Are You Paying Overtime Correctly? A Quick Payroll Audit for Malaysian SMEs

An HR manager assumes their monthly overtime calculations are correct using traditional spreadsheet formulas, then discovers during an audit that the basic rate of pay (BRP) is wrong and the pay multipliers were not included, resulting in underpayments. If this scenario is relatable, then it is time to look into the importance of overtime management. Beyond calculating working hours, OT management is a complex process that involves verifying BRP, public holiday multipliers, and statutory caps under the Employment Act 1955. Hence, this article explains how monthly payroll accuracy can build confidence among employees by conducting a quick self-assessment to look for potential OT errors while protecting the business from legal action.

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What Does a “Correct” Overtime Calculation Actually Mean?  

According to Malaysia’s Employment Act 1955, overtime compliance means legal obligations for scheduling, paying and controlling employees' working hours. This includes 4 criteria:

1. Eligibility: Automatic coverage for salaries of RM4,000 or below per month.

2. Work Limits: Standard work hours limited to 8 hours a day/ 45 hours a week, while maximum overtime is limited to 104 hours per month.

3. Proper Record-Keeping: Keep all records of work hours and calculations to prevent penalties from the Department of Labour (Jabatan Tenaga Kerja).

4. Minimum Pay Rates: Pay mandated multipliers as shown below.

Table 1.0: Overtime types and the respective multipliers.

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Employers should also ensure the Ordinary Rate of Pay (ORP) and Basic Rate of Pay (BRP) are calculated accurately. Put simply, BRP calculates on-paper salaries, while ORP includes calculating overtime and other payments. The table shows important differences between the two:

Table 2.0: Ordinary Rate of Pay (ORP) and Basic Rate of Pay (BRP).

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Which Overtime Rates and Scenarios Should HR Audit?

Based on the overtime payment categories (Table 1.0), HR should audit each overtime type to prevent miscalculations. The table below illustrates a more detailed elaboration on the types of overtime payments:

Table 3.0: Types of Overtime Payments.

What Makes Overtime Calculations Difficult to Verify Later? 

Overtime calculations can be challenging when trying to review them backwards due to these common auditing errors among Malaysian SMEs:

Spreadsheet Formula Errors

• With the convenience of tools like Microsoft Excel and Google Sheets, it can be a blind spot to overlook errors such as unlinked cells, broken functions, or manual adjustments across consecutive payroll months. Another potential gap would be ensuring that the formulas are following the newest policies set by the labour department. 

Scattered Information

• Without a system, the company may have shift logs in clock-in machines, approvals across chats, or paper sheets in different files that are difficult to track and match to the final payroll.

Missclassifying Payments

• Due to the various categories of payments, it can be confusing to exclude fixed allowances from BRP, which leads to underpayment or OT when using the formulas mentioned in the table.

Unclear Approval Process

• Manual processes also lead to a lack of transparent records between pre-approved and approved OT claims, creating miscommunication during employee exits or labour department reviews.
  

5 Simple Steps to Conduct an Overtime Audit

To avoid future errors when auditing employee overtime payments, here are 5 steps on how to minimise auditing mistakes for HR teams:

Sample 10% of Payslips

• Select a mix of shift workers, fixed-salary employees and high-OT employees from the previous 3 payroll cycles to audit. This method saves time by avoiding a full review of every employee, reduces costs, and helps identify systemic errors in the records.

Recalculate the BRP and ORP

• Ensure all formulas in the auditing spreadsheet align with the Employment Act 1955 statements on BRP and ORP rates to maintain a transparent record for labour department reviews.

Cross-Check Clock-In Vs Claimed Hours

• Create a matching system (or maintain a manual process when digital methods are limited) to approve OT claims by comparing them directly with the attendance records.

Verify OT Multipliers

• Besides the basic formulas for BRP/ ORP, another key calculation is the OT multipliers 1.5x, 2.0x, and 3.0x) being applied correctly based on the types of working days on the calendar.

Review Statutory Deduction Caps

• The last step before concluding the audit process is to consider external factors affecting the final calculation, including EPF, SOCSO, and the Employment Insurance System (EIS). Another consideration would be tax deductions like Potongan Cukai Bulanan (PCB) and employer-paid levies like Human Resources Development Corporation (HRD Corp) calculations.
  

How Can an Automated HR System Play in Overtime Accuracy?

It is normal even for HR professionals to find the filtering process of overtime claims confusing and complex. Therefore, a systematic approach would be to adopt an automated HR system for the company’s time and attendance. Integrating HR systems allows companies to centralise live time-tracking, digital workflows, and automate payroll amounts to eliminate manual calculation errors. HR systems such as ByteHR even have features like automated time and attendance and payroll modules following OT formulas with customizable shift rules to reduce reliance on manual spreadsheets. Although these processes are replaceable by HR systems, HR professionals are still an essential aspect in helping to set the correct policies in place, ensuring adherence to the newest baseline policies.

Is Your Overtime Payroll Process Audit-Ready?

After observing the importance of having a comprehensive HR system to track accurate OT payments, here is a quick self-assessment that offers a few important questions that will reveal whether the current workflow can be improved:

1. Can you explain the exact base rate formula used to calculate OT for every employee?

2. Do your attendance records directly match the OT hours paid out on monthly payslips?

3. Can another team member step in and verify your OT calculations without needing custom spreadsheet guides?

By answering these questions, SMEs can determine if changes can be made to strengthen the company’s overtime submission processes, transparency and auditing accuracy moving forward.

Conclusion

In summary, OT compliance is always built on accurate calculations, consistent auditing processes, and a reliable system to keep record-keeping safe without last-minute fixes when labour inspections or legal matters arise. More importantly, everyone from the HR department should find these records accessible at any time to save time and effort when making any adjustments towards the payment. Ready to see how ByteHR (please contact us via 036 419 5276 or salesmy@byte-hr.com for a free consultation) can help you automate overtime auditing processes? Request a free demo and see how a systematic approach to payroll management can impact your business effectively.