Budget 2027: The New Minimum Wage

With the minimum wage rising to RM2,000 a month from June 2027, one error deserves attention at the outset: checking gross pay instead of basic pay. An operator paid RM1,700 basic plus RM400 in shift, attendance and transport allowances earns RM2,100 in total, yet the employer would not be compliant, because the law looks only at the basic wage.

This guide covers what the minimum wage means in law, the wider costs of the increase, the penalties for non-compliance and the steps HR should take before the new rate applies.

The new rate, who it covers and when

Budget 2027 raises the minimum wage from RM1,700 to RM2,000 a month from June 2027. The exact commencement date and the final scope will be fixed by a new Minimum Wages Order made under section 23 of the National Wages Consultative Council Act 2011 (the NWCC Act). Until that Order takes effect, the Minimum Wages Order 2024 and its RM1,700 rate continue to apply.

Coverage is wide. The minimum wage applies to employees under a contract of service, local and foreign alike, and since 1 August 2025 it has also covered apprenticeship contracts. Domestic workers remain outside the Order, and an intern is not an apprentice.

The exemption is the part to watch. The speech exempts MSMEs with annual sales below RM50 million "to provide room for adjustment to business models". It gives no end date. It does not say how sales are measured, which financial year counts, or how a small company inside a large group is treated.. Until the Order answers them, treat the exemption as something to verify, not something to rely on. If you believe you qualify, start building the evidence now: audited sales figures, the group structure and how you arrived at the number.

For staff who are not paid monthly, the Order sets daily and hourly equivalents. If the new Order follows the formula used for RM1,700, the figures would be as follows. The right-hand column is our projection, to be confirmed when the Order is gazetted.

The speech also announces a RM2,500 monthly minimum for semi-skilled workers and graduates, as the first step in reforming the "workers' income framework". KESUMA says the mechanism will be announced soon. Nothing changes in your offer letters yet, but if your entry-level professional or technical bands start below RM2,500, flag them now. They may need to be reviewed in 2027.

What "minimum wage" means in law

This is where most errors occur. Section 2 of the NWCC Act defines "minimum wages" as basic wages, not gross pay or total cash earnings.

Fixed allowances therefore do not count, however regular they are. Neither do overtime, shift premiums, attendance or productivity incentives, commission paid on top of a basic, bonuses or service charge. The Federal Court settled the service charge point in Crystal Crown Hotel & Resort Sdn Bhd v Kesatuan Kebangsaan Pekerja-Pekerja Hotel, Bar & Restoran Semenanjung Malaysia [2021] 3 MLJ 466. The hotel wanted to use service charge to top up basic pay to the statutory minimum, or to fold it into a "clean wage". The Court refused both. Basic wages stand apart from every other cash payment, service charge is customers' money held for the employees, and relabelling it to meet a statutory obligation defeats the purpose of the Act.

Three groups need particular care. Daily-rated and hourly staff must receive at least the daily or hourly equivalent for the days and hours they actually work. Employees paid only by piece rate, tonnage, task, trip or commission must still receive at least the monthly minimum. Foreign workers are also entitled to exactly the same rate as Malaysians.

Two further rules apply. First, a contract or collective agreement that sets a lower basic wage does not protect the employer. Section 24 of the NWCC Act treats a collective agreement made under section 14 of the Industrial Relations Act 1967 as a contract of service, and substitutes the minimum rate for any lower rate. Second, the employee's agreement is no defence. An employee cannot contract out of the minimum wage, and a signed letter accepting a lower basic wage does not make the arrangement lawful.

Lawful deductions are a separate matter. EPF, SOCSO, EIS and PCB, and permitted deductions such as employer-provided accommodation charges, come off a basic wage that already meets the minimum. The test is applied before deductions, not after. An employee on RM2,000 basic will take home roughly RM1,766 after EPF, SOCSO and EIS, and that is entirely lawful.

Knock-on effects on pay and costs

As we noted in our September article, the real cost lies not in the floor itself but in everything above it. Four effects should be reflected in your budget.

• Statutory contributions. Every ringgit added to basic pay attracts the employer's share of EPF, SOCSO and EIS. Moving one employee from RM1,700 to RM2,000 costs about RM345 a month rather than RM300, before any overtime.

• Overtime and special payments. Overtime, rest day and public holiday rates are calculated from the ordinary rate of pay, which for a monthly-rated employee is the monthly wage divided by 26 (section 60I of the Employment Act 1955). When the basic wage rises, each of these rates rises with it. Our guide on calculating overtime and special payments sets out the formulas.

• Wage compression. A supervisor paid RM2,150 who currently leads operators on RM1,700 will, from June, lead operators on RM2,000, and the differential narrows from RM450 to RM150. Left unaddressed, compression of this kind tends to affect morale and retention. Decide on your differentials now, even if they are restored in phases.

• Collective agreements and increments. Where a collective agreement wage scale starts below RM2,000, section 24 lifts it automatically. Section 24 does not, however, determine whether the statutory adjustment counts towards the next contractual increment. That depends on the wording of the agreement, which should be reviewed before negotiations begin. For non-unionised employees on a discretionary increment, the employer may decide that the statutory adjustment counts as this year's increase, but should confirm this in writing and be prepared to explain the position to employees already earning above RM2,000.

The cost of non-compliance

The penalties are criminal, and they are calculated per employee. Failing to pay the minimum wage is an offence under section 43 of the NWCC Act, carrying a fine of up to RM10,000 for each employee. On conviction, the court maywill also order the arrears to be paid (section 44). A continuing offence attracts a further fine of up to RM1,000 a day after conviction, and a repeat offender faces a fine of up to RM20,000 or, imprisonment of up to five years, or both (sections 45 to 47).

For example, an employer that leaves 50 employees on a RM1,700 basic wage is exposed to a maximum fine of RM500,000, in addition to the arrears. Enforcement is active: between January and October 2023 alone, the Labour Department opened 1,654 investigation papers on wage payment, workers' housing and minimum wage offences, and compounded 775 of them for almost RM4 million.

The industrial relations risk is often overlooked. To absorb the increase, some employers reduce allowances, convert them into basic pay so that gross pay is unchanged, or ask employees to sign letters accepting a new pay structure. In Sri Maju Sarata Ekspres Sdn Bhd v Segar a/l Munusamy & Ors [2025] MLJU 3255, the Court of Appeal held that consent letters signed under pressure could not validate wage reductions falling outside the deductions permitted by section 24 of the Employment Act 1955. Reducing an allowance without genuine agreement therefore replaces a criminal exposure with a civil one: a claim for arrears at the Labour Court under section 69 of the Employment Act 1955, or a constructive dismissal claim under section 20 of the Industrial Relations Act 1967. KESUMA has also reminded employers that wages already above the minimum may not be reduced to it.

In addition, from year of assessment 2028, companies other than MSMEs that still pay wages in cash will lose the tax deduction on those salaries.

What HR should do now

There are about eight months before the new rate applies. We recommend the following steps, in this order.

1. Review basic pay across the organisation. Cover every employee, every pay basis and every entity in the group, using basic pay rather than gross pay. Identify anyone below RM2,000 a month, or below the daily or hourly equivalent for their work pattern.
   

2. Document your exemption position. If you believe you are an MSME with sales below RM50 million, record the basis for that view, then test it against the Order once it is gazetted. An assumption is not a defence.

   
   

3. Budget for the full cost, not only the gap. Include the difference in basic pay, the employer's contributions, the higher premium rates and the differentials you need to restore. Build the figure into your 2027 budget now, while it can still be phased.
   

4. Update the documents, not the allowances. Revise offer letter templates, contracts and your collective agreement wage scale. If you are unionised, begin discussions early, as agreeing a revised scale costs less than defending a trade dispute. Move any cash payroll to bank or e-wallet payment at the same time.
   

5. Communicate before June. Employees on the minimum wage may expect RM300 more in take-home pay, but EPF, SOCSO and EIS deductions apply to the new basic wage, so the net increase will be smaller. Employees already earning above RM2,000 will also ask how they are affected, and HR should have the answer ready.

Compliance costs about RM345 a month per employee. Non-compliance can cost up to RM10,000 per employee in fines, and the arrears must still be paid.