Hiring Employees in Malaysia Without Setting Up a Company

Starting a legal entity in Malaysia can be a time-consuming and expensive process. However, if you’re mainly looking to hire employees in the country to outsource back-office or customer support operations, there are other options.

This guide will walk you through the most common options for hiring employees in Malaysia that allow you to bypass the need for setting up a local legal entity.  

Key Considerations Before Hiring in Malaysia

The Employment Act of 1955 (EA) is the primary legal framework governing employment in Malaysia. It outlines the rights and responsibilities of both employers and employees and establishes minimum standards for various employment conditions. This includes wages, working hours, overtime compensation, rest days, and termination processes.  

As an employer, you are also obligated to contribute to statutory benefits: 

• Employees Provident Fund (EPF): Compulsory retirement savings scheme for private sector employees in Malaysia. Provides long-term savings for retirement, potential returns on investments, and allows withdrawals for housing, education, and emergencies.
• Social Security Organization (SOCSO): Offers social security protection, including medical benefits, disability benefits, and employment injury benefits. Covers work-related injuries, disabilities, and death benefits, providing financial assistance to employees and their families.
• Employment Insurance System (EIS): Provides temporary financial support to employees who lose their jobs due to redundancy or similar reasons. Both employers and employees contribute 0.2% of the employee’s monthly salary

Here’s an overview of the contribution per month:

Methods for Hiring Without a Legal Entity

Partnering with a Professional Employer Organization (PEO)

A PEO in Malaysia is a service provider that co-manages human resources and administrative tasks with your company. The keyword here is “co-manage”, so instead of having a completely different legal entity in Malaysia to manage your employees, you enter an agreement with a PEO and retain legal responsibility for its employees and control over HR-related decisions. 

While PEO can be useful for large multinational companies that require back-office functions such as IT support, customer service, or accounting, It is common for employees to feel a disconnect or dissatisfaction due to the perceived loss of personal HR support. This can potentially impact morale and engagement within the organization. 

There is also a higher risk in data security, as your sensitive employee information is handled by a third-party organization. 

Hiring Independent Contractors in Malaysia

Independent contractors or freelancers in Malaysia are self-employed individuals who provide services under a contract. They operate independently with control over their work, hours, and schedule. Unlike formal employees employed directly by a PEO or an Outsourcing firm, independent contractors are responsible for their own taxes and insurance. 

Hiring independent contractors offers flexibility and specialized knowledge. You can access expertise on a project basis without the long-term commitments of traditional employment. Keep in mind that you will generally retain less overall control over a project than through a traditional employment contract.

Thus, Independent contractors are better suited for short-term or seasonal operations since they can be difficult to scale. Furthermore, independent contractors often have multiple contracts with different clients and take away focus from your operations. 

Employer of Record (EOR): a Faster alternative to setting up a legal entity

An Employer of Record (EOR) is a third-party organization that serves as the legal employer for workers on behalf of your company. It assumes full responsibility for employment-related tasks, including compliance with local labor laws, payroll processing, tax filings, and employee benefits administration. Here are the core functions of an EOR:

• Employment Contracts: drafts and manages compliant employment contracts that adhere to Malaysian labor laws, ensuring that all necessary legal terms are included.
• Payroll: handles payroll processing, ensuring employees are paid accurately and on time while managing deductions for taxes and other contributions.
• Tax Filings: responsible for calculating, depositing, and filing taxes related to employment, ensuring compliance with local tax regulations.
• Compliance with Labor Laws: ensures that hiring practices and employee management comply with Malaysian labor laws, protecting you from potential legal risks.
• Social Security Contributions: manages contributions to social security for your employees in Malaysia including Employee Provident Fund (EPF), Social Security Organization (SOCSO), and Employee Insurance System (EIS).

RecruitGo’s Employer of Record (EOR) service o also accelerates the hiring process by allowing you to onboard employees quickly without the delays associated with setting up a legal entity. This enables you to scale your workforce according to demand while maintaining focus on your core business activities rather than administrative burdens. 

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FAQs About Hiring Employees in Malaysia Without Setting Up a Company

The timeline to set up a company in Malaysia can vary depending on the type of legal entity and the complexity of the organization. For a limited liability company, the process includes proposing a corporate name (approximately 24 hours), gathering necessary documents (2-3 days), submitting registration forms (1 day), and the issuance of a digital incorporation certificate (1 day).

However, the Companies Commission of Malaysia (SSM) needs time to process and approve the application, which can take 1 to 3 months. Once all required documents are submitted and in order, the company registration process takes approximately 14 working days.

Using an Employer of Record allows you to avoid substantial costs typically associated with establishing a local entity in Malaysia. These include expenses related to the entity setup, local administration, and legal fees. That way, you can access the Malaysian labor market while keeping overhead costs low and avoiding unnecessary penalties with legal compliance.

RecruitGo EOR service conducts a needs assessment to understand your company’s hiring requirements, including the critical roles and head count. Once an agreement is reached, the EOR will then start the recruitment process. 

We will be responsible for drafting employment contracts that comply with local labor laws and manage the onboarding process, which includes setting up payroll and administering employee benefits.

Once employees are onboarded, RecruitGo will continue to manage all administrative tasks related to employment, such as payroll processing, tax deductions, and compliance with statutory contributions.