Can (or should) you hire an employee without paying them wages?
It is common for start-ups (especially those who are bootstrapping) to consider “alternative compensation arrangements” for employees such as offering them share options, profit sharing or possible future bonus payments in lieu of a standard monthly wage.
Strictly speaking, employees need to be paid wages… but before we start, we should actually look at some of the definitions of the terms to make sure there is no confusion.
“Employee” in this context means a person who is under a contract of service with an employer. Partners of a business are not employees. Shareholders, even though they may be doing work for the benefit of the company, may not necessarily be employees of that company if they aren’t under a contract of service. Freelancers who do work on a project basis, are not employees.
“Wages” is defined under the Malaysian Employment Act as “basic wages” (not very helpful, we know!) and “all other payments in cash payable to an employee for work done” in respect of his contract of employment. It does not include, among other things, value of housing accommodation or supply of amenities or services, payments to defray special expenses or annual bonus. Let’s not complicate things – to keep things simple, “wages” means the cash paid to the employee on a regular basis in exchange for their services.
Under the Minimum Wage Order 2012 (which came into force in 2013), the minimum wages for confirmed employees are (as at the time of writing of this article):
|Sabah, Sarawak and the Federal Territory of Labuan||RM800||RM3.85|
A company that hires an employee with no monthly basic salary (or where the employee receives a nominal monthly salary which is less than the minimum set out above), is in technical breach of the Minimum Wage Order 2012. This is even if the alternative compensation offered (eg: shares, equity or promise of future payment) could actually far exceed the minimum wage. The penalty for non-compliance includes a fine of up to RM10,000.00 per employee, and the employer may also be asked to pay each employee the difference between the minimum wage rate and the employee’s basic wages. Parties cannot, by consent, contract out of the requirements for minimum wage.
What are some of the other options available, then? One method would be to consider independent contractor arrangements. Independent contractors (“IC”) are not employees because the nature of the arrangement is such that the IC works on his own account and generally maintains a high degree of flexibility and discretion as to how they discharge their work. Similarly ICs are typically not entitled to normal employment benefits such as annual leave. Since ICs aren’t employees, the Minimum Wage Order 2012 doesn’t apply to them and their compensation and remuneration is subject to negotiation between the parties.
A warning: an “independent contractor” may sometimes be deemed to actually be an “employee” under certain legal tests – regardless of what your contract says. Malaysian Courts have frowned upon employers trying to hide the true nature of their work arrangements behind words of a contract. Be extra careful about using template agreements, especially if the clauses don’t properly reflect your intended arrangement or practice.
The complexities of employment law can make even the simple task of hiring your first employee seem daunting. Working hand in hand with the right lawyer to get it right from the start will help your business grow and move forward.
ABOUT THE AUTHOR. Donovan Cheah is a partner at Donovan & Ho. He is an advocate and solicitor of the High Court of Malaya, and his writings have been featured in publications like The Star, the American Chamber of Commerce updates, and Asialaw.