How to hire and pay independent contractors in Malaysia

The rapid changes in communications and technology over the past decades have made it easier than ever for companies to grow internationally. With its highly skilled workforce, particularly in the tech and digital services sector, Malaysia has emerged as a prime hotspot for employers who are looking to hire in the Asian markets. 

To start hiring independent contractors in Malaysia, you should have an understanding of Malaysia’s labor laws and tax practices. You also have to manage international contractor payments and classify your workers correctly to avoid misclassification.

Before you work with independent contractors in Malaysia, there are some key things to consider, including employment laws and tax obligations. This guide will cover everything you need to know about onboarding and paying independent contractors in Malaysia. 

What are the labor laws in Malaysia?

When employing workers in Malaysia, you have to consider Malaysian labor laws, which are governed by the Employment Act 1955. It defines the rights and protections for Malaysian workers, including working hours, holiday pay, overtime rates, and sick leave entitlements.

The Employment Act only applies to certain kinds of workers, including:

• Employees whose monthly salary is lower than RM 2000 (about $448)

• Employees who are engaged in manual labor 

• Employees who supervise those involved in manual labor

• Employees who are engaged in the operation of mechanical vehicles

• Employees who work on a vessel

Some specifications of this law include:

• Minimum wage of RM1,500 (about $336) per month 

• Working hours of no more than 48 per week, with a maximum of 8 hours per day and 6 working days per week

• Overtime rate of 1.5 times the normal hourly rate

When you’re hiring from Malaysia, you have to establish clear communication with your workers immediately — as early as possible in the hiring process. Being clear about the type and amount of work they will be doing, how their work will be structured, and how they will be paid for it, is vital. 

Clear expectations make for a smoother employment relationship and help you reduce the risk of any possible legal issues. Documentation of the relationship is also essential. You’ll have to provide your employee with an offer letter, an employee handbook and an employment contract that outlines working hours, wages, holidays, leaves, benefits, probationary period, notice period for termination, and company rules.

Your independent contractors are self-employed individuals who are not protected by Malaysian labor laws, nor are they entitled to benefits.

What are the risks of misclassifying Malaysian independent contractors as employees? 

In Malaysia, an independent contractor is defined as someone who engages under a “contract for services,” whereas an employee is someone who engages under a “contract of service.” The difference between these contracts (although they sound nearly identical) comes down to the amount of control the company has over the worker.

There are specific Malaysian laws that offer more protection to employees than to contractors. For instance, if an employee is terminated in Malaysia, the Relations Act 1967 allows them to claim unfair dismissal. An independent contractor does not have this right. 

Misclassification may be intentional or accidental. If you intentionally misclassify a worker, the consequences may be more severe. However, even an unintentional misclassification can be detrimental to your company.

In general, the repercussions may include the following:

• Regulatory fines

• Business penalties and bans

• Compensation for lost wages and benefits

• Lawsuits

Misclassification may also lead to intellectual property protection issues. For instance, if your worker's classification is challenged, you may be unable to legally own your IP, and this could lead to costly, damaging legal proceedings. 

Our guide on employee and independent contractor misclassification dives deeper into this topic, further outlining the risks and how to correct misclassification. 

Remote is here to help you out and avoid misclassification risks. You can use our contractor management and payroll services to ensure that all of your workers are properly classified and receive fair treatment. Our expert team has an in-depth understanding of IP laws, and they can support you to remain fully compliant.

How do I pay an independent contractor in Malaysia?

There are a few different ways to pay your independent contractors. To avoid confusion, it's good practice to mutually decide on a payment method beforehand and specify it in your contractor agreement. You can then pay your contractors directly once after they submit an invoice to you. Some popular methods for paying an independent contractor in Malaysia include:

• Bank transfer

• SWIFT transfer

• Online payment platforms (Wise or PayPal)

These methods often include a transfer fee and high currency exchange rates. Alternatively, you can use Remote’s payroll service to help you simplify the process of your paying your contractors. With Remote, you can pay contractors anywhere in the world seamlessly — with reduced risk and complexity. 

If you need guidance on managing your international payroll process, check out our International Payroll Processing guide.

Tax and compliance practices for hiring independent contractors from Malaysia

Employers don't have an obligation to withhold taxes, as independent contractors in Malaysia are responsible for filing and submitting their own tax returns.

If you are a US company hiring contractors in Malaysia, you will need to obtain the W-8 BEN Form from each contractor and submit it to the Internal Revenue Service (IRS). You also need to collect the W-8BEN-E Form if your contractor bills through their own entities. There's also Form 1042-S which summarizes your contractors’ income and any taxes that are withheld and Form 1096, which serves as a cover sheet for your information returns (such as the 1042-S form). Keep in mind that you don't have to submit forms 1099 or 1096 for contractors in Singapore who are not US citizens or residents.

It can be challenging to file these tax forms, especially when you are working with several international contractors. Fortunately, Remote’s features can make tax compliance for US companies easier. When your contractors are onboarded through the Remote platform, they will be directed to fill and upload the relevant forms — making tax compliance a breeze.

How do I convert an independent contractor in Malaysia to an employee?

There are some benefits of hiring an employee over an independent contractor for both parties involved. For instance, employees will typically cost you less to manage than independent contractors. Hiring employees also allows more protection of your company’s intellectual property. 

Employees, contractually, are expected to stay with the company longer. It helps you retain and engage talented workers, around whom you may have built important elements of the business. 

If you decide you want to convert your contractor to an employee in Malaysia, it will involve creating a new contract. You’ll also have to figure out tax payments, offer benefits, and set up a reliable payroll process. Converting a contractor to an employee can be a complicated process, but Remote can make the conversion process simple.

The best way to hire international contractors in Malaysia

Once you've decided to hire contractors in Malaysia, you have to take precautions to ensure your company is protected legally. This starts with a preliminary understanding of Malaysian labor laws, tax and compliance practices, and other hiring policies. Misclassification of either an employee or remote contractor exposes all parties to potential risk. 

If you’re new to hiring a remote workforce or if your business lacks an HR or legal team to guide you, we have the ideal solution for your needs. You see, Remote’s contract management system has been designed to save you the time and hassle of hiring and paying contractors abroad. With Remote, you can:

• Use our customizable contracts to onboard contractors in minutes 

• Automate payments and invoice approvals quickly

• View and manage all your contractors in one place

• Stay compliant with Malaysian employment laws and tax practices

Learn more about how you can hire international contractors compliantly with Remote. Or sign up now and start onboarding contractors in minutes.