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The Case For A Fair Work Act, Part 2

A fair definition of ‘fair pay’ for all Malaysian workers

Our Fair Work Act research series makes an argument for enacting broad legislation that defines what constitutes ‘fair work’ for all categories of workers in Malaysia. In this instalment, we explore the first plank: fair pay.

By Edwin Goh & Nelleita Omar11 June 2021

Rapid digital transformation has changed the power relationship between employers* and workers, creating new employment categories in its wake and eroding the relevance of current labour laws. Building on the Oxford Internet Institute’s Fair Work Initiative as well as global research efforts to classify today’s workers, Part 1 of our research series argued for updating Malaysia’s employment categories in order to reflect today’s inherent power relationships, and to outline what is owed to workers of each category.

*Note: The term ‘employer’ is used broadly throughout this piece, representing the party that either employs the worker or is the intermediary for the supply of jobs.

In this Part 2 of the research series, we focus on a major pillar of Fair Work as per the Oxford Internet Institute, namely fair pay. What does fair pay mean in the context of a law describing Fair Work in Malaysia? And how would it apply to the different power relationships between employers and workers that we see today?

Economic fairness vs. moral fairness?

In 1965, shortly before the United States government adopted the first federal definition of the poverty line, one of its policy drafters Mollie Orshansky wrote: “There is not, and indeed in a rapidly changing pluralistic society there cannot be, one standard universally accepted and uniformly applicable by which it can be decided who is poor. … If it is not possible to state unequivocally ‘how much is enough,’ it should be possible to assert with confidence how much, on an average, is too little.”

The term ‘fair pay’ usually suggests an equitable level of compensation for a specific job. Going by this framing, the basis of fair pay becomes founded on the idea of that job’s value contribution to a good or service. This primarily economic idea of fairness leads to policies emphasising the linkage of wages to productivity, which assumes that low wages can be increased or avoided if the job’s productivity is calculated and if the job is made more value-adding. 

While the concept of productivity-linked wages appears principled, in reality, it is tested by the challenge of measurement. An assembly line worker’s output can be measured by units assembled per hour but how much is the productivity and value contribution of a cleaner and what is the commensurate level of compensation for that job? What about for a security guard?

The question of fair pay by occupation, sector, paper qualification or productivity calculation has its place in policy discussions and in union negotiations, but we argue that it is not the core problem in question for this piece. 

Instead, the idea of fair pay in the context of fair work legislation is primarily one of moral judgement. Going back to Mollie Orshansky above, it is about asserting with confidence how much is too little, i.e. how much is a societally acceptable level of compensation for working a customary number of hours a month, regardless of the job performed? How much is the amount, where coming below the said figure would be considered humanly exploitative and warranting of legal penalties? Going by this framing of the issue, the basis of fair pay becomes founded on the idea of a minimum living wage and non-wage benefits – i.e. how much is the minimum needed to live on.

As will be argued, the gap between this idea and what is currently practised underpins the need for a revised conception and administration of fair pay in Malaysia.

Of formulas and consultations

Historically, governments have established a minimum income floor by enacting minimum wage laws. Along with the statutory wage laws, each country has a regulatory infrastructure or process by which to revise the minimum wage periodically. Figure 1 below shows a brief cross-country comparison of minimum wage regimes.

Figure 1: Selected Cross-Country Comparison of Minimum Wage Regime

Malaysia – Minimum Wages Order 2020; National Wages Consultative Act 2011
China – Employment Law Overview China 2019 – 2020 by L&E Global
United Kingdom – UK’s National Minimum Wage Act 1998
Australia – Australia’s Fair Work Act 2009

As stated in Figure 1, countries’ minimum wage regimes differ in several key respects such as coverage. The minimum wage may not cover all workers and can exclude or be silent on coverage for informal or self-employed workers. Many governments set minimum wages federally or nationally, though countries like China favour local government setting of minimum wages. In many countries, final authority to decide on the minimum wage resides within the responsible ministry or government department, whereas some like Australia have established a commission by law to set the minimum wage. Revisions to the minimum wage level appear based on a combination of formula, research and stakeholder consultation, though the level of transparency on each of these varies from country to country.

In Malaysia, the advent of the minimum wage is a fairly recent phenomenon – the first minimum wage was enforced in 2012. Before that, wage levels were regulated by the Industrial Relations Act 1967 and the Wages Councils Act 1947, where wage rates were determined through collective bargaining for unionised workers and work councils for non-unionised workers.

When a key 2009 study found that over one-third of private sector workers earned less than the national poverty line, the government resolved to set up the National Wages Consultative Council (NWCC) via the National Wages Consultative Council Act 2011 to develop and advise on the national minimum wage. One year after the founding of NWCC, the government implemented the first minimum wage via the Minimum Wages Order 2012 with the announced aim of helping to eradicate poverty and ensure workers can meet the rising costs of living.

The National Wages Consultative Council (NWCC) is a tripartite working group set up to study all matters concerning minimum wages and to give recommendations to the government for making or revising the Minimum Wages Orders according to the sector, type of employment and regional area.

According to the NWCC Act 2011, the council shall consist of the following members who shall be appointed by the Minister of Human Resources:

1. A Chairman
2. A Deputy Chairman
3. A Secretary
4. At least 5 public officers from the Ministry of Finance, the Public Service Department, the Ministry of International Trade and Industry and the Economic Planning Unit
5. At least 5 members representing employees
6. At least 5 members representing employers
7. At least 5 members representing independent members

Source: International Labour Organisation (2018)

The first minimum wage level was set at RM900 a month for West Malaysia and RM800 a month for East Malaysia. Any employer who fails to comply with the minimum wage law can be punished by paying the worker the sum owed as well as a potential fine of not more than RM500 per offence. Editor’s note: A low amount on the surface, in comparison to other fines in Malaysia’s statutes.

Since 2012, the government has increased the minimum wage level to RM1,200 a month for 56 cities and municipal council areas and RM1,100 a month for other areas. Despite these revisions, experts and worker unions still think the current amount is too low to live on adequately. In partial response, the former Human Resources Minister had said in 2019 that the government was considering a sectoral-based minimum wage, which is where the question of minimum wage setting still stands today, after the change in government and the onset of the COVID-19 pandemic in early 2020.

Non-wage financial benefits* in Malaysia are covered by social security acts mandating employers to protect their employees against future financial risks, the key ones being employer monetary contributions to employees’ retirement savings and unemployment insurance. Today, the Employee Provident Fund (EPF) Act 1991 requires all employers to contribute 11-12% of their employees’ base salaries for retirement savings while the Employment Insurance System (EIS) Act 2017 requires employers to contribute a set amount into a national unemployment insurance program for full-time employees. Although informal workers are not eligible for any employer contributions for EPF or EIS, they are allowed to contribute into the self-employed versions of these schemes voluntarily, and on their own initiative.

*Note: Social protection schemes relating to workplace safety and accidents like SOCSO, and reskilling like HRDF, will be discussed in our next article on ‘fair conditions’.

To date, there is no law in Malaysia mandating employers to contribute to workers’ healthcare insurance; provision of private healthcare insurance by companies is mostly due to market norms. To a large extent, the mandating of healthcare insurance by law is driven by the characteristics of a country’s healthcare system. Countries such as Singapore, Thailand and China mandate eligible employers to contribute into a national healthcare insurance scheme for every eligible worker (much like our EPF scheme) while countries like the USA mandate eligible employers to provide company-sponsored health insurance or subsidise their employees’ private health insurance premiums.

What are the current gaps?

Although Malaysia has a legal framework to govern workers’ wages and benefits, there are key gaps in definition and administration that put us some way from achieving the notion of ‘fair pay’. Given the significant role of the minimum wage laws in achieving ‘fair pay’ in Malaysia, this piece focuses on the limitations of the current wage framework and reserves discussion on non-wage compensation such as retirement contributions in future related pieces.

Vague rationale for minimum wage

Currently, Malaysia’s minimum wage levels are determined through a combination of formula application and stakeholder consultation. The NWCC’s website states that the setting of the minimum wage rates are based on factors affecting workers’ ability to make ends meet, such as the national poverty line, the median income, productivity growth, inflation and the unemployment rate. A technical committee under the NWCC conducts calculations, industry sensitivity tests and consultations with stakeholders, after which proposed options for the minimum wage are debated amongst members of the NWCC. The agreed upon minimum wage range is then proposed to the Minister of Human Resources and the Cabinet for the government’s decision. 

It is unclear whether the core basis of the minimum wage is driven by the question of the minimum needed to live in today’s society, or by the question of what industry can or is prepared to bear. The NWCC website states two potentially competing aims of ensuring employees are able to meet basic needs as well as providing a conducive environment for industrial production. 

The current formula suggests that Malaysia’s minimum wage setting takes into consideration the national poverty line, median income, inflation rate, unemployment rate and productivity growth. However, as mentioned above, experts and worker unions still think the current minimum wage is too low to live on adequately. The significant difference between the current minimum wage (RM1,200 for Kuala Lumpur & major cities) and estimates for the real living wage (BNM’s RM2,700 for Kuala Lumpur & major cities and SWRC’s reference budget of RM1,870 for an unmarried public transport user in Klang Valley) implies that either the formula needs improvement or that employer readiness plays a more significant role in deciding Malaysia’s national income floor.

Read our past primer on minimum wage vs. living wage.

Opaque review and decision-making process

While there are broad guidelines under the current framework, there is a lack of transparency in how the review of the minimum wage level is conducted and what factors drive decision-making. The recommendations of the NWCC, including its supporting calculations and information sources are not published for public comment or information. The deliberations on these recommendations and the rationale for the government’s final decision are also not published.

Increasingly outdated policy paradigm

As outlined in Part 1, the emerging trend of labour informalisation makes policy frameworks that revolve around formal full-time employment increasingly obsolete, including minimum wage laws. Even if the official minimum wage were to be sufficient to cover local costs of living, its enforcement would still be limited to full-time or part-time formal employees only – a declining employment category in an era of digitalisation and contract or ‘gig’ employment. To ensure that all workers who work a stipulated number of full-time or part-time hours receive the fair minimum pay, new employment categories would need to be established (such as dependent contractors) and would need to be thoughtfully integrated into current minimum wage laws.

Finally, the acute hardships caused by the COVID-19 pandemic on low-waged income earners have shown how policy frameworks that focus on employer affordability are increasingly insufficient and siloed. Minimum wage policy needs to be compatible and consistent with a national policy on social safety nets. In this past year of COVID-19 we have seen the government implement both ad hoc measures such as wage subsidies as well as more established Bantuan Sara Hidup household cash transfers (or its pandemic-times name, Bantuan Prihatin Rakyat) to supplement low or interrupted incomes. This same approach should be a cornerstone of a long-term social safety net policy post-COVID, where minimum wages and non-wage financial contributions by employers plays the role it is intended to accomplish, in tandem with wage support, household income support and reskilling schemes by the government.

A clear, viable policy for fair pay

To reiterate, the core policy question on fair pay in the context of this piece is about determining the minimum amount owed to a worker for a specified (and conventional) number of hours worked. To close the gaps in doing so, we propose the following:

A societally acceptable level for the minimum wage

What is the purpose of a national minimum wage? If it is to ensure that workers can meet a minimum reasonable cost of living – which we argue is the foremost purpose – the minimum wage should be researched, calculated and set at the level of a minimum living wage for the locality. 

There will surely be debates around what is a societally acceptable definition of a minimum living wage and minimum living conditions but at the very least, Malaysians would be clear that the minimum wage, in principle and in law, is set at a level that does not come below the poverty threshold or other benchmarks of misery or exploitation. Future revisions of the minimum wage would be mostly reflective of changes in the consumption basket, inflation, and the level of local economic development.

A transparent review and decision-making process

Setting the minimum wage, even to the level of a living wage, will likely continue to be a negotiation between application of a formula as well as appeals from stakeholders. While we aspire to the level of independence in Australia’s minimum wage set-up, particularly in the autonomy of the Fair Work Commission, as a medium-term measure we advocate emulating the transparency of that same commission.

The details of the annual minimum wage review process and data sources should be made public including the formula or calculation for the minimum wage, any research papers commissioned to amend or update the formula, counter-proposals from stakeholders, proceedings from stakeholder engagement sessions, to name a few. Instead of closed-door discussions, we strongly advocate for these key information to be published and for the government to explain discrepancies between NWCC’s minimum wage proposals and the government’s final decision on the minimum wage. These pieces of information can then be constructively debated in Parliament by elected representatives (when Parliament reconvenes).

An updated policy paradigm of wages and social safety nets

With new forms of employment mushrooming in the fast-changing labour market, the eligibility criteria for earning a fair minimum wage and benefits should not only be limited to those in formal employment. As argued above, the minimum wage should apply to all worker categories, unless there are sectoral or practical obstacles barring its implementation (in which cases wage or income support kicks in).

In Part 1, we argued for the establishment of 3 major employment categories to reflect 3 major underlying power relationships: employees, dependent contractors and independent contractors. As per current laws, all formal employees who contribute full-time hours should earn a minimum living wage and have non-wage financial benefits such as employer contributions to EPF and EIS. 

For dependent contractors, we propose that those who work the equivalent of full-time hours should also earn incomes not less than the minimum living wage. Independent contractors meanwhile have the highest degree of job autonomy and control; workers in this category should have sufficient means and capacity to negotiate for rates and fees above the minimum living wage but for additional information and know-how support, should also be supported by collectives supporting independent contractors and solopreneurs.

Some countries have created a tiered minimum wage system to account for younger workers, apprenticeships, hours worked and other material circumstances.

In the United Kingdom, workers younger than 23 years old and workers in apprenticeship have separate minimum wage levels. Australia adopts a different approach by offering special provisions known as modern awards in addition to the statutory wage law to set sectoral/occupation-based minimum wage and employment conditions. To accommodate flexible working hours, some state governments in the United States have enabled those working full-time hours or more in a week to earn a premium payment on top of their minimum wage.

Anticipated Issues

At the time of writing, the debate* about raising the minimum wage to the living wage level is increasing across the world in the United States, Indonesia, and more. In Malaysia, the COVID-19 pandemic has highlighted the struggles of many low-income Malaysians to make ends meet, exposing the inadequacy of our current minimum wage, both in amount and in coverage. While the government promises a review of the minimum wage, we argue that its definition, administration and policy paradigm needs to undergo a significant change.

*Note: Debate amongst economists on the effects of raising the minimum wage have come a long way from mostly negative to mixed, based on empirical evidence showing little impact to employment upon modest increases (paywall).

Implementing a local living wage as the minimum wage in one stroke will very likely not be possible or even advisable. The difference between the current minimum wage and the revised poverty line (not to mention various proposals of local living wage figures) is very large, and there will be serious and legitimate concerns regarding companies’ ability to pay, especially SMEs. Raising the minimum wage has to be done in stages. To further support the transition to a minimum living wage regime, the government may also institute sectoral exemptions to reflect the cost of living in specific working environments such as oil palm plantations, as well as targeted, temporary wage subsidies for qualifying companies with clear criteria.

Extending minimum wage coverage to all workers will also not be straightforward. One challenge is in determining numbers of hours worked for certain types of dependent contractors, for example gig platform workers. Should hours spent on the platform app be equated to hours worked or would this result in ‘gaming the system’? There is as yet no answer to this question, and many other practical nuts-and-bolts questions of implementation. But if ensuring fair pay for all workers, including informal workers, is something we consider not only societally acceptable but also societally important, we should ensure that the principle is agreed upon, and that time and effort are invested towards resolving the practical issues.

Beyond earning a living wage, what other factors constitute Fair Work? We take up fair working conditions and fair contracts in the next instalment of this research series.

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