Hire Contractors in Malaysia

Backed by the government's ongoing commitment to enhancing human resource development across all sectors, Malaysia currently boasts one of the highest-skilled labor forces in the region. 

Take the Malaysian Education Blueprint 2015-2025 as an example. It facilitates collaborations between universities and industries, where various industrial sectors can lead curriculum design and partner with programs such as hands-on training and real-life simulations. 

Thus, graduates of this country are highly educated and well-versed in the latest technologies and trends in multiple domains, thereby contributing to a strong workforce. 

In addition, the Malaysian workforce is multilingual. In addition to Malay (the official language), they are proficient in English, Mandarin, and other languages. 

All these factors have ultimately proved to be hugely beneficial for companies that wish to hire contractors in Malaysia. 

This article will discuss the various ways to hire contractors effectively in Malaysia and ensure a compliant contractor onboarding process.

How to Hire Contractors in Malaysia

You can hire an independent contractor in Malaysia using either of these two methods. 

• Direct Hiring: Deemed to be one of the more traditional approaches to hiring contractors, the process involves a lot of crucial tasks.
  • These include outlining the specific scope and requirements of the project, sourcing candidates based on the requirements, drafting compliant agreements, making multi-currency payments, and ensuring an overall compliant process. 

• Hiring through contractor onboarding software or AOR: An alternative to hiring contractors directly is by leveraging the services of an Agent of Record (AOR).
  • An AOR handles all the administrative tasks associated with contractor onboarding, including payment processing, on your behalf. 
  • They also guarantee optimal compliance with all the labor laws of Malaysia so that you do not face any legal challenges. 

Hiring Contractors through Skuad AOR

• Skuad AOR is an all-inclusive platform that facilitates the entire contractor hiring process by consolidating all your needs under one roof. 
• This includes drafting locally compliant contracts, making accurate payments, and managing all contractor processes, such as expenses, reimbursements, invoicing, etc.
• Additionally, Skuad runs payroll in 100+ currencies and boasts a built-in IP protection system that safeguards your company’s IP under the laws of Malaysia.

How to Pay Contractors in Malaysia

One of the most common payment methods for contractors in Malaysia is direct payment through

• Bank transfers
• Direct deposit
• Paper checks or 
• Money orders

However, this form of payment is usually associated with many challenges, such as hefty service fees from banks and digital transfers or a detailed understanding of tax requirements and currency exchange rates.

To avoid such headaches, most businesses opt for an alternative payment method: through contractor management software or an AOR like Skuad.

Skuad is an all-in-one solution when it comes to paying international contractors in Malaysia. 

Skuad facilitates global payroll, so you won’t have to juggle multiple banking partners or worry about multi-currency complexities. 

Additionally, Skuad ensures compliance with all the tax laws and regulations in Malaysia and guarantees timely and accurate payments for all your contractors.

Hiring Contractors Directly vs Hiring Contractors via Skuad

Let’s compare the two main ways of hiring contractors in detail so that you can better understand which works best for your business.

Cost of Hiring Contractors in Malaysia

The cost to hire contractors in Malaysia can differ based on three major factors. They include,

• Project requirements: If you hire contractors for projects requiring specialized skills in a particular field, they will likely need more monetary resources than generic ones.
• The industry: The fees of contractors in Malaysia can also differ depending on the industry. The current average contractor rate in the construction domain is MYR 26 per hour. On the other hand, if you are seeking a professional from the IT industry, they might charge you MYR 43 for an hour.‍
• The experience level: A contractor in Malaysia with many years of experience will charge more than someone who has just started their career.

Challenges of Hiring Contractors in Malaysia

While Malaysia is undoubtedly a tempting spot for hiring contractors, it has its fair share of challenges. Let’s take a look at a few examples. 

1. Unique and Complex Labor Laws

The labor laws of Malaysia consist of various provisions and regulations, which can often be difficult for employers to understand or adhere to.

Additionally, it becomes even more challenging for companies to keep up with the numerous amendments to these laws. 

For instance, Malaysia has made different amendments to the Employment Act 1955 (the primary labor law) over the years. 

One of these amendments included introducing a set of presumptions as to who is engaged in a contract of services (employment contract) instead of a contract for services.

The Courts of Malaysia have utilized various tests to determine whether a worker is an employee or a contractor. They include,

• The Control Test: Assesses the degree of control exercised by the employer.
• The organization or integration test: Whether the individual is part and parcel of the organization.
• Economic Reality test: if the individual has invested in tools and taken the chance of profit or risk of loss.
• Multiple tests: if there is control and whether the contract's provisions are similar to those of an employment contract.

Since there is no proper set of guidelines or a single determinative factor to check if the worker is an independent contractor or an employee, understanding and maintaining compliance with the distinction often gets difficult for employers. 

2. Tax Requirements for Independent Contractors in Malaysia

One of the most challenging aspects of hiring contractors in Malaysia is adhering to the country’s tax system. 

Unlike employees, contractors are required to file and pay their taxes. 

As an employer, it becomes your responsibility to ensure that each independent contractor in Malaysia is fulfilling their tax obligations on time and accurately. 

The process usually involves a lot of paperwork and wasted hours filing a tax return. If your contractors do it manually, the chances of mistakes increase further.

Also, Malaysia does not have a flat income tax rate for all individuals. Instead, it ranges from 1% to 30%, depending on the income. 

Ensuring contractors are placed in the correct tax bracket adds an extra layer of complexity for employers. 

As an alternative, many businesses rely on contractor management software or automated payroll solutions to ensure a compliant international contractor payment process. 

However, both these options are incredibly costly and require a substantial amount of upfront investment.

3. Copyright Ownership

Under the Malaysian Copyright Act 1987, if there is no written agreement, the creator of any original literary, artistic, musical, or cinematographic work becomes the initial copyright owner. This also applies to independent contractors in Malaysia. 

Therefore, to avoid potential disputes and ensure clear ownership, it is very important for you as an employer to draft a proper written agreement that will explicitly state the ownership of any IP created during the project and specify the deliverables.

This ensures clarity about who owns the creative elements, such as design elements or code. 

However, adhering to all these regulations can be highly challenging for businesses without a proper legal team or contractor management software. 

If you feel the contractor services are required longer than expected, you may covert the independent contractor into an employee.

How to Convert a Contractor into an Employee in Malaysia

Here is a detailed step-by-step guide on compliantly and successfully converting a contractor into an employee or switching from Form 1099 to W2. 

• Carefully go through all the provisions and guidelines laid down by the labor laws in Malaysia. For example, there is no statutory probationary period for employees in this country. 
• Compliant salary and benefits offered to the contractor should be based on local employment regulations. Understanding the laws related to maternity benefits, paid leave, and health insurance is advisable. 
• Draft an employment agreement containing all the necessary information, such as roles and responsibilities, entitlements, and working hours.
• Add the contractor-turned-employee to your company’s payroll after they have signed the agreement. 

Hire Contractors in Malaysia with Skuad

With 600+ clients worldwide, Skuad has been the number one choice for multiple businesses when it comes to international hiring. 

We provide a compliant hiring journey through multiple features, such as a robust team of legal professionals to guide you through the labor laws of Malaysia, a built-in IP protection system, strong privacy and data security, and more.

You can also contact us if you decide to switch your contractors to employees. 

We will guarantee a smooth transition and keep all the necessary information, such as employment history and records, intact for your convenience.

‍Book a demo today and explore the capabilities of Skuad!

FAQs

Q1: How do I employ an independent contractor in Malaysia?

Ans: You can hire a contractor in Malaysia directly by sourcing candidates directly from job portals and complying with labor laws. However, the process is highly time-consuming and costly. Therefore, most businesses choose a much more cost-effective alternative to hiring contractors through contractor management software or an AOR. 

Q2: What is the difference between an employee and an independent contractor in Malaysia?

Ans: One significant difference between an employee and an independent contractor in Malaysia is that the former individual's rights and benefits are laid down by the labor laws of Malaysia, such as the Employment Act 1955 or the Industrial Relations Act 1967. On the other hand, a contractor is not covered under these laws and is only bound to the terms and conditions of the agreement. 

Q3: What is the tax rate for contractors in Malaysia?

Ans: The personal income tax rate for contractors in Malaysia ranges from 1% to 30%, depending on their income level. 

Q4: How does Skuad help hire, pay, and manage independent contractors in Malaysia?

Ans: Skuad’s AOR solutions enable you to guarantee a seamless contractor hiring process in Malaysia. They boast numerous features, such as an in-house legal team to guide you through the country's labor and tax laws, a global payroll system, a built-in IP protection system, and automated invoicing. 

Q5: How do I pay independent contractors in Malaysia?

Ans: You can pay an independent contractor in Malaysia directly through bank transfers, direct deposits, or paper checks. However, due to its complexity, this process is generally suggested for small-scale projects. A cost-effective alternative is to pay with Skuad’s AOR, which runs multipayments and automates invoicing, among other capabilities.