Understanding Section 2: What Are "Wages"?
The Legal Text of Section 2
According to Section 2 of Malaysia’s Employment Act 1955, “wages” are defined as:
“Basic wages and all other payments in cash payable to an employee for work done in respect of his contract of service.”
This fundamental legal definition underpins how employee compensation is interpreted across various statutory applications. However, it’s equally important to note that not all forms of remuneration are included under this definition.
Practical Interpretation in HR & Payroll
For HR and payroll professionals, understanding what qualifies as “wages” is critical for ensuring compliance with laws related to minimum wage enforcement, EPF contributions, SOCSO deductions, and even payroll tax computations. The Employment Act’s specificity ensures that only certain types of payments count toward minimum wage calculations and other statutory obligations.
What Is Included in "Wages"?
Basic Salary
This is the core of any wage structure. It refers to the agreed-upon salary stated in the employment contract. It’s fixed and paid regularly, forming the baseline for most calculations.
Fixed Allowances
Allowances like housing, meal, or shift allowances can be included in “wages” if they are:
- Fixed in amount
- Paid regularly
- Clearly stated in the employment contract
Guaranteed Commissions
If a commission is contractually guaranteed—say a monthly sales incentive of RM300 that the employee earns regardless of fluctuations—then it’s considered part of wages. However, variable commissions that depend on performance thresholds may not qualify.
What Is Excluded from "Wages"?
Non-Cash Benefits
Things like company-provided accommodation, a car, or utilities (water, electricity) are explicitly excluded. These are classified as benefits-in-kind.
Employer Contributions to Schemes
Payments toward:
- EPF (Employees Provident Fund)
- SOCSO (Social Security Organisation)
- Superannuation or pension schemes
are not included as wages. They’re separate statutory obligations.
Bonuses & Reimbursements
- Annual or discretionary bonuses are excluded unless clearly guaranteed in the contract.
- Travel allowances or reimbursements for petrol, tolls, or meals incurred during work travel are also not part of wages.
Why the Definition Matters: Implications for Employers
Role in Minimum Wage Compliance
The Minimum Wage Order 2025 outlines a monthly wage floor of RM1,700. To comply, employers must ensure this amount is met using only components defined as wage.
Impact on Statutory Contributions (EPF, SOCSO, EIS)
The wage base affects how much employers and employees must contribute to EPF, SOCSO, and EIS. Overstating wages by including non-qualifying components could result in under-contributions, leading to penalties.
Application in Payroll Management
Aligning Payroll Components with Legal Definitions
Payroll systems must distinguish between what counts as wages and what doesn’t. HR professionals should:
- Audit payroll structures
- Label components clearly
- Reference the Employment Act and Minimum Wage Order directly
Audit and Compliance Checklist
| Audit Step | Compliant? | Notes |
|---|---|---|
| Review employment contracts | ✅ | Ensure clarity on salary and fixed allowances |
| Separate conditional bonuses | ✅ | Tag them as non-wage elements |
| Calculate minimum wage using legal wage definition | ✅ | Avoid overestimation of salary compliance |
Minimum Wage Order 2025: Key Provisions
Effective Dates for Different Employers
Who Is Covered Under the Order?
All employees, regardless of wage structure, must receive the minimum wage. This includes foreign workers and those paid by commission or piece rate—except domestic workers and apprentices (pending law updates).
Components Considered for Minimum Wage Calculation
| Wage Component | Included in Minimum Wage? | Remarks |
|---|---|---|
| Basic Salary | ✅ Yes | Core of contractual wages |
| Fixed Allowances | ✅ Yes | Must be stipulated in the contract |
| Commission (if guaranteed) | ✅ Yes | Regular and contractually promised |
| Overtime Pay | ❌ No | Variable and not counted |
| Conditional Bonuses | ❌ No | Not guaranteed |
| Travel Allowance | ❌ No | Considered reimbursement |
| Service Charge | ❌ No | Excluded unless guaranteed |
How to Calculate Minimum Wage: Monthly, Daily & Hourly
Monthly Rate
Daily Rates
| Workdays/Week | Daily Wage | Calculation |
|---|---|---|
| 6 days | RM65.38 | RM1,700 × 12 ÷ (52 × 6) |
| 5 days | RM78.46 | RM1,700 × 12 ÷ (52 × 5) |
| 4 days | RM98.08 | RM1,700 × 12 ÷ (52 × 4) |
Hourly Rate
Case Studies & Examples
Non-Compliant Scenario
- RM1,200 basic salary
- RM500 in commissions (variable)
- Outcome: ❌ Not compliant. Commission not guaranteed.
Compliant Scenario
- RM1,500 basic salary
- RM200 housing allowance (fixed)
- Outcome: ✅ Fully compliant
Treatment of Special Payment Structures
Piece Rate, Task, Trip-Based Pay
Even if employees are paid based on units of work or trips, their total monthly earnings must not fall below RM1,700. Employers must maintain careful records to prove compliance.
Foreign Workers and Special Categories
- Covered under the order.
- Domestic workers and apprentices are currently exempt until future amendments take effect.
Best Practices for Employers
- Regularly audit payroll components
- Use clear and fixed terms in contracts
- Consult legal counsel when uncertain
- Implement automated payroll systems for compliance monitoring
Enforcement and Penalties for Non-Compliance
Legal Consequences
- Penalties can include fines up to RM10,000 per employee
- Continuous non-compliance could lead to civil suits or blacklisting
How Inspections Are Carried Out
- Conducted by the Department of Labour
- Employers must produce payroll records and contracts for verification
Role of HR and Payroll Software in Compliance
- Automate wage classification
- Flag non-compliant payroll structures
- Generate real-time compliance reports
- Track overtime, fixed vs. conditional payments
FAQs
No. Service charges are not considered part of wages under the Employment Act.
If the total guaranteed wage components fall below RM1,700, the employer is non-compliant.
No. Only components defined as wages are subject to EPF deductions.
Yes. The minimum wage applies to all employees, including foreign workers (except domestic workers).
That is not compliant. Transport allowance is not part of wages.
Only if they become part of a contractual guarantee and are paid consistently.
Conclusion: Staying Compliant in 2025 and Beyond
Understanding the definition of “wages” under Malaysia’s Employment Act 1955 is more than a formality—it’s essential for avoiding penalties and building fair compensation practices. As the Minimum Wage Order 2025 takes full effect, employers must ensure every payroll element is clearly defined, legally compliant, and contractually documented.
With proper planning, transparent contracts, and the right payroll tools, businesses can confidently navigate Malaysia’s evolving labor laws.
