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16 February 2023
Tapestry
Alert – Malaysia
Salary
deductions – restrictions expanded
Dear
Client
Recent changes to employment
legislation in Malaysia mean that the approval of the Director
General of Labour (DGL) is now required for an employer to make
deductions from an employee’s salary to pay contributions towards
an employee share plan.
Background
Under the Malaysian Employment Act (the Act), an employer is only
permitted to make specified lawful deductions from the wages of all
employees. The Act exempts additional specific deductions
which can be made at the written request of the
employee. In all other cases, the permission of the DGL is
required prior to making any salary deductions. Before the recent
amendments, the Act only applied to employees whose wages were below
MYR 2,000 (around GBP380) per month or who worked in manual
labour. Given this limited scope, the Act usually did not
cover participants in global employee share plans and consequently
no DGL approval was required for salary deductions for contributory
share plans.
Amendments
to the Act
Following wide ranging amendments to the Act, which came into
effect on 1 January 2023, the scope has been extended to cover all
private sector employees who enter into a service contract with an
employer. As a result, the Act now applies to participants in
global share plans who would not previously have been caught by the
salary deduction restrictions.
Employee
share plans
As noted above, the Act includes exemptions for specific
deductions which can be made at the request of the employee and
without the need for approval from the DGL. One of the
specific deductions is in respect of payments for shares in the
employer’s business. Unfortunately, this exemption has been drafted
and construed very narrowly and only applies to shares in the
actual employer, which is usually the local entity rather than the
parent company. In the view of local counsel, this exemption
cannot be relied upon for deductions to make payments for shares in
the parent company, meaning companies will need to re-evaluate the
operation of share plan related salary deductions. The Act
provides for employers to apply to the DGL for approval to make
salary deductions for a purpose that is not otherwise permitted
under the Act. It would be theoretically possible to apply for
a general approval to extend this exemption to cover
offers made by a parent company to purchase its shares.
However, it is not possible to say how long it would take to get a
response or whether the response would be favourable.
What can
companies do now?
Unless the exemption is extended to cover a foreign share plan, for
companies offering contributory share plans in Malaysia, the
choices are suddenly more restricted. The local employer can
apply for permission from the DGL to take deductions in respect of
payments to a third party on behalf of the employee, which would
include payroll deductions under a share plan offered by a parent
company (this is different from an application to extend the
exemption, as discussed above). This is a potentially lengthy
process and requires an application to the employer’s local Labour
Department branch (or each branch if there are multiple employers).
The employer will be required to complete a prescribed application
form and file detailed documentation. A response is likely to take
at least 10 weeks. An alternative is for the employee to make the
contribution directly to the company once they have been paid,
either by setting up a standing order or a direct debit.
Date of
implementation
The amendments to the Employment Act came into force on 1 January
2023.
Tapestry
comment
This is a
surprising change and seems to go against the general trend to
simplify the process for employees to participate in employee share
plans. For example, Singapore recently removed the requirement
to obtain regulatory approval for salary deductions. It is
disappointing to see Malaysia move in the opposite
direction. As the Employment Act includes a specific exemption
for employee share plans, it is particularly frustrating that the
exemption is considered not to apply to employee share plans
offered by foreign companies to employees in
Malaysia. Although we can all understand the desire of
regulators to protect employees from fraudulent or unscrupulous
behaviour, making it more difficult for companies to include
Malaysian employees in global share plans is unfortunate. We hope
that the DGL will consider extending the share plan exemption to
include offers to Malaysian employees under global share plans.
If you want to discuss any of the points above or want help with
your share plans or other incentive arrangements, please do contact us.
Rebecca
& Sharon
 
Rebecca Perry
Sharon Thwaites
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