SEPTEMBER 1 ― On August 26, 2022, the Human Resources Minister M. Saravanan announced the postponement of the implementation of the amendments to the Employment Act 1955. The implementation has been postponed from September 1, 2022 to January 1, 2023, after studying the views of all quarters and stakeholders. The deferment was partly due to requests by employers to be given time to address problems in relation to recruitment and the shortage of foreign workers and recovery from the Covid-19 pandemic.

The postponement is certainly a much-welcomed decision by the employers as the increased cost due to the amendments may not have been budgeted for by businesses. It allows the employers more time to ensure that the implementation is carried out smoothly and properly. Knowing how employers react to higher labour costs is crucial to understand how much job opportunities will be reduced or created and for predicting the economic impacts of the new employment legislation.

The new amendments to be deferred

The amendments to the Employment Act 1955 include, among others, reduction of the working hours from 48 hours to 45 hours a week, introduction of flexible work arrangements, extended maternity leave from 60 days to 98 days and paternity leave entitlement of 7 days. The amendments to the First Schedule of the Employment Act 1955 widen the scope of applicability of the Act to all employees.

Pursuant to the new amendments, employees who earn monthly wages of RM4,000 and below will be entitled to statutory overtime payment. If employers do not have the financial capacity to absorb the overtime costs, they need to reduce the working hours to 45 hours per week. Whilst it is the government’s proactive effort to stay in line with the standards required by the International Labour Organisation, the amendments will certainly bring about heightened hiring cost of employees.

It is to be noted that the implementation of the amendments will be deferred to January 1, 2023 as the deferment has been gazetted on August 29, 2022.

Impact of the heightened labour costs

Policies that increase labour costs should be implemented progressively as it can substantially impact both employment rate and economic recovery. Higher labour costs may or may not make employees better off in a long run, but it will certainly reduce the employer’s profit margins. Higher costs could also mean that employers use fewer employees but to use them more productively.

Any attempt to make workers better off by raising their wages or giving them wage for longer hours of work may potentially reduce the number of employees that employers will use. On top of the improved statutory benefits under the amended Employment Act 1955, the increase of minimum wage to RM1,500 in Malaysia has also been gazetted this year.

While the higher minimum wage or employment entitlements may boost the purchasing power of the people and help them cope with the rising cost of living, the higher operating costs of companies would likely be passed on to consumers. For companies which are not able to pass on the costs due to weak business demand, profit margins and earnings could tumble which lead to the closing down of businesses. The link between higher labour cost and inflation in Malaysia is real. Investors who wish to expand their businesses in Malaysia may also be discouraged by the increased labour costs.

Grace period to streamline internal employment procedures and rules

The deferment provides transitional period for these new amendments to be implemented and employers should take advantage of this grace period in taking stock of their existing employment contracts and policies to ensure that they are consistent with the new laws. The employees should also be informed regarding the changes made to their employment terms and conditions.

* Leonard Yeoh is a partner and Pua Jun Wen an associate with the law firm, Tay & Partners.

** This is the personal opinion of the writer or publication and does not necessarily represent the views of Malay Mail.