How SMEs Can Build an Effective HR System

Written by: Izz Murtada

Running a small or medium business is hard work. You think about sales, customers, stock and cash flow every day. HR can feel like something you will fix “later”. But a good HR system saves you time, money and stress. It also helps your staff feel safe and treated fairly.

You do not need a big team or an expensive system to start. You only need clear steps and good habits. Below are five simple areas to focus on. We based this article on the Employment Act 1955 (Act 265), so you know your steps follow Malaysian law.

1. Establish Clear HR Policies and Procedures

Policies are simply the rules of your workplace, written down. They tell everyone what is expected. When the rules are clear, there are fewer arguments and fewer surprises.

A good starting list includes working hours, leave, dress code, how to apply for leave, and what happens when someone breaks the rules. Keep the words simple. If your staff cannot understand the policy, it will not work.

Here is a point to remember. Under section 7 of the Act, if your contract or policy gives an employee less than what the Act promises, that part is void. This means it has no effect. So write your policies to meet the Act first. You are free to give more than the Act, but never less.

Also think about how you handle problems. Section 14 says that before an employer punishes an employee for misconduct, there must be a proper inquiry. So your policy should explain the steps, such as telling the employee what went wrong and listening to their side.

2. Implement an Efficient Payroll and Employee Benefits System

Nothing upsets staff faster than late or wrong pay. A good payroll system keeps your team happy and keeps you out of trouble.

The Act gives some clear rules on pay. Here are the main ones:

• Your contract must state a wage period, and it cannot be longer than one month (section 18).
• Wages must be paid no later than the seventh day after the wage period ends (section 19).
• Wages should be paid into the employee’s account at a bank or other approved financial institution (section 25).
• You can only make deductions from wages that the law allows (section 24). You cannot just deduct money because you feel like it.

Benefits matter too. The Act sets the minimum, and many SMEs forget to check these:

• Normal working hours are not more than eight hours a day and 45 hours a week, and staff must get a 30 minute rest after five hours of continuous work (section 60A).
• Paid annual leave is 8, 12 or 16 days a year, depending on how long the employee has worked for you (section 60E).
• Paid sick leave is 14, 18 or 22 days a year, and 60 days if the employee needs to stay in hospital (section 60F).
• Employees get at least 11 paid public holidays a year (section 60D).
• Female employees get at least 98 days of maternity leave (section 37), and married male employees get seven days of paid paternity leave (section 60FA).

Please note that the Act says some of its rules do not apply to employees who earn more than RM4,000 a month. It is always good to check which rules apply to each person.

3. Develop a Structured Recruitment and Onboarding Process

Hiring the wrong person costs a lot. Hiring the right person without a good start can also go wrong. That is why you need a clear process from the first interview to the first month at work.

For recruitment, write a simple job description before you advertise. List the main tasks, the working hours and the pay range. Use the same questions for every candidate so the process is fair.

Once you choose someone, put it in writing. Section 10 of the Act says that a contract of service for more than one month must be in writing. It must also include a clause that explains how either side can end the contract. If you do not have a written notice period, section 12 sets the minimum. It is four weeks if the employee has worked for less than two years, six weeks for two to five years, and eight weeks for five years or more.

Onboarding is the first few weeks at your company. Use this time to explain the policies, show the employee around, introduce their team and make clear what you expect from them. A good start helps new staff settle in quicker and stay longer.

4. Maintain Accurate Employee Records and Documentation

Many SMEs keep records in many places, such as WhatsApp, drawers and personal laptops. That is risky. If there is a dispute, you may not be able to find what you need.

Section 61 of the Act says employers must prepare and keep registers with information about each employee. These records must be kept so that they can be checked for at least six years after they are written.

A simple set of records for each employee should include:

• The signed contract of service and any changes to it
• Personal details and job position
• Pay records and payslips
• Leave taken and leave balance
• Warning letters, inquiry notes and other HR actions

Store them neatly in one place, with a backup copy. Keep them private too. Only the people who really need them should be able to open these files.

5. Ensure Compliance with Malaysian Employment Laws

Laws change. The Employment Act 1955 was amended by Act A1651, and the changes started on 1 January 2023. Because of this, an SME cannot just copy an old contract and hope for the best.

Here are a few newer areas that employers should know about:

• Flexible working arrangement: Under section 60P, an employee can apply to change their hours, days or place of work. The application must be in writing, and the employer must say yes or no within 60 days. If the answer is no, the employer must give the reason in writing (section 60Q).
• Sexual harassment: When an employer receives a complaint, the employer must inquire into it (section 81B). If the employer refuses to do so, the employer must tell the complainant in writing, with reasons, within 30 days.
• Wage disputes: The Director General of Labour can inquire into disputes about wages and other payments owed to an employee (section 69). Good payroll records make these problems much easier to settle.

A simple habit helps here. Set a date every year to review your contracts, policies and leave rules against the latest version of the law.

Start Small, Then Grow

You do not have to do everything in one week. Pick one area, fix it, and then move to the next. Start with your contracts and payroll, then add policies and records. Slowly, you will have an HR system that works for your business and your people.

If you are not sure where to begin, you are not alone. At Kita Strategies, we are an HR and payroll consulting company that works with Malaysian businesses of all sizes. We can help you write clear policies, set up your payroll and keep your HR practices in line with the Employment Act. Feel free to reach out to us for a friendly chat about what your business needs.