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Compliance
Published:
11 August 2025
Last updated:
11 August 2025
Malaysia has rapidly become one of Southeast Asia’s most attractive markets for international hiring. With a strong legal framework, multilingual talent pool, and cost-competitive employment landscape, it’s a prime destination for companies expanding into the region. But hiring in Malaysia in 2025 involves more than finding the right candidate—it means understanding the local payroll structure, statutory obligations, and compliance environment in detail.
Whether you’re testing the waters with one employee or planning to build a full-scale team, getting familiar with how Malaysia’s employment system works is essential. From navigating monthly payroll and tax deductions to contributing to national schemes like EPF and SOCSO, employers—especially those without a local legal entity—must take a structured and compliant approach.
This guide breaks down:
Who this guide is for:
Hiring in Malaysia involves more than just issuing a job offer—it requires full compliance with employment laws, proper registration with statutory bodies, and understanding local hiring norms. Whether you’re a foreign company entering Malaysia or a domestic business scaling your workforce, these foundational steps are critical.
Before hiring in Malaysia, companies must be legally registered with the Companies Commission of Malaysia (SSM). This applies to both local and foreign-owned businesses that establish a local entity. Incorporation involves appointing at least one resident director, registering a business address, and fulfilling paid-up capital requirements. You can learn more about incorporation requirements directly from SSM’s official site.
For companies without a local entity, engaging an Employer of Record (EOR) service provider is an alternative route. This model allows foreign businesses to legally hire employees under the EOR’s registered entity, bypassing the need to incorporate locally.
If you’re hiring foreign talent, you must apply for a valid work permit. The most common permit for professional expatriates is the Employment Pass (EP), administered by the Expatriate Services Division (ESD). The EP is typically issued to foreign nationals in managerial, technical, or professional roles earning a minimum monthly salary of RM5,000. Employers must first register with ESD and secure approval before sponsoring a pass.
In some cases, employers may also apply for a Professional Visit Pass or Temporary Employment Pass, depending on the job type and sector.
Once your company is ready to onboard employees, it must be registered with the following statutory bodies:
These registrations must be completed promptly upon hiring the first employee. Delays or omissions can result in fines or non-compliance penalties.
Employers must issue written employment contracts that specify terms such as job scope, salary, working hours, and termination clauses. Under Malaysia’s Employment Act 1955, these contracts are legally enforceable, particularly for employees earning RM4,000 and below.
Key legal stipulations include:
Employers must also adhere to guidelines on probationary periods, termination notice, and maternity protections.
In regulated industries, additional licensing or registration may be required before hiring can proceed. For example:
Failure to obtain the appropriate permits may result in delays or legal consequences.
Successfully managing payroll in Malaysia goes far beyond simply transferring salaries each month. For employers—especially foreign companies or those operating without a local legal entity—understanding the country’s complex statutory framework is essential to ensure compliance, avoid costly penalties, and maintain employee trust. Malaysia’s payroll system encompasses multiple layers of mandatory contributions, tax deductions, and administrative obligations that collectively safeguard employee rights and government revenue.
This section will guide you through the full payroll compliance landscape in Malaysia for 2025, explaining registration requirements, monthly contribution calculations, tax withholding, and the penalties for non-compliance. Additionally, we’ll offer practical examples and regional comparisons to clarify how Malaysia fits within Southeast Asia’s broader employment environment.
Before your first salary can be paid, your company must register with the key Malaysian statutory bodies overseeing payroll-related contributions and taxes. This requirement applies regardless of whether your company has a local legal entity or works through an Employer of Record (EOR).
The main agencies to register with include:
Registration must be completed within seven days of hiring your first employee to avoid penalties and ensure timely compliance.
Example: A manufacturing firm expanding into Malaysia delayed registering with EPF and SOCSO, resulting in monthly fines of RM200 per employee and complications in backdated contributions. Registering promptly could have prevented these issues.
Once registered, employers must calculate and remit monthly contributions for each employee. Malaysia’s system is notable for its relatively modest contribution rates compared to some neighboring countries, but accuracy is critical.
EPF Contributions form the backbone of employee retirement planning in Malaysia. Employers contribute between 12% and 13% of monthly wages, matched by an 11% employee contribution. This is deposited monthly to the EPF fund, which invests the sums to generate returns for members. Failing to remit EPF contributions on time incurs penalties including interest and possible legal action.
SOCSO Contributions cover workplace injuries and invalidity, an essential social safety net. The employer’s contribution rate varies based on salary and employee category. Employees contribute a fixed 0.5%. Notably, this coverage extends to non-Malaysian employees holding valid work permits.
EIS, introduced in 2018, protects employees against retrenchment and supports workforce retraining. Both employer and employee contribute 0.2% of monthly wages, a comparatively low rate but a vital scheme to buffer economic shocks.
For certain industries—like manufacturing and services—employers must pay the HRDF levy of 1% on monthly payroll to fund government training programs. This fund allows employers to apply for grants to subsidize employee upskilling.
Malaysia employs a Pay-As-You-Earn (PAYE) system called Potongan Cukai Bulanan (PCB), which mandates employers to deduct monthly tax installments from employees’ gross pay. The Inland Revenue Board (LHDN) requires employers to submit these deductions and file monthly returns via electronic systems by the 15th day of the following month.
The PCB amount depends on multiple factors:
Employers must utilize LHDN’s official PCB calculator or approved payroll software to ensure accurate deduction amounts. Failure to comply can lead to fines, interest on underpaid tax, or even prosecution for tax evasion.
Example: A regional marketing firm failed to deduct PCB on bonuses paid to foreign employees, resulting in a tax audit that imposed back taxes and penalties totaling over RM100,000.
Most Malaysian companies operate a monthly payroll cycle, disbursing salaries on or before the last working day of the month. It’s mandatory to provide each employee with a detailed payslip outlining all components of pay and deductions. This promotes transparency and satisfies requirements under the Employment Act 1955.
Payslips must include:
Employers must retain payroll records, payslips, and statutory submission confirmations for at least six years to comply with tax and employment audits.
Failing to meet payroll obligations can have severe consequences. EPF can impose interest penalties of 6% per annum on late payments, and SOCSO has the power to fine employers up to RM5,000 or imprison responsible persons for up to two years under the Employees’ Social Security Act 1969.
LHDN may issue penalties for late PCB remittance, ranging from 10% to 100% of the tax amount owed. In extreme cases, repeated offenses can lead to criminal charges.
Compared to regional neighbors, Malaysia offers a moderate employer burden. For example:
Malaysia’s relatively lower contribution rates, combined with multiple specialized schemes (EIS, HRDF), provide flexibility but demand administrative rigor.
Expanding your business into Malaysia introduces you to a complex and carefully regulated payroll ecosystem. More than simply transferring salaries, compliance with Malaysia’s payroll requirements involves a comprehensive understanding of statutory deductions, employer contributions, tax withholdings, and meticulous reporting obligations. Mismanaging payroll can expose your company to costly fines, legal risks, and damage employee trust. This section walks you through the full payroll landscape, ensuring you build a compliant, efficient, and transparent payroll process.
Although Malaysian labour law does not explicitly prescribe a mandatory payroll cycle, monthly salary payments are the industry norm. According to Section 19 of the Employment Act 1955, employees must receive their wages no later than seven days after the end of the wage period. Practically, if the pay period closes on July 31, payment must be issued by August 7.
Delays in salary payment are not merely administrative slip-ups; they constitute violations that can trigger enforcement action from the Ministry of Human Resources. Beyond legal penalties, untimely salary disbursement damages workforce morale and may lead to costly disputes or employee turnover.
To ensure smooth payroll operations, companies often leverage payroll automation tools or partner with local providers who understand the nuances of Malaysian payment practices.
In Malaysia, issuing itemized payslips to employees every payroll cycle is not optional—it is a legal requirement. Payslips must detail all components of an employee’s compensation package, including:
Clear payslip issuance not only fulfills a legal mandate but also fosters transparency and trust between employer and employee. In disputes, payslips serve as critical documentation proving payment accuracy.
Best practice among Malaysian employers is to automate payslip generation via integrated HR/payroll software systems, ensuring timely, consistent, and error-free payslip delivery.
One of the most intricate aspects of Malaysian payroll is timely and accurate remittance of statutory contributions. Malaysia requires employers to manage several mandatory contributions monthly, each with its own deadlines and submission portals:
Missing these deadlines or submitting incorrect amounts exposes companies to fines, interest charges, and potential audits by Malaysian authorities.
Beyond monthly submissions, Malaysian payroll compliance mandates comprehensive annual reporting:
The accuracy and timeliness of these reports directly impact your company’s tax standing and employee satisfaction. Non-compliance attracts financial penalties and can complicate corporate tax audits.
Per Section 60A of the Employment Act 1955, employers must retain all payroll records — including payslips, remittance receipts, tax filings, and salary calculations — for a minimum of six years. These records are subject to inspection during labour audits or tax investigations.
Best practices for record-keeping include:
Robust record management not only mitigates legal risks but also facilitates swift resolution of employee queries and disputes.
Foreign workers constitute a significant portion of Malaysia’s workforce, especially in specialized sectors. Their payroll treatment includes some important distinctions:
Failing to apply these distinctions correctly can result in costly audits and penalties.
Even companies with dedicated HR and finance teams frequently stumble in Malaysian payroll compliance. Understanding common pitfalls can save you from costly repercussions:
Manual payroll processes and insufficient knowledge of contribution rates lead to late or incorrect EPF, SOCSO, EIS, or PCB payments.
Avoidance: Automate payroll using locally compliant software and schedule early reminders.
Employees must receive payslips every pay cycle with all deductions and allowances itemized. Failure to do so damages transparency and risks inspections.
Avoidance: Standardize payslip issuance with automated generation tied to payroll systems.
Mislabeling contractors or interns as full-time employees—or vice versa—results in incorrect statutory deductions and tax treatment.
Avoidance: Define employment status clearly and consult local experts when uncertain.
Applying resident tax rates to short-term foreign employees leads to compliance issues.
Avoidance: Monitor residency days and adjust withholding accordingly.
Omitting payment for accrued leave, bonuses, or notice period compensation often causes disputes.
Avoidance: Use detailed offboarding checklists and cross-check legal obligations.
Late submission of Form E or failure to issue Form EA results in penalties.
Avoidance: Set internal deadlines and assign clear responsibility.
Lack of comprehensive, easily accessible records complicates audits and dispute resolution.
Avoidance: Maintain digital records for at least six years with regular internal audits.
Malaysia enforces strict penalties to uphold payroll integrity:
Proactively maintaining compliance minimizes risk and safeguards your company’s reputation.
Accurate, timely, and transparent payroll builds trust with your workforce, ensuring high morale and retention. It also protects your business from regulatory penalties and audit risks.
Given the complexity and evolving regulatory landscape, many companies entering Malaysia partner with Employer of Record (EOR) providers or local payroll experts. This partnership ensures payroll compliance is handled seamlessly, allowing you to focus on scaling your business with confidence.
Expanding your business into Malaysia offers exciting growth potential but requires a comprehensive understanding of its employment and payroll regulations. Every phase—from recruitment to salary disbursement and statutory filings—is governed by rules designed to protect both employers and employees. Overlooking any detail can result in fines, legal disputes, and damage to your company’s reputation. A thoughtful approach to compliance is therefore essential.
Malaysia’s Employment Act 1955 outlines minimum employment standards, covering contracts, working hours, leave entitlements, and termination procedures. Employers must ensure contracts comply with these regulations to avoid disputes and penalties. Clear communication of terms also helps build trust and employee satisfaction.
The backbone of payroll compliance in Malaysia lies in accurate and timely statutory contributions to agencies such as the Employees Provident Fund (EPF), Social Security Organisation (SOCSO), Employment Insurance System (EIS), and income tax (PCB). Employers must remit these payments by the 15th of the following month to avoid fines.
Annual filings, including Form E (employer declaration) and Form EA (employee tax statement), are mandatory and require accuracy to maintain compliance.
Many companies reduce complexity by using payroll software tailored for Malaysia or outsourcing to local payroll specialists. These solutions automate deductions, generate payslips, track deadlines, and securely store records.
To maintain a compliant and efficient hiring and payroll process, businesses should:
Real-life cases highlight the costs of non-compliance. For instance, one company incurred substantial fines and damaged employee morale due to delayed EPF payments caused by manual tracking. By adopting automated payroll systems and clear schedules, they eliminated these risks. Another business faced retrospective penalties after misclassifying contractors, demonstrating the need for clear hiring policies and expert guidance.
Compliant hiring and payroll processes do more than fulfill legal obligations—they build employee confidence and loyalty, improve retention, and protect your company from financial and reputational harm. Proactive compliance enables leadership to focus on strategic goals instead of firefighting regulatory issues.
Getting It Right from the Start Hiring in Malaysia can unlock major growth—but only if companies stay compliant with complex local laws. Missteps in employment contracts, statutory contributions, or payroll filings can lead to penalties, legal challenges, and reputational damage. It’s why many expanding companies choose to outsource these risks from day one.
Establishing a legal entity in Malaysia requires months of paperwork, capital investment, and long-term commitments—such as appointing local directors, opening corporate bank accounts, registering for tax and statutory contributions, and staying on top of corporate compliance.
For companies testing the market, hiring a lean team, or aiming for speed, this route can slow growth before it even starts.
That’s why more businesses are turning to Employer of Record (EOR) solutions. With an EOR provider like AYP, you can:
At AYP, we act as your legal employer on the ground—so you can focus on managing performance and building your business, while we handle the local complexities.
Looking to expand into Malaysia without the cost, delay, or compliance risk of setting up an entity?
Let’s talk about how AYP’s EOR service can get your team up and running in days—not months.
