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Navigating the employment landscape in Southeast Asia is no small feat, especially for businesses expanding into the region or managing a remote workforce. Given the region’s fragmentation and myriad of local rules and regulations, Human Resource (HR) non-compliance can quickly become a costly mistake for companies unfamiliar with local policies. With each country in Southeast Asia having its own legal framework, it is crucial to understand the risks involved and the penalties for failing to comply.
In this article, we explore 3 challenges and 3 risks of HR non-compliance that can pose significant risks to businesses in Southeast Asia.
Southeast Asia is a mosaic of legal systems, with each country enforcing its own set of labor laws. For example, Singapore, Malaysia, Indonesia, Vietnam, and Thailand each have distinct rules regarding minimum wage, employee benefits, termination protocols, and working hours.
Take Singapore, for instance, where the Employment Act governs core labor provisions, including annual leave, sick leave, and overtime, among others. Meanwhile, Malaysia enforces the Employment Act 1955, which differs significantly, for example in terms of wage protections and rest days
In this complex environment, businesses operating across borders must maintain a solid understanding of the variations in legal obligations. Misinterpretation or ignorance of these differences can lead to unintended violations.
Misclassifying employees as independent contractors or freelancers is a growing compliance issue in Southeast Asia. In many cases, companies attempt to bypass employment laws by misclassifying workers, avoiding the need to provide statutory benefits like social insurance, medical coverage, and paid leave.
In Malaysia, for instance, employers must provide unemployment insurance for full-time employees, which independent contractors are exempt from. Misclassification can lead to penalties, including back pay for benefits and taxes owed.
Similarly, in Singapore, the government has ramped up its focus on correct worker classification, particularly when it comes to freelance and gig economy workers. Misclassification could result in legal disputes, with companies being required to pay owed wages, CPF contributions, and other benefits.
The consequences of employee misclassification are severe, especially as labor ministries across Southeast Asia are strengthening enforcement efforts. Companies must carefully evaluate the employment status of their workers or risk expensive back payments and regulatory fines.
With the rapid digitization of HR processes, handling employee data correctly is a growing compliance challenge in Southeast Asia. Most countries in the region have enacted data protection laws that companies must adhere to, including Singapore’s Personal Data Protection Act (PDPA) and Malaysia’s Personal Data Protection Act (PDPA).
Failure to comply with these regulations can lead to hefty fines and legal action. In Singapore, companies found in violation of the PDPA can be fined up to SGD 1 million. For businesses processing payrolls, non-compliance can also result in fines and disruption in business operations.
Cross-border data transfers are another major challenge. For instance, Malaysia’s PDPA has strict guidelines about transferring employee data outside the country without proper safeguards. Multinational companies must navigate these regulations carefully or face the risk of fines and data breaches.
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Non-compliance with HR regulations in Southeast Asia can lead to severe financial penalties, lawsuits, and, in some cases, criminal charges. This is not limited to large corporations; even small businesses face stiff fines for violations.
In countries such as Indonesia and Thailand, non-compliance with labor laws, failing to provide severance pay to terminated employees, can lead to both fines and potential court action. As another example, in Vietnam, wrongful termination could result in additional compensation of at least 2 months’ salary for the employee on top of reinstatement of all salary and pension contributions for the period during which the employee was wrongfully terminated.
The legal repercussions go beyond fines and extend to business operations. Companies found guilty of HR non-compliance may face temporary shutdowns, lengthy audits, or litigation, all of which disrupt daily operations and drain resources. In severe cases, company executives could face criminal prosecution.
For example, PT Freeport Indonesia, a subsidiary of the American company Freeport McMoRan, faced significant labor unrest when thousands of workers were laid off a few years ago. The government stepped in to intervene in the dispute and eventually sided with the workers after a long-drawn court battle, requiring the company to compensate all the workers.
Ultimately, the financial risks of non-compliance are not limited to penalties alone; companies also face indirect costs, such as legal fees, compensation payouts, and the expenses associated with rehiring or retraining employees. For international businesses, the complexity of navigating local employment laws without local expertise can lead to costly mistakes that could have been avoided through proper compliance protocols or by engaging a trusted HR service provider.
The financial penalties for HR non-compliance are significant, but the long-term impact on a company’s reputation can be even more damaging. In today’s interconnected and transparent business world, non-compliance scandals can quickly make headlines, eroding customer trust and tarnishing a company’s image. For instance, news of employee mistreatment, wrongful termination, or unpaid wages can spread rapidly through social media, attracting public outrage.
According to Aon’s 2023 Global Risk Management Survey, 8% of respondents indicated that reputation damage had contributed to some form of financial loss for their organization in the past 12 months. Loss of trust in a company can very quickly impact a company’s customer relationships, supplier relationships, and employee branding, to name a few.
For example, logistics company Ninjavan made the news in September 2024 for having delayed salary and social insurance payments to employees in its Vietnam subsidiary, which led to a suspension of its operations as well as a protest outside a company office that received widespread media coverage. This had a negative impact on the company’s reputation and also raised concerns from employees in other regions, while the shutdown in operations has a significant business impact.
Beyond immediate backlash, the negative perception of a company can hinder its ability to attract top talent, especially in competitive industries. With growing awareness around ethical employment practices, staying compliant is not just a legal necessity but a critical component of maintaining brand integrity and trust in Southeast Asia.
Non-compliance with HR laws doesn’t just carry financial or legal risks—it also affects workforce morale. Employees who feel their rights are being violated may lose trust in the organization, leading to decreased productivity, higher turnover, and a damaged employer brand.
It is also common for candidates in some markets to turn down offers that do not include statutory payments as they would be unable to apply for housing loans, which increases hiring costs and durations for companies that may be trying to urgently fill vacancies to ensure effective operations.
Cultural expectations also play a crucial role in employee satisfaction. In countries like Indonesia, where religion is intertwined with labor laws, failure to accommodate religious holidays and practices can cause discontent. For example, Indonesian labor law mandates time off for religious observances such as Idul Fitri, and not adhering to this or having poor understanding of its importance could create friction with employees.
Similarly, failure to comply with maternity leave regulations, such as the 98-day leave requirement in Thailand or the 105-day maternity leave in the Philippines, could severely impact female workforce participation and morale.
For companies expanding into Southeast Asia, the risks of HR non-compliance are compounded by the lack of local expertise. Without in-country HR professionals or local expertise, global businesses can easily fall foul of these regulations, incurring significant costs. Outsourcing HR functions to an Employer of Record (EOR) can offer a practical solution by ensuring all local regulations are adhered to, minimizing risk.
Glints is the leading Employer of Record (EOR) service provider in the region – we take the burden of HR compliance off your shoulders. With our local expertise across Southeast Asia’s talent markets, we manage everything from employee classification to payroll, ensuring that your business remains compliant in every Southeast Asian market.
Don’t leave your company vulnerable to costly penalties and legal repercussions. Contact us today to learn how we can help your business navigate HR compliance in SEA.
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