Hiring your first employee is an important milestone for any business. This article highlights some of the important legal considerations to take into account when you first become an employer.
- Determine the type of employee you are hiring
Employees can be divided into different categories, for example full time employees, part time employees or fixed term employees. Some individuals can perform services as “independent contractors” without being your employees in a legal sense. Carefully consider the requirements of your business in order to identify the right kind of employee to hire. If you don’t understand the differences between the various arrangements above, be sure to get proper legal advice before proceeding.
- Put it in writing
Once you decide to hire someone, you should have an employment agreement prepared. This document will set out the material terms of employment, for example – designation, salary, benefits and the notice period. Different employers may use different names to refer to this document (“letter of offer”, “employment contract”, etc). The title is not important so long as you have the terms clearly stated in the document. If you are using templates from the internet, be sure to run through the document with a qualified lawyer to ensure that you don’t run afoul of Malaysian employment laws. In our practice we have seen many good intentioned start-up owners use an employment contract which looks like Frankenstein’s monster – a copy and paste job from various samples. These type of agreements may have clauses that contradict themselves, or worse, may be unenforceable in Malaysia. This type of approach may save you costs in the short term, but might expose you to bigger problems down the line.
- Know the law (at least a little bit)
You should have some general understanding about Malaysian employment law before you hire your first employee. The primary body of legislation relating to employee rights is the Employment Act 1955, but even this Act doesn’t apply to all categories of employees. You should also familiarise yourself with basic knowledge about common issues such as:
- Minimum Wage
- Minimum retirement age
- Maternity protection & benefits
- Sexual harassment
- Managing poor performance & misconduct
- Termination of employees and unfair dismissal claims
If you need a summary about Malaysian employment law, our Guide to Malaysian Employment Law may be a good start.
- Statutory Payments
Typical statutory contributions that need to be made by employers are the Employees Provident Fund (EPF) and Social Security Organisation (SOCSO). Certain situations may require the employer to also make Zakat payments on behalf of Muslim employees. Businesses in certain sectors and with a certain number of employees will also be required to contribute to the Human Resources Development Fund (HRDF). Employers also have to make income tax deductions from their employees’ salary.
If you are a first time employer, you may need to register yourself as an employer with the relevant statutory bodies, and also notify those bodies of new employees that have been hired.
There is no requirement for payroll to be automated or computerised. Smaller businesses handle their payroll by manually calculating and generating payment vouchers/payslips for their employees. Some businesses invest in payroll software to make this process less painful. Remember – wrong calculations, errors or failure to make statutory contributions could expose you to legal liability and may amount to an offence under the applicable legislation. For example, in addition to it being an offence, failing to contribute to EPF (or having a shortfall in contributions) could result in your business having to top up the contributions and also pay interest and the dividends that the employee would have received had the contributions been made properly.
Another option is to have your payroll outsourced to an external service provider. If you are outsourcing this function, please note that you have certain obligations under the Personal Data Protection Act to inform your employees that their personal data may be shared with the payroll provider. Payroll providers usually charge a nominal fee per employee and this can be seen as a cost effective alternative to hiring a full time accounts or payroll staff.
There are of course a lot more issues that need to be dealt with when you become an employer. Hiring is just the first step and what happens after that is a whole different ball game.
If you are planning to take the leap and hire your first employee, make sure you have a proper plan to address the five considerations above to ensure that adding a new member to your business family will be as smooth as possible.
ABOUT THE AUTHOR. This article was written by Donovan Cheah. Donovan Cheah is a partner at Donovan & Ho and has been recognised as a recommended lawyer for labour and employment by the Legal 500 Asia Pacific 2017. He is an advocate and solicitor of the High Court of Malaya, and his writings have been featured in publications like The Edge, The Star, the American Chamber of Commerce updates, and Asialaw.