Navigating Malaysia's Employment Contract Landscape

For global enterprises expanding into Malaysia, mastering local employment regulations is fundamental to sustainable operations. Understanding Malaysian employment contracts, probation periods, and termination procedures enables companies to mitigate compliance risks while strengthening their competitive position in this dynamic market.

Essential Employment Contract Requirements

Malaysian employment contracts must align with the Employment Act 1955, covering working hours, overtime compensation, leave entitlements, and social security provisions. Contracts should be drafted in both English and Bahasa Malaysia, with salary details specified in Malaysian Ringgit (MYR). While supplementary translations may assist foreign employees, the legally binding version must comply with statutory requirements.

Critical contract components include:

Full names of employer and employee
Detailed job description and responsibilities
Designated workplace location
Contract duration and terms
Compensation structure and payment schedule
Termination conditions and procedures
Leave policies and additional benefits

Compliance Risks and Penalties

Recent legislative amendments have intensified compliance obligations. Labor contractors must maintain written contracts and supporting documentation, with failure to produce records upon inspection carrying penalties up to RM50,000. The Director General may investigate employment discrimination disputes, with non-compliance penalties reaching RM50,000 plus daily fines for ongoing violations.

Sexual harassment investigation failures now attract penalties up to RM50,000, while forced labor violations can result in RM100,000 fines or two-year imprisonment. A prominent manufacturing firm recently faced RM75,000 in penalties for inadequate contract documentation during a labor audit.

Malaysian Probation Period Framework

The standard probation period spans three months, extendable to six months with contractual provision. Employers cannot arbitrarily dismiss probationary staff without valid justification. Notice periods vary by service duration:

0-2 years service: 4 weeks' notice
2-5 years service: 6 weeks' notice
Over 5 years service: 8 weeks' notice

Probationary employees typically qualify for four weeks' notice. Non-covered employees (earning above RM2,000 monthly) follow contractual agreements, though statutory guidelines often influence best practices.

Termination Procedures and Severance Provisions

Severance Compensation Structure

Severance payments apply to non-disciplinary dismissals, with calculations based on service duration:

Under 2 years: 10 days' wages
2-5 years: 15 days' wages
Over 5 years: 20 days' wages

Payment must occur within seven days of termination. SailGlobal's case management system automatically calculates these obligations, reducing administrative errors.

Termination Notification Requirements

Statutory notice periods mirror those for resignations. Redundancy situations require 30-day advance notification to the Labour Department using Form PK. Regional submission portals include:

Peninsular Malaysia: http://jtksm.moh.gov.my
Sabah: http://jtksb.moh.gov.my
Sarawak: http://jtkswk.moh.gov.my

Non-compliance risks RM50,000 penalties under Section 63 of the Employment Act.

Unlawful Dismissal Consequences

Employees may file unfair dismissal claims within 60 days to the Industrial Relations Department. Successful claims can yield reinstatement with backpay or compensation equivalent to 12-24 months' wages. Courts determine amounts based on service duration and mitigating factors.

Notable cases include:

Murphy Sarawak Oil Co Ltd (2017): RM1.2 million settlement
Nor Aini Sabil (2019): RM540,000 compensation
Konsortium Transnasional Berhad (2019): RM2.45 million for constructive dismissal

Beyond financial penalties, companies face reputational damage and decreased employee morale. Proactive compliance through services like SailGlobal's employment monitoring can prevent such scenarios.

Malaysia Employment Law Guide: Contracts, Probation & Termination