This article first appeared in The Edge Malaysia Weekly on October 28, 2024 - November 3, 2024

IN the past week, employers have expressed their dissatisfaction over a government proposal to extend the mandatory pension contribution to non-citizen employees, which they say is unnecessary and adds to their already considerable business costs.

They said the proposal — presented during the tabling of Budget 2025 — that employers make mandatory Employees Provident Fund (EPF) contributions for non-citizen employees took them by surprise, as it was the first time they were hearing of it. What they had expected were the labour-related measures of the raising of the minimum wage and introduction of a multi-tiered foreign worker levy.

Following the tabling of the Budget, the Ministry of Finance (MoF) released further details proposing that the mandatory EPF contribution rate for non-citizen employees with a new contract of employment be set at the same contribution rate as Malaysian employees. That is, the employee contributes 11% and the employer 12% to 13%, depending on salary compensation. Further details about how the contribution rate will be calculated based on salary compensation was not disclosed.

As for those with an existing contract of employment, the contribution rate for both employer and employee will commence at 2% and be increased in phases until the rate is on a par with the contribution rate of Malaysian employees within a period of six years.

“I don’t see why the government wants to have this. It will be an additional cost for employers, as we have about 2½ million foreign workers in Malaysia. We also have to be mindful that the foreign workers are here to earn a living and the money they make will be repatriated back to the families. To put aside even some of the wages can be quite a lot for them, so what will they be left with to repatriate to their families?” says an economist, who requested anonymity.

UOB Global Economics and Market Research senior economist for Malaysia Julia Goh estimates that the potential amount from the mandatory EPF contribution could come up to RM11 billion, assuming an 11% contribution rate by employees and 13% by employers for 2½ million foreign workers, based on the current minimum wage of RM1,500.

“The rationale to have this policy is unclear. EPF is mandatory savings for Malaysians who intend to retire in Malaysia. The majority of foreign workers are here on a temporary basis and on contract. They would return to their home country or move elsewhere for work,” Goh says.

With the temporary nature of their employment — as blue-collar migrant workers — and the minimum wage earned, the dividend derived from their contribution to EPF may not be significant enough to justify such a contribution.

Some also point to a potential administrative nightmare for EPF, which would have to deal with the paperwork for withdrawals when foreign workers leave after their contract ends.

Goh observes that in Singapore, contribution to the retirement fund — the Central Provident Fund (CPF) — applies only to permanent residents and Singapore citizens.

“In Singapore, the foreign labour workforce stood at 1½ million as at mid-2024, which is sizeable relative to the total of four million employed. It was stated that from April this year, CPF accounts were closed for all foreigners.

“From 2023, all foreign employees are exempted from CPF contributions, as they may not retire in Singapore,” she says.

Employers say the mandatory contribution for non-citizen employees, on top of the hike in minimum wage, would lead to a heavy financial burden on businesses, possibly threatening their ability to continue operating.

In a statement dated Oct 21, the Federation of Malaysian Manufacturers says: “With about 2½ million foreign workers in the country, the EPF contribution for non-citizens would translate into an additional minimum annual payroll cost of RM6.6 billion. The upcoming minimum wage increase is projected to add RM10.8 billion annually to payroll expenses.

“When combined, the impact is substantial — about RM17.4 billion annually, which could significantly threaten business sustainability, especially in industries that depend heavily on foreign labour.”

Also worried are employers in the construction as well as iron and steel industries.

Master Builders Association Malaysia, which says the construction industry is already facing rising material costs, a labour shortage and intense competition, contends that the sector is unable to take on additional costs such as the mandatory EPF contribution.

The Malaysian Iron & Steel Industry Federation (MISIF) has similar concerns, saying that the industry is dependent on skilled foreign labour.

“Coupled with the forthcoming minimum wage increase to RM1,700 and the implementation of the multi-tier levy system, this measure will significantly raise operating costs and impact cash flow within the industry.

“We respectfully urge the government to put the mandatory EPF contributions on hold and engage in immediate discussions with industry stakeholders to address these concerns. It is essential that the government strikes a balance between promoting fair treatment for workers and ensuring the sustainability and competitiveness of the iron and steel industry,” says MISIF.

Given the various labour-related costs, such as a higher minimum wage and imposition of the multi-tiered foreign worker levy on top of the proposal for mandatory EPF contribution, coming into the picture in 2025, will employers resort to passing on the costs to consumers?

“It is a risk that cannot be ruled out, but the details on the multi-tiered levy have not been finalised and this would have an impact on the way firms think about cost management next year,” says OCBC senior Asean economist Lavanya Venkateswaran.

According to a Maybank Investment Bank Research (Maybank IB Research) report dated Oct 20, the levy will be progressively charged based on the industries’ foreign worker to total workforce ratio — that is, the higher the ratio, the higher the levy.

UOB’s Goh believes higher worker-related costs are likely to be passed on to consumers.

“As such, we will have to watch the degree of pass-through to prices and inflation from the various measures that were announced in the budget,” she says.

As it stands, MoF forecasts that inflation will rise 2% to 3.5% in 2025, after taking into account the subsidy rationalisation and its knock-on effects on other items.

Nevertheless, employers are supportive of the increase in minimum wage to RM1,700 beginning in February 2025, from RM1,500 currently. Businesses with fewer than five employees are given a six-month grace period to August 2025 to raise the minimum wage to RM1,700.

Associated Chinese Chambers of Commerce and Industry in Malaysia president Datuk Ng Yih Pyng says in a statement that the increase is “reasonable”, but employees must improve productivity to offset the cost increase.

He also suggests that the government consider fixing the minimum wage by state, which takes into account the economic growth, cost of living, social and other demographic factors of each state.

Goh says, however, that fixing the minimum wage by state may sound fairer in theory, but it may not be practical.

“Inflation does vary across states, but to have differentiated minimum wages can cause distortions in terms of labour supply, particularly if more workers shift to states with the higher minimum wage,” she explains.

Interestingly, CIMB Securities points out in a report that despite its centrality in supporting the lower-income group, the minimum wage increase has “demonstrated little in lifting the overall household income”, as the median wage rose only 4% between 2010 and 2022.

Malaysian Employers Federation says most employers pay more than the minimum wage and it urges employers not to use the minimum wage as an excuse to pay employees based on the minimum wage.

“It is only ethical and good practice for employers to remunerate their employees based on [the performance of] their employees and businesses,” it says in its statement dated Oct 18.

In an effort to address the issue of using the minimum wage as a benchmark for starting salaries, the Human Resource Ministry will be publishing updated guidelines for employers regarding starting salaries across all sectors.

Having said that, only time will tell whether the labour-related measures will be enough to push businesses to reduce their dependence on foreign labour while raising the salaries of skilled workers and graduates. 

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