How the Amended Malaysian Employment Act Affects Equity Plans

Companies offering equity awards in Malaysia have long had to balance the cumbersome tax and securities filings against the business case for providing additional benefits to Malaysian employees. Recent amendments to the Malaysian Employment Act (the "Act") mean that companies will need to re-evaluate payroll deduction requirements and potential translation requirements when deciding to offer equity awards or an ESPP in Malaysia.

New Rules Under Malaysian Employment Act

Under amendments to the Act that became effective on January 1, 2023, in order to take payroll deductions from employees, companies will need to fall under an exemption or obtain approval from the Director General of Labour (DGL). Further, the Act requires that employers maintain a "register" of benefits offered to employees. Any document kept as part of the register should be translated into Bahasa Malaysia. Arguably, this translation requirement captures certain grant documents provided to Malaysian employees. To be clear, translated documents do not need to be distributed to individual employees.  Instead, the local employer will need to keep the translated documents on file.

Payroll Deduction Application and Potential Exemption

Prior to January 1, 2023, approval from the DGL was required to take payroll deductions from employees earning wages of MYR 2,000 (approx. USD 450) or less per month (irrespective of occupation) as well as those engaged in specific types of blue-collar work (e.g., manual labor, supervising manual labor, or engaged in the operation or maintenance of a vehicle) (irrespective of wages earned). Since most employees' monthly wages exceed this threshold and many employees participating in equity programs are not engaged in these specified occupations, very few companies were required to obtain an approval from the DGL. However, the MYR 2,000 ceiling and specific occupation distinctions no longer matter for purposes of the payroll deduction restrictions under the revised Act. Companies operating a share plan that involves payroll deductions, such as an ESPP, for any type of employee in Malaysia will therefore be subject to the rules under the Act.

Potential Exemption

An exemption from the requirement to obtain a payroll deduction approval exists where payroll deductions are used to purchase shares of the employer. On its face, this exemption does not appear to extend to shares purchased from a parent company of the employer. However, it may be possible to approach the DGL to ask if the exemption could be extended to parent company share purchases although there is no guarantee that this approach would yield a positive response from the authorities. This would require a company to submit a letter to the DGL describing the terms of the plan and the payroll deduction process. 

This could be done on a no-names or named basis. A response to a named inquiry would be specific to the terms of that company's plan and payroll deduction process such that a positive response from the DGL should allow the company to get comfortable that the approach outlined in the letter submitted to the DGL applies to its share plan.

Application Process

It is also possible to apply for and obtain approval from the DGL to take payroll deductions under a share plan offered by a parent company. The company will need to submit an application to the branch of the Labour Department that is closest to the employing entity in Malaysia. If there is more than one entity in Malaysia, then multiple applications would be required.

In general, companies should expect eight to ten weeks from the date of submission to obtain an approval. This time period could be longer if there are comments, clarifications, or additional requests from the local Labour Department.

Such application is made through the submission of a prescribed form together with supporting documents.  Strictly speaking, an application package would include several documents including (but not necessarily limited to) the following:

• a screenshot of the company's website;
• a screenshot of the enrollment platform;
• copies of the plan, plan prospectus/summary and enrollment agreement;
• a list of employees in Malaysia participating in the plan;
• sample employment contracts of those participating in the plan;
• sample salary slips of employees participating in the plan;
• an abbreviated organizational chart illustrating the relationship between the company and its Malaysian entity(ies); and
• the employees' written consent to payroll deductions under the plan (wet signatures may be required unless the relevant Labour Department branch is willing to grant an exception).

Some Labour Department branches might not require all the documentation listed above and some branches may require different or additional documentation, so it is important to determine the relevant requirements prior to submitting an application. Further, if new employees enroll in the plan, an updated approval may be required from the Labour Department branch.

Next Steps

Companies should determine, as soon as possible, if it makes sense to take the following actions:

1. Submit an inquiry to the DGL on either a no-names or named basis to determine whether the exemption from approval is applicable to their plan being offered in Malaysia;
2. Submit an application for payroll deductions to the relevant Labour Department branch;
3. Suspend or cease offering the share plan in Malaysia; and/or
4. Transition to offering the share plan in Malaysia without the use of payroll deductions, such as by having the employees separately provide their contributions to the company or the local employer (for further remitting to the company) according to procedures to be established by the company.

Regarding the latter two alternatives, most plans include provisions allowing for suspension or termination of the plan where the plan cannot be operated in compliance with applicable law and many plans include provisions allowing for contributions other than by way of payroll deductions. However, each company should review its share plan and related agreements to confirm the exact provisions that may support the position the company decides to take.