Malaysian small and medium enterprises (SMEs) account for 98.5% of all businesses and more than half of total employment in the country. Yet many SMEs still view employee well-being through a narrow lens, focusing only on basic legal requirements, which is no longer sufficient in today’s workplaces. To attract top talent, improve productivity, and meet growing investor expectations, SMEs must move beyond minimum compliance and embrace proactive well-being strategies that create genuinely thriving workplace cultures.
This article explores how Malaysian SMEs can shift from box-ticking compliance to building genuine employee well-being programmes that deliver measurable business results whilst aligning with Environmental, Social and Governance (ESG) principles.
Why Basic Compliance Is No Longer Enough
Malaysia’s Occupational Safety and Health Act 1994 (OSHA) serves as the cornerstone of workplace safety legislation, requiring employers to ensure the safety, health, and welfare of their employees at work. The Employment Act 1955 prescribes legal standards for employment contracts, working hours, leave entitlements and termination procedures. These laws establish essential protections for workers.
However, compliance with these minimum standards does not create engaged, loyal employees. Research shows that approximately 29% of Malaysian employees struggle with mental health issues, leading to an estimated 3.78% loss in annual gross output due to absenteeism, presenteeism and turnover. Staff turnover due to mental health issues alone cost Malaysian businesses RM1.34 billion in 2018. Malaysia also has the third-highest voluntary turnover rate in Southeast Asia at 9.5%.
According to the research, the lack of specific provisions for workplace mental health support in the current legal framework, particularly the Occupational Safety and Health Act 1994, leaves SMEs that only meet basic requirements with significant gaps in employee support.
The Business Case for Employee Well-being
Lower Turnover and Reduced Costs
Employee turnover is expensive. Replacing an employee can cost over 50% of their annual salary, including recruitment, training, and lost productivity. For SMEs with limited resources, high turnover creates significant financial strain and operational disruption.
Research confirms that employee well-being is strongly correlated with productivity. Organisations that prioritise well-being through flexible work arrangements enable employees to maintain a healthy work-life balance, which is essential for sustained productivity. When employees are engaged, job satisfaction rises, and employee turnover decreases.
Studies have established clear links between engagement and well-being, life satisfaction, productivity, organisational performance and efficiency. Highly engaged employees foster adaptability and innovation, resulting in higher productivity, greater effectiveness, happier customers, lower absenteeism, and reduced staff turnover.
Learn about financial support available for Malaysian SMEs through the MIDA DIAF-ESG fund and other ESG initiatives.
Stronger Employer Branding
In Malaysia’s competitive hiring landscape, 62% of professionals plan to change jobs in 2025, with many citing a lack of alignment between their contributions and company values. Top talent wants to join organisations they can trust, with strong reputations for ethical leadership, fair treatment and transparent practices.
A company’s reputation spreads quickly in Malaysia’s relationship-driven business culture. Poor reviews on job sites can immediately damage recruitment efforts, whilst positive visibility positions organisations as top choices for ambitious professionals. Companies that foster inclusive workplaces and demonstrate genuine care for employee well-being attract and retain the best candidates.
SMEs face particular challenges competing with large companies for talent. Multinational corporations attract talent more easily through more substantial resources and well-established company cultures. However, SMEs can differentiate themselves by offering what larger organisations often cannot: meaningful work, career growth opportunities and genuinely caring workplace cultures.
Meeting Investor and Buyer Expectations
ESG considerations now play a critical role in investment decisions. With ESG-related assets projected to exceed substantial figures globally, SMEs demonstrating strong sustainability credentials can attract forward-thinking investors committed to long-term value creation.
International scrutiny of labour practices has intensified. Companies that fail to perform adequate ESG due diligence may face legal penalties, reputational damage and business disruptions. Multinational buyers and banks increasingly examine labour practices and workplace culture as part of their ESG due diligence processes.
Labour practices encompass how a company treats its employees across its operations and supply chain, including fair compensation, safe working conditions and respect for employee rights. These elements form a key part of the ‘Social’ component in ESG frameworks. For Malaysian SMEs in supply chains serving international markets, meeting these standards is becoming essential for maintaining business relationships.
Global buyers increasingly require suppliers to have certifications or be members of organisations that ensure good labour standards are upheld throughout the supply chain. The EU’s proposed Corporate Sustainability Due Diligence Directive, for example, will require comprehensive due diligence on labour practices, environmental sustainability and governance standards. Malaysian companies must align with these stricter standards to maintain business relationships with EU-based companies.
Discover how ESG investing trends in Malaysia are reshaping investor expectations for sustainable business practices.
Practical Well-being Initiatives for Malaysian SMEs
The good news is that creating a thriving workplace culture does not require massive budgets. With strategic planning, SMEs can implement impactful well-being programmes that are both realistic and effective.
Mental Health Support
Mental health challenges are significant among Malaysian workers, with studies reporting high rates of depression, anxiety and stress across various sectors. At Malaysian public universities, the prevalence of depression, anxiety and stress was found to be 28.7%, 50.1% and 14.8% respectively.
Simple mental health policies that SMEs can implement include:
- Employee Assistance Programmes (EAPs): These confidential employer-sponsored benefits help employees navigate personal and work-related challenges through counselling, stress management support and crisis intervention. Companies offering EAPs report improved retention, higher employee satisfaction and lower absenteeism.
- Mental health awareness training: Regular workshops on stress management and mental wellness help employees recognise symptoms and seek support early. Research shows that workplace health promotion programmes effectively reduce work-related depression, anxiety and stress levels.
- Clear policies on workload management: Setting expectations for reasonable working hours and encouraging employees to disconnect after work help protect against burnout.
AIA Malaysia partnered with digital mental health platform ThoughtFull to launch an end-to-end Mental Health Solution, demonstrating that comprehensive mental wellness can be integrated into employee benefits. AIA employees reported a 43% average reduction in depression, anxiety and stress levels through the programme.
Flexible Working Arrangements
The Malaysian government has recognised the importance of work flexibility by introducing Flexible Work Arrangement (FWA) Guidelines through the Ministry of Human Resources. Following amendments to the Employment Act 1955 in 2022, employees can now officially request flexible working arrangements under Sections 60P and 60Q.
Flexible arrangements include telecommuting, staggered hours, compressed workweeks and part-time schedules. Research confirms that workers with good work-life balance are at lower risk of mental health problems. Flexible working arrangements significantly enhance work-life balance by giving employees control over their schedules, thereby improving performance and reducing absenteeism.
Two in five Malaysians are willing to resign if required to work more frequently in the office, with nearly half of Gen Z and Millennials opposed to inflexible work arrangements. SMEs that offer flexibility can expand their talent pool to include individuals such as people with disabilities and caregivers, fostering equal opportunities and elevating employee skills.
Fair Wages and Compensation
Fair compensation demonstrates that an organisation values its employees. In 2025, Malaysia implemented a revised minimum wage of RM1,700 per month. However, government-linked investment companies have gone further, implementing a living wage of approximately RM3,100 per month, nearly double the minimum wage.
The living wage approach empowers employers to offer total compensation beyond base salary, encompassing healthcare, retirement plans and savings mechanisms. Findings from Bank Negara Malaysia show that living wage estimates for Malaysia range from a minimum of RM2,700 for a single adult.
Companies with highly engaged employees report 23% higher profitability, and fair wages help foster loyalty and reduce turnover, according to Gallup. SMEs should regularly benchmark their compensation against industry standards and consider how their total compensation packages, including benefits, compare with competitors’.
Workplace Inclusion and Diversity
Malaysian companies are increasingly adapting their workplace environments to eliminate gender bias, bridge generational differences, and ensure fair processes for all. Diversity, equity and inclusion (DEI) is crucial for innovation and organisational resilience beyond merely retaining talent.
A diverse workforce brings varied perspectives and ideas whilst fostering creativity and innovation. Inclusive workplaces empower employees to perform at their best, thereby increasing productivity. TalentCorp Malaysia is actively promoting inclusive workplaces where employees from diverse backgrounds can thrive.
SMEs can start with simple steps: review hiring practices for unconscious bias, ensure equal opportunities for advancement, and create an environment where all employees feel valued regardless of background.
Safe Working Conditions
Beyond basic OSHA compliance, proactive safety management includes:
- Regular risk assessments: Employers should conduct them to identify potential hazards and implement control measures. The amended OSHA now requires every employer, self-employed person, and principal to conduct safety and health risk assessments.
- Safety and health coordinators: Every employer must appoint an employee as a safety and health coordinator if five or more employees are employed at the workplace.
- Comprehensive training: Employers must provide adequate training and supervision to ensure employees understand safety procedures and how to use equipment safely.
The most significant recent amendment to OSHA is that statutory workplace health and safety obligations now apply to all workplaces, including remote work arrangements. Employees are now entitled to remove themselves from imminent danger at the workplace if employers fail to act.
Grievance Channels
Effective grievance mechanisms allow employees to raise concerns without fear of retaliation. A grievance mechanism will enable employees and stakeholders to raise concerns or report misconduct in a secure, confidential and trusted manner.
Malaysia has introduced the Working for Workers (WFW) app, a digital channel for all employees to access grievance mechanisms. However, awareness remains low: 18.4% of workers surveyed were unaware of any official channels for reporting violations.
SMEs should establish clear internal grievance procedures with multiple reporting channels (telephone, email, anonymous forms) and ensure all employees understand how to use them. Regular communication about these channels builds trust and encourages early identification of problems.
Upskilling and Training
Nine out of 10 Malaysian employees feel the need to upskill and reskill to survive and thrive in the digital-dominant business world. In January 2025, PERKESO, HRD Corp, and HCL Tech announced a new initiative to train 5,000 workers in cybersecurity, data science, and artificial intelligence, according to Human Resources Online.
For SMEs, investing in employee development:
- Personalised learning pathways: Create development plans tailored to each employee’s role and career aspirations.
- Cross-training opportunities: Allow employees to learn new skills across departments.
- Mentorship programmes: Pair experienced employees with newer hires to facilitate learning and skill development.
Employees are more likely to stay when they see a future in the company. Structured training, mentorship programmes and transparent promotion criteria build loyalty and attract ambitious candidates.
Malaysian SMEs can access fully funded ESG training through AsiaESG’s Partner, Nusan, HRD Corp-Funded ESG programme to build internal sustainability expertise.
Community Initiatives
Corporate social responsibility projects engage employees whilst contributing positively to society. SMEs can champion community health by undertaking CSR projects such as charitable giving, volunteering, disaster relief and food banks for underprivileged communities.
In Malaysia, businesses can benefit from tax deductions by donating to registered charitable organisations. CSR projects help companies project a positive image, enhance brand reputation and increase their ability to attract and retain the best employees. They also help employees develop people skills and community-based outreach that benefits job performance.
Aligning Well-being with ESG Requirements
Malaysia’s ESG landscape is rapidly evolving. Bursa Malaysia introduced its Corporate Social Responsibility Framework in 2006, followed by progressive enhancements to sustainability reporting. The National Sustainability Reporting Framework, launched in 2024, mandates reporting for larger companies, with smaller listed companies required to comply by 2027.
To facilitate SME participation, Capital Markets Malaysia introduced the Simplified ESG Disclosure Guide (SEDG) in 2023. This modular framework comprises 35 sustainability disclosures covering environmental, social and governance indicators, including detailed labour and human rights disclosures.
Social dimension disclosures should encompass policies related to labour standards and human rights, training initiatives, employee turnover rates, diversity and inclusion metrics, occupational safety statistics, and impacts on community engagement. While voluntary for SMEs, adopting SEDG positions businesses to meet buyer expectations and participate in ESG-aligned procurement ecosystems.
SME Corp Malaysia’s ESG Quick Guide, introduced in February 2024, provides step-by-step assistance for integrating ESG into operations. The government now offers ESG tax-deduction incentives of up to RM50,000 per year, demonstrating that ESG has moved from awareness to accountability to business advantage.
For a detailed overview of Malaysia’s ESG regulatory landscape, read our Business Guide to ESG Requirements in Malaysia.
Building Your Well-being Strategy
Creating a thriving workplace culture requires leadership commitment and systematic implementation. Consider these steps:
- Assess your current state: Survey employees to understand their well-being challenges and what support they need. Identify gaps between current practices and best practices.
- Start with quick wins: Implement simple, low-cost initiatives that demonstrate commitment, flexible working policies, mental health awareness communications, or improved grievance channels.
- Develop clear policies: Document your well-being initiatives in formal policies to keep your organisation accountable and to help all employees clearly understand expectations.
- Train managers: Managers play a critical role in employee well-being. Train them to recognise signs of stress, conduct supportive conversations and model healthy behaviours.
- Measure and improve: Track relevant metrics such as turnover rates, absenteeism, engagement scores and grievance resolution times. Use data to continuously refine your approach.
- Communicate your commitment: Share your well-being initiatives with employees, candidates and business partners. Transparency builds trust and strengthens your employer brand.
Learn more about measuring social sustainability metrics, including employee well-being and labour practices.
Taking the Next Step
Malaysian SMEs have a tremendous opportunity to differentiate themselves through a genuine commitment to employee well-being. Moving beyond basic compliance creates workplaces where people want to work, stay, and contribute their best efforts. The resulting business benefits, lower turnover, higher productivity, and stronger employer branding, make investing in employee well-being a compelling choice for SMEs.
As ESG expectations become embedded in capital markets and regulatory systems, SMEs that proactively address employee well-being position themselves to pursue growth, investment, and partnership opportunities advantageously.
Ready to transform your workplace culture and align your business with ESG best practices? Discover comprehensive ESG solutions tailored for Malaysian companies.
