With effect from 1 June 2026, Malaysia will be revising its Employment Pass (EP) salary policy. In essence, Malaysia is raising all EP minimum salaries for Categories I, II and III, and implementing a structured employment duration framework. This would be the country’s most significant adjustment in a decade, affecting how businesses, especially small and medium-sized enterprises (SMEs), approach hiring local and foreign talent.
*Requires Mandatory Succession Plan
While the jump in salary is quite substantial, the most significant hurdle (arguably) would be the newly mandated succession plan.
Any Category II or III renewal requires documentation of proof that the business is actively training up its local employees with knowledge transfer and expertise. This allows employers to manage their workforce and ensures foreign workers are contributing tangible value to local talent. Succession plans – which must be approved by ESD – must include:
- The specific role that will be localised
- A structured training programme
- A clear timeline for skill development and readiness
For SMEs, this implies that their human resources (HR) teams must function similarly to a coaching academy. HR should pivot from being hiring-centric to one that’s focused on development. Given that competing with larger businesses on salary alone is increasingly costly for SMEs, the focus should be on cultivating and retaining local talent.
Malaysia’s strategic growth plan for the next 5 years
These EP salary hikes are part of RMK-13. The theme, “Melakar Semula Pembangunan”, is a RM 611 billion investment to enhance Malaysia’s economic, social and environmental development. With key focuses on raising wages, improving value creation and strengthening good governance, these steps are a move forward to Malaysia attaining a developed nation status by 2030. In line with this, the government is also reducing reliance on foreign labour, capping it to a maximum of 15% of the total workforce.
This affects SMEs in Malaysia in 2 ways:
- Upskilling locals by prioritising the employment of skilled Malaysian talent to build a more resilient domestic economy
- Moving away from labour-intensive models towards high-growth, high-value sectors
A reflection of Southeast Asia’s move towards a high-value talent hub
This transformation is not isolated to Malaysia, but a trend happening in Southeast Asia.
- Thailand’s Board of Investment (BOI) introduced mandatory minimum salary thresholds for expatriates from 1 October 2025.
- Vietnam increased its monthly and hourly regional minimum wage by approximately 7.2% since 1 January 2026 for employees under employment contracts.
- Indonesia recently launched Phase 1 of its National Vocational Training programme which focuses on skills upgrading for over 10,000 participants on 1 April 2026.
- Singapore’s Budget 2026 revealed that the minimum qualifying salary for EPs will be raised to at least $6,000 from 1 January 2027.
This move is proving that Southeast Asia is tightening its focus on strengthening its workforce upskilling. With Southeast Asia moving away from being a low-cost labour market, this means that SMEs within the region can no longer “arbitrage” cheaper labour just by moving across the border.
How SMEs in Malaysia can adapt
Consider hiring local fractional specialists
More often than not, SMEs are experiencing skill shortages, especially when costlier, senior positions being more difficult to hire. Instead of one high-cost EP holder, SMEs can outsource to local B2B firms or professionals that operate on a fractional basis. By hiring a local agency or senior-level consultant, budget-constrained SMEs tap into the skilled expertise they need while bypassing the EP headache, all while saving on costs that can be redirected into other areas of business operations.
Offset salaries with automation and AI
If the cost of a Category III manufacturing role increases to RM 7,000 per month minimally, the return on investment (ROI) for artificial intelligence (AI) adoption comes at an ideal time. Malaysia’s Ministry of Digital aims to drive the country towards becoming an AI nation by 2030, which has seen great strides in that direction, with 81% of SMEs already adopting some form of AI in their operations. Currently, SMEs can apply for the MADANI Smart Automation Grant, which allows companies to each receive up to RM 1,000,000 to invest in equipment or software that automate processes.
Partner with Technical and Vocational Education and Training (TVET) institutions
The government is also taking strides to encourage integration and collaboration between the industry and vocational institutions, to bridge the gap between education and market needs. As of 2024, partnerships between the Federation of Manufacturers Malaysia and TVET institutions have led to over 10,000 programmes being organised. This builds Malaysians as an agile workforce that is adaptable, allowing SMEs to tap into a sustainable pipeline of local talent.
Building a local and regional pool of “deep talent”
With Malaysia fully focusing its efforts on the goals it set out in the RMK-13, the economy is heavily investing in its local workforce to become high-value “deep talent”. This type of working professional is specialised, AI-literate, and capable of driving growth in various industries that Malaysia is capitalising on.
With the EP policy happening in roughly a month’s time, the government is essentially challenging SMEs to compete on value and productivity instead of cost. Now, SMEs are becoming the drivers of Malaysia’s future middle-class.
As regional neighbours like Singapore, Thailand, Vietnam and Indonesia tighten their skilled talent pools, Southeast Asia is transforming into a valuable talent hub. This provides Malaysia with the golden opportunity to upskill and become an attractive regional and global partner as it moves up the value chain.
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