Employment Law: 5 Compulsory Statutory Contributions or Deductions

Introduction

In Malaysia, the monetary costs of hiring an employee are not merely confined to his or her monthly salary.

There are also other monthly contributions that an employer is legally obligated to contribute or to pay on behalf of the employee.

Such monthly contributions are also known as ‘statutory contributions‘ because they are provided in the statutes or the Act of Parliament.

Some of these contributions are to be deducted from the employee’s monthly salary and some are to be forked out by the employer. 

These statutory contributions are as follows:

1. EMPLOYEES PROVIDENT FUND (EPF)

This is provided under the Employees Provident Fund Act 1991 (Act 452) (‘EPF Act’).

According to Section 43(1) of the EPF Act, every employee (aged from 14 years old and up to 75 years old) and employer within the meaning of this Act shall be liable to pay monthly contributions on the amount of wages at the rate respectively set out in the Third Schedule (effective from 1 January 2019) (‘EPF‘).

“Wages” refers to all remuneration in the form of money paid by an employer to an employee under a contract of service or apprenticeship, which includes any bonus, commission or allowance payable by the employer to the employee, but does not include service charge, overtime payment, gratuity, retirement benefit, retrenchment, and lay-off or termination benefits, any travelling allowance or the value of any travelling concession.

An employer who fails, within the prescribed period, to make the said EPF contributions which he is liable under this Act to pay in respect of or on behalf of any employee in respect of any month, shall be guilty of an offence and shall, on conviction, be liable to

• imprisonment for a term not exceeding 3 years, or
• to a fine not exceeding RM10,000.00,
• or to both.

For wages exceeding RM20,000.00 for a particular month, the employee’s contribution rate shall be 11% of the total wages of the month, while the rate of contribution by the employer is 12% of the total wages of the month. Total contributions, including cents, shall be rounded up to the next ringgit.

2. SOCIAL SECURITY ORGANIZATION (SOCSO)

All employees shall be insured against certain contingencies via the Social Security Organization as provided under Section 5 of the Employees’ Social Security Act 1969 (‘SOCSO Act’).

The contributions payable to the organization in respect of an employee shall comprise of a contribution payable by the employer as well as a contribution payable by the employee, both at the rates as specified in the Third Schedule of the SOCSO Acts.

With effect from 1.1.2019, employers must make foreign worker contribution payments based on the Second Category for the Employment Injury Scheme under the SOCSO Act, according to SOCSO’s Employers’ Circular No. 3 Year 2018. The rationale was explained by the Minister in a news piece dated 12.1.2020 here.

Failure on the part of the employers to contribute their part or to contribute on behalf of the employees will result in

• a fine not exceeding RM10,000.00, or,
• up to 2 years of imprisonment, or
• both, as per Section 94 of the SOCSO Act.

3. EMPLOYEE INSURANCE SYSTEM (EIS) SCHEME

According to Section 16 of the Employment Insurance System Act 2017 (Act 800) (‘EIS Act’), all employees between the age of 18 and 60 years old and their employers must make the statutory contribution under the EIS Act, except for those employees who have reached the age of 57 before the coming into operation of the EIS Act.

Failure on the part of the employers to contribute their part or to contribute on behalf of the employees will result in the employer being

• fined a maximum of RM10,000.00, or
• up to 2 years of imprisonment, or
• both.

The authority had recently (on 24.12.2018) clarified that EIS Act is to provide coverage for Malaysians and permanent resident workers who lose their jobs here.

The latest EIS contribution rates can be found here.

Kindly refer to our earlier article: Employment Insurance System (EIS) Scheme in Malaysia on the purpose and how to make contributions in just a few clicks away.

4. SCHEDULAR TAX DEDUCTION or ‘POTONGAN CUKAI BERJADUAL’ (‘PCB’)

This is a monthly deduction from the employee’s salary by the employer to account for the employee’s annual income tax to the Inland Revenue Board (‘IRB‘). 

Upon finalization of the income tax payable by said employee by year-end, the IRB will inform the employee accordingly if there is any shortfall or excessive payment.

In other words, PCB is a system of tax recovery where the employer makes a deduction from the employee’s salary every month under a schedule according to section 107 of the Income Tax Act 1967 (Act 53). The said schedule can be found here.

5. Trade Union Subscription Fees or PTPTN loan repayment

At the request of the employee, there can be a monthly deduction from the employee’s salary by the employer to account on behalf of the employee, his or her trade union subscription fees or PTPTN loan repayment. 

For trade union subscription fees, such deduction is only lawful provided it was requested in writing by the employee, according to Section 24(3)(a) of the EA. 

For PTPTN loan repayments, likewise, such deduction is lawful provided it was requested in writing by the employee, according to Section 24(4)(c) of the EA.

Conversely, it is provided in the Perbadanan Tabungan Pendidikan Tinggi Nasional Act 1997 (‘PTPTN Act‘), under Section 29(1), that it shall be the duty of an employer (upon being notified in writing by the Perbadanan or Inland Revenue Board from time to time) to deduct on a  monthly basis from the salary of the recipient student such sum of money as the monthly amount of repayment.

Despite contradicting provisions between the EA Act and PTPTN Act in respect of PTPTN loan repayments, the good news is, the salary deduction under PTPTN Act is presently put on hold by the relevant minister as seen in:

https://www.thestar.com.my/news/nation/2018/12/07/iclr-ptptn-repayment-scheme-on-hold-says-maszlee/.

Latest Developments

EPF

Pursuant to the amendment made to the EPF Act by the Employees Provident Fund (Amendment to Third Schedule) Order 2018 which comes into effect on 1.1.2019, the employers’ contribution for those employees who above the age of 60 will be reduced to 4 % per month , whereas the employees’ contribution will be calculated at the rate of 0%. The said contribution rates can be found here.

According to the media stattement by EPF board dated 27.2.2020, the contribution rate for employees below 60 years old shall be reduced to 7% effective from 1.4.2020. However, employees may still choose to maintain the current contribution rate of 11% if they wish to do so. 

EIS

The implementation of the Employment Insurance System (Full Benefit) in view of replacing the Employment Insurance System (Interim Assistance) is a result of the introduction of the Employment Insurance System (Benefit and Re-Employment Placement Programme) Regulations 2018 made under Section 85 of the EIS Act, which comes into effect on 1.1.2019. The benefits under the new system include allowance claim for job search, early re-employment, reduced income, training and benefits to a dependent.

Under Employment Insurance System (Amendment of First Schedule) (No. 2) Order 2018 and deemed effective from 1.1.2018, the Employment Insurance System Act 2017 (Act 800) seems to be now extended to cover foreign workers with a valid permit or employment pass, which includes expatriates in Malaysia. Further clarification can be seen in paragraph 4 of the clarification dated 18.12.2018 issued by SOCSO.

SOCSO

According to Employees’ Social Security (Amendment of First Schedule) (No. 2) Order 2018 and with effect from 1.1.2019, employers who hire foreign workers with valid permit or employment pass, which includes expatriates in Malaysia, shall register their employees with SOCSO and contribute to the Employment Injury (EI) Scheme under the SOCSO Act.

Under the EI Scheme, the employers are obliged to make contributions on behalf of the foreign workers at the rate of 1.25% of their monthly wages, which shall be under the schedule of contribution under the SOCSO Act.

The foreign workers’ benefits under the EI scheme is inclusive of medical benefit, temporary and permanent benefit, dependent’s benefit, funeral benefit, constant-attendance allowance, and rehabilitation.

Further details on registration, contribution, and claims of the foreign workers’ benefits under the EI scheme can be found at 

https://www.perkeso.gov.my/index.php/en/perlindungan-perkeso-untuk-pekerja-asing

Useful links

EPF/KWSP

Kumpulan Wang Simpanan Pekerja,

Bangunan KWSP, Jalan Raja Laut,

50350 Kuala Lumpur

Website: http://www.kwsp.gov.my/portal/ms/web/kwsp/home

Tel: 03-8922 6000  

SOSCO/EIS 

Pertubuhan Keselamatan Sosial Malaysia 

Menara PERKESO,
No. 281, Jalan Ampang,
50538 Kuala Lumpur

Website: https://www.perkeso.gov.my/index.php/ms/  
Tel: 1-300-22-8000 

PTPTN

Perbadanan Tabung Pendidikan Tinggi Nasional,
Tingkat Bawah, Menara PTPTN,
Blok D, Megan Avenue II,
No.12, Jalan Yap Kwan Seng,
50450 Kuala Lumpur

Website: https://www.ptptn.gov.my/

Tel:  03-2193 3000

About the Author: 

This article is written by Chia Swee Yik, Partner of this Firm (assisted by the paralegal, Ooi Zhuang Hong) who has provided practical advice on employment law.

Feel free to contact us using the form below if you have any queries.