From 1 September 2022, when the new Employment Act (“EA”) amendments come into force (See: Employment Act to apply to all employees from 1 September 2022, some sections subject to increased salary threshold of RM4,000/month), all employees with wages up to RM4,000/month will be entitled to overtime payments. This is a significant change from the pre-amendment EA, where generally only employees with wages up to RM2,000/month were entitled to overtime payments.
This widened scope will have a major financial impact on many employers, who have already had to cope with the increased minimum wage from 1 May 2022 (See: Confirmed: New Minimum Wages Order effective 1 May 2022; employers with less than 5 employees exempted), and the Malaysian Employers Federation recently called on the government to defer the implementation of the EA amendments.
The practical effect of this change is that employees with monthly wages in the RM2,001-RM4,000 range who previously may have been used to occasionally working beyond their normal working hours to complete urgent tasks, or to attending to work matters on weekends or public holidays, will be entitled to overtime payments for doing so. However, overtime does not simply mean any work done outside of the 9-5 window. There are various, sometimes fairly technical, definitions and legal provisions that have to be considered in order to understand the legal definition of “overtime”.
What is considered “wages”?
To determine which employees fall within the criteria of being paid wages up to RM4,000/month, it is important to understand that the EA has a specific definition of “wages”. Under the EA, “wages” means basic wages and all other payments in cash payable to an employee for work done in respect of his contract of service but does not include —
- the value of any house accommodation or the supply of any food, fuel, light or water or medical attendance, or of any approved amenity or approved service;
- any contribution paid by the employer on his own account to any pension fund, provident fund, superannuation scheme, retrenchment, termination, lay-off or retirement scheme, thrift scheme or any other fund or scheme established for the benefit or welfare of the employee;
- any travelling allowance or the value of any travelling concession;
- any sum payable to the employee to defray special expenses entailed on him by the nature of his employment;
- any gratuity payable on discharge or retirement; or
- any annual bonus or any part of any annual bonus.
It is important that when employers are ascertaining which employees are included or excluded from certain provisions of the EA that the above definition and exclusions are clearly understood.
The meaning of “overtime”
There are two key sections in the EA which define “overtime”:
- Section 60A(3)(b) of the EA reads: “In this section ‘overtime’ means the number of hours of work carried out in excess of the normal hours of work per day: Provided that if any work is carried out after the spread over period of ten hours, the whole period beginning from the time that the said spread over period ends up to the time that the employee ceases work for the day shall be deemed to be overtime.”
- Section 60A(3)(c) of the EA reads: “For the purposes of this section, section 60, paragraph 60D(3)(a) and section 60I, ‘normal hours of work’ means the number of hours of work as agreed between an employer and an employee in the contract of service to be the usual hours of work per day… and such hours of work shall not exceed the limits of hours prescribed in subsection (1).”
Based on the above two sections, overtime work is work done outside of the hours of work stated in the employment contract. It is not based on a generic 9-5, but is based on what is stated in the contract. However, as seen above, the EA also states that the hours stated in the contract are subject to the limits in Section 60A(1). Following the new amendments, Section 60A(1) states that an employment contract cannot require an employee to work —
- more than five consecutive hours without a period of leisure of not less than 30 minutes duration;
- more than eight hours in one day;
- in excess of a spread over period of ten hours in one day;
- more than 45 hours in one week.
There are some technical conditions and potential exemptions to the working hour limits under the EA, but the above sets out the general position.
Determining when employees are entitled to overtime payments, and the overtime formula/rate
These are the instances when employees on a monthly wage are entitled to overtime, and the respective overtime formulas/rates:
- Works more than the normal working hours on a normal work day: 1.5x hourly rate of pay [Section 60A(3)(a)].
- Works on a rest day, but the period of work does not exceed half the normal hours of work: 0.5x ordinary rate of pay [Section 60(3)(b)(i)].
- Works on a rest day, but the period of work is more than half but does not exceed the normal hours of work: One day’s wages at the ordinary rate of pay [Section 60(3)(b)(ii)].
- Any work on a rest day which is in excess of the normal hours of work: 2x hourly rate of pay [Section 60(3)(c)].
- Works on a public holiday, but not exceeding normal hours of work: Two days’ wages at ordinary rate of pay [Section 60D(3)(a)(i)].
- Any work on a public holiday which is in excess of the normal hours of work: 3x hourly rate of pay [Section 60D(3)(aa)].
Calculating an employee’s “ordinary rate of pay” and “hourly rate of pay”
The overtime rates above are based on “ordinary rate of pay” and “hourly rate of pay”, and the EA also defines how these rates are to be calculated. There are very detailed provisions in the EA (all in Section 60I) depending on whether an employee is normally paid on a monthly, weekly, daily, or hourly rate, or on piece rates.
For the purposes of this article, I will just explain that for an employee paid on a monthly rate of pay —
- her “ordinary rate of pay” is her monthly wages divided by 26; and
- her “hourly rate of pay” is her ordinary rate of pay divided by her normal hours of work (per day).
For example, an employee whose monthly salary is RM3,900 and is required under her employment contract to work 8 hours a day has —
- an ordinary rate of pay of RM150 (3900/26); and
- an hourly rate of pay of RM18.75 (150/8).
What employers need to do
As a result of these latest EA amendments, many employers who previously did not have to consider the law on overtime payments will now have to do so. These are some basic steps which all employers should urgently take before 1 September 2022:
- Review all employee salaries and, taking note of the definition of “wages” explained above, determine which employees fall within the scope of the revised EA and will be entitled to overtime payments.
- Review all existing employment contracts to ensure that the hours of work for all employees are clearly spelt out, and are in line with the working hour limits imposed by the EA. These contractual working hours will be the basis for calculating any overtime payments.
- Ensure that there are clear is a clear policy on overtime or work outside of the normal working hours to avoid unnecessary or excessive overtime claims.
- Establish a system for recording overtime work, calculations, and payments These records should be retained for at least six years.