arrears, plus interest and penalties. Companies hiring contractors should ensure the contractual and working arrangements genuinely support independent contractor status.

Can a company have both employees and contractors working alongside each other?

Yes, but care is required. If contractors and employees perform essentially the same work under the same conditions, authorities may view the contractor arrangement as sham employment. Companies should ensure contractors have genuinely distinct working arrangements — different supervision, different deliverable-based contracts, no integration into the company's daily operations, and ideally other clients. Regular review of contractor arrangements against the applicable misclassification test in each country is good practice to minimize audit risk.

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Differences Between Hiring Employee vs Contractor