law of employment act in malaysia

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Last updated: August 15, 2019

Salary and Wages in Malaysia by Rohayu Abd. Ghani Rasidah Arshad Fazli Idris Rozhan Othman Noreha Halid June M.

L. Poon Ayu Trisna University Kebangsaaan Malaysia, Bang’, Selangor This paper discusses the compensation practices in Malaysia against the backdrop of the legal framework for wage and salary deterinatio n. It also exa mines the Malay Sian labo ur mark et situation a nd trends in salary and wage administration together with the role of unions in compensation determination. INTRODUCTION Malaysia is a country of more than 20 million located at the southernmost tip of mainland Asia.Besides being a leading exporter of commodities such as natural rubber, tin, palm oil, timber, petroleum, and natural gas, Malaysia is also one of the world’s leading exporters of electronic semicond uctors, roo m air-cond itioners, and a udiovisual e quipmen t. Prior to July 199 7, Asia was seen as a region exemplifying success in economic growth and development. Between 1991 to 1996, the Malaysian econom y grew at an ave rage rate of m ore than 8% .

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Howev er, Mala ysia could no t shield itself from being negatively impacted by the 1997 Asian Financial Crisis where the nation suffered a 7. c ontraction in its Gross D omestic P roduct (G DP) in 1 998. In 2000, M alaysia had a workforce (defined as persons between 15-64 years old) of slightly above 9 million. About 60% of the workforce were below 35 years of age.

Union members accounted for about 8. 15% of the labour force. Unemployment was reported at 3% of the labor force, and foreign workers accounted for one out of every seven jobs (Malaysia 1996-1998, 1996 This scenario shapes the Malaysian labour market condition. Until 1997, the salary and wage rate in the country had experienc ed a significant g rowth.Th is was a esult of the rapid econom ic growth and near p erfect emp loyment. T his paper will discuss the salary and wage practice in Malaysia. It will begin by describing the legal framework for wage and salary determination.

It will then describe the Malaysian labour market and trends in salary and wage administration in the country. An examination of the role of unions is also included. LEGAL PROVISIONS ON WAGE AND SALARY DETERMINATION The legal framework for salary and wa ge payme nt in Malaysia is governed by the payments made to employees for their contract of service.

The following payments, owever, are no t included as part of wages: The value of any house accomm odation, the supply of any fo od, fuel, light or water, and medical attendance. Contributions paid by employers on their own account to any fund or scheme established for employee s’ benefit or welfare including pension fund, provident fund, superannuation scheme, retrenchment scheme, termination scheme, layoff scheme, retirement scheme, and thrift scheme. Traveling allowance or the value of any traveling concession.

! Any sum payab le to emplo yees to defray s pecial exp enses entailed on them by th e nature of the ir employm ent.Under the Act, payment of wages must be mad e no later than the 7th day after the last day of a wag e period. A wage period mu st not exceed one mon th, and unless this period is specified in a contract of service, it is deemed to be one month.

That is, employees are paid at least once a month. Employers, however, may pay wages at shorter intervals, say once a w eek or on ce every two weeks. The Act specifies that when an emplo yer terminates an employee without notice, the wages owing to the employee must be paid no later than the day the service is terminated.If it is the employee who terminates the service without notice, payment ust be made within 3 days from the day of such termination. If termination is with notice by either the employer or employee, wages must be paid by the end of the notice period. The Employment Act does not govern every aspect of wages. For example, wage rates or levels are not regulated by the Act but are determined through negotiations between an employer and an employee or, in the case of unionized companies, between the representa tives of the company and the trade union.However, wage determination for some employees, such as hotel and restaura nt workers, ar e subject to the minimum wage requ irements of the Wage Councils Ordinan ce 1947 .

Malaysia’s Industrial Co urt and Ind ustrial Arbitratio n Tribun al, in some of their judgments, have indicated some factors that should be considered in determining wage rates and wage levels. In one Industrial Court case, the Court determined that in fixing wage levels, employers should (a) com pare their wage levels with that of sim ilar or related industries; (b) consider whether their wage levels are fair, giving due meet such wage levels.In another case, the Industrial Arbitration Tribunal stated that due consideration should be given to the following factors in determining wage and alary levels and increases: (a) the cost of living, (b) the wag es and salarie s paid by co mparab le establishme nts in the same region, (c) any inconsistencies in the wage and salary structure of the comp any itself, and (d) the financial capacity of the company to institute wage and salary increases.In addition, the T ribunal op ined that emp loyers should consider fac tors such as lab or prod uctivity, prevailing wage rates in similar industries in the same region and the present economic condition as well as the future prospects of the industry in determining wage levels (Ayadurai, 1985). EMPLOYMENT TREND IN MALAYSIA : 1990-1999 The rapid economic growth in Malaysia between the period 1990-1999 was accompanied by a shift in labor force utilization in the country. One noticeable shift was the reduction in the percentage of the work force employed in the agriculture sector.Data published by The Labor Force Survey Report 1999 by the Department of Statistics shows that certain sectors experienced significant changes in their share of total employment between 1990-1999 (refer to Ta ble 1). The percentage of people employed in the agriculture, forestry, livestock and fishing industry dropped from 26% of the total national employment in 1990 to 18.

% by 1999. The biggest increase was experienced by the manufacturing sector, which saw its share of total employment rise from 19. 9% in 1990 to 22. % in 1999 .

Major increases we re also experienced in the construction sector and the sectors c lassified as financial, insurance, real estate and business services. The property boom during this period led to the increase in the percentage of people employed in the construction sector. The growth in this sector needed to be supported by the fin ancial service sector which explains the increase in the finance, insurance, real estate nd business services sector. Table 1: Pe rcentage o f Employme nt Accord ing to Sectors.Sector 1990 1995 1999 Agriculture, forestry, livestock and fishing 26 20 18. 4 0. 4 0. 6 Manufacturing 19.

9 23. 3 22. 5 Electricity, gas and water 0. 7 Construction 8. 0 Wholesale, retail, restaurant and hotel 18.

2 17. 9 18. 8 Transport, storage and communication 4. 5 4. 8 Finance, insurance, real estate and business services 3. 9 5.

3 Community, social and personal services 20. 3 21. 1 THE MALAYSIAN LABOR MARKET . The main labor markets in the country are located in the major industrial areas (refer o Table 2).

The Klang Valley is the biggest ind ustrial area in the c ountry and c overs Ku ala Lumpur, the capital city, and the neighboring towns of Petaling Jaya, Shah Alam and the port town of Klang. These three towns are located in the state of Selangor. The Klang Valley Periphery covers areas in Selangor outside the Klang Valley, as well as the neighboring states of Negri Sembilan and Melaka.

The industrial areas in these states have be en developed mainly in the last 10-15 years. At the southern tip of peninsula Malaysia is the JB industrial area. JB is the acronym for the own of Johore Baru which borders Singapore.Many Malaysians in Johore Baru work in Singapo re. As such, the labor mar ket conditio n here is affected by the conditions in Singapore. In the northern part of the country are two major industrial areas.

The first is Penang, which is one of the oldest industria I areas in the country. This covers the Penangisland and the adjacent area on the peninsula. The second industrial area is the No rthern Plains, w hich cover s the states of Pe rak, Ked ah and P erlis which borders Thailand. Like the Klang V alley Periph ery, this area was developed in the last 15 years.The last major labor market is the east coast of Malaysia.

This is a new area and is expected to be the nex t growth area. This area is also a major oil producing area and is home to man y petrochemical plants. Area Klang Valley Klang Valley Periphery Northern Plain Penang Table 2: A reas in the M aJor Labo r Mar kets. Cities and states Kuala Lumpur and its suburbs Parts of Selangor and the states of Negri Sembilan and Melaka State of Johore States of Kelantan, Terengganu and Pahang States of Kedah, Perak and Perlis Island of Penang and adjacent areas on the mainland.FACTORS AFFECTING SALARY LEVELS IN MALAYSIA Several factors have b een identified as contributin g to the increa se in pay offered to employees in Malaysia. The tight labor market is a major factor causing the increase in pay among occupations.

In the JB area, the close proximity to Singapore and the increased mobility of workers create a condition whereby companies in the area have to comp ete with Singaporean co mpanies for M alaysian workers. Tight Labour Market Malaysian employers compete for the same number of workers. As more foreign investments flow in, more Jobs are being created.For instance, in the production related sector alone, an increase of 5 7. % n ew Jobs w as reporte d in 1996 (Seventh Malaysia Plan, 1996). Foreign investment under the Sixth Malaysia Plan (1990-1995) was RM80 billion, and under the cu rrent Seven th Malaysia Plan (19 95 – 2000) is expe cted to reac h RMI 20 billion. A Ithough the government has encouraged the intensive use of modern technology in exchange for human labor, the dependence on labour still con tinues.

Table 3: Registered Job Seekers W ith the Manpow er Department.Year Active Job Seeker New Registrants 1991 1992 1993 1996 1997 54,387 50,199 42,344 31 ,617 26,445 25,546 21 ,688 23,762 11,939 9,214 9,128 8,596 7,524 897 9,127 NA: Not available An indication o f the tight labour m arket is reflected in the consecutive reduction in the number of Job seekers. The number of active Job seekers registered with the Manpower Department dropped from 54,387 in 1990 to 23762 in 1997 (Siaran Perangkaan, 1998: 27). The number of new Job seekers also dropped from 11,939 to 7,524 in 1995 and increased slightly to 9,127 in 1997 (refer to Table 3).Proximity to Singapore Singapore offers comparatively higher salaries than its neighbors. The attractive salary offered has attracted a considerable number of Malaysians to work there. Malaysian employer s in the JB are a not only hav e to comp ete with their Mala ysian counter parts for wo rkers but also with Singapo rean emp loyers. Singapore currently employs about 200,000 Malaysians of whom 50,000 commut e daily to the island rep ublic (New Straits Time, May 24, 1997).

The fgure represents about 13% of the total work force in Singapore.Those who commu te daily to work in Singapore are able to gain the benefit of a higher pay in Singapore while at the same time enjoy the lower co st of living in Ma laysia. Most Malaysians work in the ma nufacturing, construction and service indu stry.

In August 1996, the Singaporean government decided to exempt foreigners from contributing to the Central Provident Fund (CPF). The contribution is a compulsory deduction from the employee’s pay, which is kept in a retirement fund. This decision exemption will give Malaysian workers in Singapore a bigger take home pay and make it more attractive to continue working there.However since the economic slowdown affecting the region has a Iso affected S ingapore , it is unlikely that more M alaysians will b e able to seek employment in the republic. Given Singapore’s emphasis on the high-tech sector, new Job creation will be mainly for professionals nd engineers. Influx of Foreign Labor Until 1997, Malaysia was a major importer of foreign workers. It was reported that the number of legal foreign workers was 750 ,OOO in 19 94 and th e number of illegal worke rs was 500 ,OOO. In 1 996, the nu mber swe Iled to about 900,000 legal workers and one million illeg al workers (F ernz, 199 7).

The e conom ic slowdown has caused the country to review its policy of depending on foreign workers. Malaysia has pursued a more active policy of repatriating illegal workers since 1998. Although the general perception is that foreign wo rkers cost less, the Federation of Malaysian Manufacturers ( FMM) disagrees (Yeow, 1997). Employers have to incur various costs such as preparing paper work before getting the required approvals from the relevant authorities and pay high levies to the government before they can hire foreign workers.T he FM M exp lained that relian ce on foreig n workers d oes not in any w ay reduce th e cost to em ployers. T he number o f skilled foreign p rofessionals a nd expatria tes has also incr eased du e to the increa se in foreig n investments and a shor tage of M alaysians who can fill professional and managerial positions.

According to the Director of Employment Pass and Foreign Labor Division of the Immigration Department, a total of 29,958 expatriate posts were approv ed in 199 6 as com pared to 1 4,991 p osts in 199 5 (The N ew Straits T imes, Ma rch 7, 199 7).As mentioned earlier, the view that the use of foreign workers is less costly and may moderate salary level has limited truth. Among the blue collar laborers the cost of foreign workers is not necessarily lower. As for professional and managerial positions, the u se of expatria tes is more co stly and provides a higher ceiling by which Malaysians compare their salary. Even then, this impact is limited to only certain employm ent categories.

Increased M obility of M alaysian W orkers Work ers in urban a reas such as the Klang V alley, Penan g, and the JB area are pa id better than th Ose workin g in the rural areas.As an example, a salary survey by the Malaysian Employers’ Federation in 1996 showed that the average monthly salary of top executives in Penang is RMI 4,268 T his is about the same as the average salary of top executives in JB (RMI 5,05 0). These amounts are far above the average sa lary of top exe cutives in the E ast Coast wh o were pa id RM9 ,400 or th e Northe rn Plain ho were paid RMI 1,034.

The salary differences between various parts of the country attract people to areas offering a higher rate. Malaysian workers have a tendency to move to those high- paying areas.According to a Department of Statistics report, Selangor, which borders the highest number of internal migrants (Re port on M igration 19 95, 199 6).

Internal m ‘grants refer to 10 cals migrating w ‘thin the country. The data also show a similar trend with most of the internal migration in Malaysia being from other areas to the major industrial areas. This has the effect of raising the salary of workers in the ewer industrial areas. In the long term, one can expect salary differences between the industrial areas in Malaysia to become smaller.

COMPARISON O F MANAGERIAL SALARY FOR SELECTED AREAS FOR 1994-1996. A survey by the Malaysian Employers Federation (MEF) found that on average the salary given to e mployees in managerial positions (i. e. from executives to the top mana gers) has incre ased substa ntially during the period of 19941996 (M alaysian Em ployer Fed eration Co mpensatio n and Sala ry Survey, 19 96). 1 This salary increase was experie nced by em ployees at all m anagerial leve Is during this period (re fer to Tab le 4).

A number of distinct trends can be noted from the data.It can be seen that the largest salary increase was experienced by positions in the JB and Klang Valley Periphery area. The Northern Plain area also saw large increases for top management positions. The large increase in JB can be attributed to the competition from Singapore.

Many Malaysians are attracted by the higher pay in Singapore, which is only about a half an hour drive from JB. The Klang V alley Periphery and Northern P lain consist mainly of relatively new industrial areas and upward adjustments in the salaries are needed to attract expe rienced m anagers to m ove to hese areas.It can also be due to th e need to reduce the attraction of opportunities elsewhere for their senior and top manage rs. Table 4: Percentage Salary Increase for Selected Positions According to Region Between 1994-1996 -rop Senior Middle Executives Managers 18. 9% 15.

5% 12. 4% Periphery 50. 3% 26.

9% 26. 2% East Coast 67. 6% 6% 56% 59% 42. 8% 45.

5% 6. 7% 57. 5% 40. 4% 2.

2% 6. 8% 10. 1% 0. 9% 3. 5% 18. 7% Source: Malaysian Employers Federation Compensation and Salary Survey 1996 Table 5: Overall Percentage Salary Increase For Selected Positions From 1994-1996 Top 1994 to 1995 1995 to 1996

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