Hiring independent contractors can be a great way to take on short-term specialists as necessary to complete a specific project. In particular, hiring contractors internationally opens your business up to a new world of talent. Independent contractors in Malaysia are no exception, with companies in the tech and service industries standing to benefit particularly. However, how ready are you to hire and pay contractors in Malaysia in line with all necessary local regulations?
This article will give you the essential information you need to know on defining and safely hiring contractors in Malaysia. We’ll also give you tips on the best ways to pay contractors in Malaysia without worrying about contractor misclassification issues.
How Do Definitions Differ for Employees and Independent Contractors in Malaysia?
Malaysian labor law provides a straightforward definition to separate employees and contractors in the country. In effect, employees are those hired with a “contract of service,” while contractors are those engaged with a “contract for service”.
What this means is that according to Malaysian labor law, employees are those hired through an employment agreement to perform general services to a company. Companies pay employees each month, organize most aspects of their job, including their work hours and methods, and provide all the equipment needed to do the job.
On the other hand, contractors do specific tasks, typically on a project-by-project basis. Contractors provide their own equipment and set their own work schedules. As a result, companies pay contractors in Malaysia based on specific goals as outlined in the contractor work agreement signed between the contractor and company.
Because of this distinction, contractors in Malaysia do not have the same benefits or protections as employees, including protections against unfair dismissal or different forms of paid leave.
Contractor Misclassification Risks in Malaysia
As it is possible to save on employer costs by treating contractors as employees while paying them as contractors, some companies may run the risk of committing contractor misclassification.
However, companies caught doing this in Malaysia face severe financial and even criminal repercussions. This is seen as both depriving the worker of employee benefits and the state of funding because of unpaid tax and social security contributions.
There is no single test for defining misclassification in Malaysia. Rather, judges will decide on a case-by-case basis.
Should authorities investigate a company and find them to be wrongly hiring contractors and treating them as employees, the company may be subject to the following:
- Payment of all back salary, taxes, and social security for up to 2 years
- Fines of MYR 200 to MYR 40,000
- Investigation for fraud or tax evasion
- Possible criminal charges which can result in jail time of 6 months to 3 years
- Future restrictions to opening businesses or hiring workers leading to a loss of reputation and increased difficulties in performing business operations in Malaysia
That’s why signing a contractor work agreement before beginning any working relationship with a contractor is essential. This work agreement will clearly outline both parties’ responsibilities and limitations and provide details on how your company will pay contractors in Malaysia.
You can avoid potential difficulties by defining the relationship clearly at first and continuing to check employment laws as they are amended to work with contractors compliantly.
Which are the Benefits and Employment Laws That Relate to Contractors in Malaysia?
Laws around employee benefits in Malaysia only apply to those who meet minimum thresholds for “employment.” As contractors do not meet these thresholds, they are not eligible for the same benefits or protections (like overtime pay or paid leave) as employees.
How Do Malaysian Taxes and Other Labor Rates Relate to Paying Contractors in Malaysia?
Since independent contractors in Malaysia are typically their own bosses and are responsible for preparing and submitting their own taxes, employers do not have to withhold taxes or make additional social security contributions.
This may save your company money in labor costs, but it comes with less control over how a contractor performs their job.
International companies may still have to perform additional procedures when they hire or pay contractors in Malaysia. For example, US companies who work with and pay contractors in Malaysia must fill out a W-8 BEN form for each contractor they pay. It’s essential to check first if your country of operation has similar rules when hiring international contractors.
How to Hire and Pay Contractors in Malaysia: 4 Potential Ways to Pay Contractors in Malaysia Safely
Even though you can also use them to pay employees, it is possible to pay contractors in Malaysia via direct deposit or wire transfer. This can be done once or regularly depending on your work agreement and payment schedule.
While doing this, be sure to keep contractor payments separate from other more regular payments. Also, remember that you cannot withhold taxes or social security contributions from clients as you would from employees.
While checks used to be common forms of payment for most contractors, they are now far less common because of the possibility for bouncing.
If you’re paying a contractor in Malaysia, consider other choices unless a contractor specifically requests checks. Checks are more likely to be lost and take longer to complete than electronic payments, leading to dissatisfied contractors.
PayPal or Other Online Payment Systems
Because of its high fees and the rise in other online businesses which manage electronic payments, PayPal’s popularity has declined substantially over time. However, similar internet payment methods remain quick and easy ways to pay contractors in Malaysia.
Payroll Services and Outsourcing Support Systems
There are third-party systems and payroll partners which are specifically designed to pay freelancers and independent contractors on time and following all applicable local laws. These options include PEOs (Professional Employer Organizations), umbrella firms, and EOR (Employer of Record) services.
By partnering witch this type of provider you can avoid the complications of compliance assurance in unfamiliar markets, while also benefitting from a more stable form of worker relationship.
What You Can Do to Safely Convert Independent Contractors in Malaysia into Employees
Suppose you have found a contractor that perfectly complements your current business and want to keep the relationship going in the long run. In that case, it can be worthwhile to consider turning them into full-time employees.
Due to the need to prevent the relationship from becoming tainted, this can be a delicate operation to perform safely. You might also need to provide the contractor with extra reasons for giving up the freedom that comes with freelancing, thereby increasing the cost in addition to also paying employer taxes.
An organization that will pay contractors in Malaysia might find that moving the employee to an employment arrangement with guaranteed payment is more economical for both sides in the long term.
Once you’ve agreed on an employment contract that works for both of you, you both must understand every aspect of how your business partnership will transform into an employment one. It is best to offer more incentives and devote more time to reintroducing them to your business to ease the contractor through the transition into an employee.