16 February 2023
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.
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.
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 Perry & Sharon Thwaites