During peak seasons or in service-based sectors, working overtime becomes an inevitable necessity. Consequently, the issue of overtime payment frequently arises in such circumstances.
According to the Employment Act 1955 (“EA”), overtime is defined as the additional hours worked by employees beyond their normal hours of work per day. Normal hours of work are the working hours agreed upon between the employer and the employee in the employment contracts.
When employees worked beyond the agreed-upon hours of work, it becomes the employers’ obligation to provide overtime payment. It is important to note that not all employees are entitled to overtime payment. Employees earning a monthly salary above RM 4,000 are not entitled to overtime payment as mandated by the law. This means that any overtime payment is subject to the employers’ discretion.
The EA provides specific rates of overtime payment that employers must follow. Employers have the flexibility to offer higher rates, but they are not allowed to offer lower rates. The rate of overtime payment varies depending on whether it is a normal working day, a rest day, or a public holiday. The table below illustrates the rates of overtime payment for various occasions.
|
Day |
Prescribed Overtime Rate |
|
Normal Working Day |
HRP x 1.5
|
|
Rest Day |
HRP x 2 |
|
Public Holiday |
HRP x 3 |
|
ORP (ordinary rate of pay) = monthly rate of pay/26
HRP (hourly rate of pay) = ORP/normal hours of work |
|
The mandatory overtime payment can significantly increase the employers’ expenses, particularly during peak seasons or when a significant number of employees fall within the salary range of RM 4,000 and below. As such, some employers are exploring alternatives to preserve cash flow while still meeting the legal requirement. One commonly considered alternative is granting replacement leave to employees at a later date. However, the question is whether this approach is legally acceptable.
It is important to note that the EA does not explicitly prohibit the use of alternative arrangements to replace overtime payment. Furthermore, there is a provision in the EA allowing employers and employees to agree on more favourable terms than the provisions outlined in the EA. It is subject to discussion as to whether a replacement leave is a better alternative and is more favourable to the employees. It is undeniable that some employees prefer monetary compensation over a day off.
The safest approach for employers is to comply with the EA by providing overtime payment to eligible employees. If employers decide to pursue an alternative arrangement, they should clearly communicate the alternative to their employees, explain the rationale behind such a decision, and obtain the employees’ written consent for such arrangement. These will ensure transparency and fairness when dealing with the issue of overtime.
To further assist employers in navigating the issue of overtime, the employers may consider the following:
- Requesting employees to work overtime only when necessary.
- Conducting performance reviews to identify the root causes of performance deficiencies if overtime is required due to performance issues.
- Hire more freelancers during peak seasons if the cost is lower than the cost of overtime payment.
- Establishing well-defined procedures and guidelines that clearly state when overtime is permissible, how it should be requested, and how it will be compensated.
- Establishing a system for recording overtime work, calculations, and payments.
While it is important to comply with the law regarding overtime payment, it is equally important to address internal governance issues that may be causing excessive overtime. By reviewing and improving internal systems and procedures, employers can create a more productive work environment and reduce the need for excessive overtime. By striking a balance between hard work, fair compensation, and a healthy work environment, employers can create a foundation for employees’ satisfaction.
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About the author:
This article was written by Wong Shen Ming, Corporate Associate – law firm in Kuala Lumpur, Malaysia.
The view expressed in this article is intended to provide a general guide to the subject matter and does not constitute professional legal advice. You are advised to seek proper legal advice for your specific situation.
