Malaysia Employment Law 2026: A Practical Guide for Foreign Companies

Last updated: October 27, 2026

Hiring employees in Malaysia involves more than preparing an employment contract and processing payroll. Employers need to consider the employee’s work location, applicable labour legislation, statutory contributions, immigration requirements, and the terms of the employment relationship.

This guide outlines key employment requirements foreign companies should review in 2026. Malaysia’s rules are not identical across every state, employee category, or employment arrangement. Employers should confirm which requirements apply to their specific workforce.

Which employment laws apply in Malaysia?

The Employment Act 1955 applies in Peninsular Malaysia and the Federal Territory of Labuan. Sabah and Sarawak have their own labour ordinances. Amendments to the Sabah and Sarawak ordinances took effect on May 1, 2025.

The applicable rules may depend on where the employee works, the type of work performed, and the employee’s terms and conditions. A company with employees in Kuala Lumpur, Sabah, and Sarawak should not assume that one compliance checklist covers all three locations.

Before hiring, identify the employee’s work location and check the relevant legislation and local procedures:

• Employment Act 1955 and regulations
• Sabah Labour Ordinance resources
• Sarawak Labour Ordinance amendment FAQs

Companies comparing employment requirements across the region can also read our guides to China Employment Law 2026 and Hong Kong Employment Law 2026.

Minimum wage

The national minimum wage is RM1,700 per month. Full implementation for all employers, regardless of workforce size, began on August 1, 2025.

Minimum wage refers to basic wages. Allowances, incentives, and other additional payments do not count toward the minimum wage. The prevailing order contains specific statutory exclusions, so employers should check whether an exclusion applies before relying on it.

The Ministry of Human Resources’ announcement and the Minimum Wage Order FAQ explain the implementation schedule and how minimum wages are defined.

Employers should review basic salary by employee and location, and avoid counting housing, transport, or meal allowances toward the minimum wage.

Employment contracts and working hours

Employers should provide written employment terms and make sure the contract matches the work arrangement. Important terms typically include the role, work location, working hours, wages, leave, notice, and other applicable benefits.

For employees covered by the Employment Act 1955, normal working hours are generally limited to 45 hours per week. The law also sets rules for rest days, overtime, and work on public holidays.

Statutory overtime entitlements depend on the employee’s coverage and category. Many non-manual employees earning more than RM4,000 per month are outside certain statutory overtime-pay provisions; exceptions and other coverage rules can apply. Employers should check the Act’s First Schedule and the employee’s actual duties rather than relying on salary alone.

The general monthly overtime limit under the relevant regulations is 104 hours, subject to the rules and any applicable approval. See the Employment Act 1955 and the Employment (Limitation of Overtime Work) Regulations 1980.

Employers should keep attendance and overtime records and ensure payroll calculations are consistent with the contract and applicable law.

Flexible work arrangements

Employees covered by the Employment Act 1955 may submit a written request for a flexible work arrangement to change their working hours, working days, or place of work.

An employer must respond in writing within 60 days. If the request is rejected, the employer must provide written reasons. A request does not automatically have to be approved; it must be considered and handled according to the applicable requirements.

See the Department of Labour Peninsular Malaysia’s Flexible Working Arrangement guidance.

EPF contributions

The Employees Provident Fund (EPF) rules depend on the employee’s citizenship and membership status.

From wages for October 2025, mandatory EPF contributions were extended to eligible non-Malaysian citizen employees who work in Malaysia and hold a valid passport and pass permitting them to work. Domestic workers are excluded from the mandatory 2% + 2% scheme.

For eligible non-Malaysian citizens who are not permanent residents and fall under the new scheme, the contribution rate is generally 2% from the employer and 2% from the employee. Permanent residents and certain existing EPF members follow different contribution rules. Eligibility also depends on other criteria, including the type of employment and age.

EPF contributions for a month’s wages are generally payable by the 15th of the following month. Employers should confirm each employee’s status and current rate using EPF’s official guidance:

• EPF guidance for non-Malaysian citizen employees
• EPF mandatory contribution information

Do not apply the 2% + 2% rate to every foreign employee without checking whether the employee is a permanent resident, an existing member under a different contribution category, or otherwise outside the scheme.

SOCSO and EIS

SOCSO and the Employment Insurance System (EIS) are separate from EPF. Their coverage and contribution requirements depend on the employee’s status, age, earnings, and applicable scheme.

The SOCSO wage ceiling increased to RM6,000 per month effective October 1, 2024. Foreign workers are covered under SOCSO rules that differ from the employee and employer contribution arrangements for Malaysian citizens. PERKESO also introduced changes affecting foreign-worker protection from June 1, 2026.

EIS coverage generally applies to eligible Malaysian citizens and permanent residents, subject to the statutory requirements. Employers should not assume that EIS applies to every foreign employee.

For current rates and eligibility, check the official PERKESO contribution-rate guidance and foreign-worker protection information.

Employment Pass salary thresholds from June 1, 2026

The revised Employment Pass salary policy applies to new and renewal applications submitted on or after June 1, 2026.

Employment Pass category	Revised minimum monthly salary	Maximum duration
Category I	RM20,000 and above	Up to 10 years
Category II	RM10,000–RM19,999	Up to 10 years with a succession plan
Category III	RM5,000–RM9,999	Up to 5 years with a succession plan

The duration and succession-plan conditions are important: Category II is not limited to five years, and Category III is not limited to two years under the revised policy.

The official Expatriate Services Division announcement provides the revised thresholds and duration framework. Employers should consult the current ESD requirements before submitting an application. Meeting a salary threshold alone does not guarantee that an application will be approved.

Leave entitlements

For employees covered by the Employment Act 1955, annual leave entitlement generally depends on length of service:

Length of service	Minimum annual leave
Less than 2 years	8 days
2 years to less than 5 years	12 days
5 years or more	16 days

The Employment Act also provides statutory sick leave and maternity protections for covered employees. Sabah and Sarawak have separate ordinances, so employers should check local requirements for employees working there.

Keep leave records aligned with payroll and employee records, and verify any applicable collective agreement or more favourable contractual entitlement.

Termination, notice, and retrenchment

Termination must be managed according to the employment contract and applicable legislation. In cases of dismissal, the employer should ensure there is a lawful basis and follow the required process. Employees may challenge a dismissal through the applicable industrial-relations process.

Where a contract does not provide a longer notice period, the Employment Act 1955 generally sets minimum notice periods based on length of service:

Length of service	Minimum notice
Less than 2 years	4 weeks
2 years to less than 5 years	6 weeks
5 years or more	8 weeks

Statutory termination benefits may apply to eligible employees, subject to the governing rules and exclusions. Under the relevant regulations, minimum rates are generally 10, 15, or 20 days’ wages per year of service, depending on length of service. Eligibility should be checked before calculating or promising a payment.

Retrenchment also involves notification and procedural requirements. Employers in Peninsular Malaysia should review the Department of Labour’s retrenchment notification guidance and confirm the corresponding procedure with the relevant labour department in Sabah or Sarawak.

Avoid assuming a single “locals first” rule applies in every retrenchment situation. Review the applicable law, government procedures, contracts, and circumstances of the proposed workforce reduction.

Can a foreign company hire in Malaysia without setting up a local entity?

The answer depends on the company’s structure and circumstances. An Employer of Record (EOR) may be one possible arrangement, but the service label alone does not determine which entity employs the worker or resolve the company’s wider legal, tax, immigration, and employment obligations.

To understand how an EOR differs from payroll outsourcing, see our guide to Employer of Record vs. Payroll Outsourcing.

Before using an EOR or another third-party arrangement, confirm:

• Which entity signs the employment contract
• Who is responsible for payroll and statutory contributions
• Which entity manages the employee’s day-to-day work
• How work-pass requirements will be handled
• Which obligations remain with the foreign company

Companies should obtain appropriate local advice before deciding on an employment structure.

Practical checklist for foreign employers

Before hiring

• Confirm the employee’s work location and applicable labour legislation.
• Check the current minimum wage and employment terms.
• Prepare a written contract that reflects the actual role and arrangement.
• Confirm EPF eligibility and the correct contribution category.
• Check SOCSO, EIS, and work-pass requirements for the employee.
• Set up payroll to reflect working hours, leave, and statutory deductions.

During employment

• Keep contracts, payroll, attendance, and leave records consistent.
• Record overtime and check whether statutory overtime provisions apply.
• Remit statutory contributions by the relevant deadlines.
• Review pass expiry dates and renewal requirements.
• Recheck local rules when an employee changes location or role.

Before termination or retrenchment

• Confirm the applicable law and the employee’s coverage.
• Review the contract, notice period, and reason for termination.
• Check whether termination benefits are payable.
• Follow applicable consultation and notification procedures.
• Keep written records of the decision and calculations.

Frequently asked questions

Conclusion

Malaysia employment compliance depends on the employee’s location, status, work, and employment arrangement. Foreign companies should review contracts, minimum wages, working hours, statutory contributions, leave, work-pass requirements, and termination procedures before hiring and as rules change.

A reliable compliance process starts by identifying the correct jurisdiction, confirming the employee’s statutory coverage, and keeping the contract, payroll, and HR records aligned.

Need support reviewing your Malaysia workforce setup?
Contact Big Fish Global Consulting to discuss your requirements.