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Converting contract workers to regular employees in Malaysia can offer several advantages for both the employer and the employee. However, it is a complex process that requires careful attention to legal requirements and regulations.
This article will provide a step-by-step guide on how to convert contractors to employees in Malaysia, including the legal requirements, processes, and benefits.
- Employers in Malaysia are required to comply with the regulations of the Employment Act of 1955.
- If the employer has already established a legal entity in Malaysia, they can start converting the contract workers to regular employees right away by following the legally established steps, such as registering with the relevant authorities and setting up payroll and social security contributions.
- If the employer does not have a legal entity in Malaysia, they can contract a Professional Employer Organisation (PEO) with the capacity to act as the legal employer of record (EoR) for the employees. The PEO then takes responsibility for payroll, benefits, and compliance functions.
Converting contractors to employees with a legal entity: eight steps
If a business has a legal entity established in Malaysia and wants to convert their contract workers to regular employees, the steps are as follows:
Step 1: Review the legal requirements.
Before converting contractors to employees in Malaysia, it is important to review the legal requirements to ensure compliance with all relevant laws and regulations, such as the Employment Act of 1955, which outlines the minimum requirements for employees in Malaysia.
Step 2: Negotiate with the contractors.
Once the legal requirements are ready to be met, it is necessary to meet with the contractors and discuss the terms of employment. This may include changes to their responsibilities, compensation, and benefits.
Step 3: Prepare the employment contracts.
After negotiating with the contractors, it is important to prepare employment contracts that comply with Malaysian labour laws. These contracts should include details such as job responsibilities, compensation, working hours, leave entitlements, and other benefits.
Step 4: Transfer the contractors to employees.
The next step is the actual process of transferring the contractors to employees. This can be complicated, and it is critical to ensure that all employment contracts and benefits are correctly transferred. Companies may also need to train new staff to ensure they understand the company’s policies and processes.
Step 5: Register with the relevant authorities.
Employers are required to register their employees with the relevant authorities in Malaysia. These include the Employees Provident Fund (EPF), Social Security Organisation (SOCSO), and the Inland Revenue Board (IRB).
Step 6: Set up payroll and social security contributions.
Employers are required to set up payroll systems and ensure that social security contributions are made for all employees. This includes contributions to the social security fund, as well as withholding taxes and other statutory deductions.
Step 7: Establish HR policies and procedures.
It is important to establish HR policies and procedures that comply with Malaysian labour laws. This involves creating an employee handbook and outlining procedures for issues such as performance management and employee grievances.
Step 8: Provide employee benefits.
Finally, employers in Malaysia must provide their employees with benefits, including medical insurance, paid time off, and retirement contributions. These are not only required for compliance with Malaysian labour laws, they can also help to attract and retain employees.
Converting contractors to employees without a legal entity: five steps
Companies without a legal entity in Malaysia can still convert their contracted workers to regular employees by working with a Professional Employer Organisation (PEO) that offers employer of record (EoR) services. In this arrangement, the EoR acts as the legal employer of the employees in Malaysia, taking responsibility for the payroll, benefits, and compliance functions. Here are the steps to follow:
Step 1: Choose a PEO with the capacity to act as an Employer of Record
The first step is to choose a reputable PEO that can help navigate the legal and regulatory requirements of employing workers in Malaysia. The PEO should have a verifiable track record, experienced local staff, and a deep understanding of Malaysian labour laws and regulations.
Step 2: Provide information about the contractors
It is essential to provide the PEO with information about the contractors transitioning to employees, such as their names, addresses, social security numbers, and job titles.
Step 3: Notify the contractors
It is important to ensure that the employees are fully informed about the reasons behind their transfer and how it will affect their employment. Additionally, employers should also highlight the advantages of the transition, like gaining access to health insurance and other benefits.
Step 4: Convert contractors
The PEO will convert the contractors to employees and manage the paperwork and legalities involved in converting the contractors to employees.
Step 5: Monitor progress
The last step is to monitor the progress of the employees’ transition and communicate regularly with the PEO to ensure that everything is running smoothly.
How Acclime can help
Converting contract workers to employees in Malaysia can offer multiple benefits for both the employer and the employee, but it can be a daunting task given the country’s strict labour laws and regulations.
One way to streamline the process of converting contractors to employees in Malaysia is to work with a Professional Employer Organisation (PEO) such as Acclime. Acclime can act as the legal employer of record for your workforce, administering their payroll and benefits and mitigating the risks associated with employee relations. All this allows you to focus on your core business operations. Working with a reputable PEO like Acclime can also enhance your credibility with employees, customers, suppliers, and investors, as it demonstrates your commitment to compliance and ethical business practices. PEO offerings are just one part of our full suite of our business services. Contact the Acclime team in Kuala Lumpur to learn more about how we can help with all of your business needs in Malaysia.
Acclime is Asia’s premier tech-enabled professional services firm. We provide formation, accounting, tax, HR and advisory services, focusing on delivering high-quality outsourcing and consulting services to our local and international clients in Malaysia and beyond.