How to Legally Terminate an Employee in Malaysia

As your business in Malaysia grows and changes, managing your team will sometimes mean having to let someone go. It’s an inevitable part of business, but one that needs to be handled carefully according to local laws. 
This article walks you through the legal essentials of termination of employment in Malaysia so you can manage these situations fairly and responsibly.

Understanding Key Legal Terms in Malaysian Employment Law 

Before initiating any termination, it’s important to understand certain legal terms as defined under Malaysian employment law, primarily the Employment Act 1955 and the Employment (Termination and Lay-Off Benefits) Regulations 1980. Understanding these concepts is foundational for determining lawful procedures, assessing your obligation regarding termination benefits, and ultimately mitigating legal risks.

Key terms to be aware of include:

• Continuous Contract of Service: This refers to an employee’s uninterrupted period of service. It’s important to note that service is generally considered continuous even if interrupted by legitimate absences such as sick leave, approved annual leave, maternity leave, or other circumstances where the interruption is not due to the employee’s fault. The length of continuous service is a key factor in calculating termination benefits.
• Entitlement to Termination Benefits: Employees who have completed at least 12 months of continuous service are typically entitled to termination benefits (e.g., severance pay) if their employment is terminated for reasons such as redundancy or by the employer for reasons other than misconduct.
• Exclusions: An employee is generally not entitled to termination benefits if they are dismissed for proven misconduct (after a due inquiry), if they resign voluntarily, or if they unreasonably reject a valid offer of re-employment from the employer on terms and conditions that are no less favorable.

Lawful Reasons to End Employment in Malaysia

In Malaysia, an employer cannot terminate an employment contract without just cause or excuse. The decision to terminate must be based on valid, fact-based reasons, and it is crucial to maintain thorough documentation to support your grounds. Failure to do so can expose your business to claims of unfair dismissal at the Industrial Court.

The primary lawful reasons for termination in Malaysia include:

• Misconduct: This involves serious breaches of contractual duties or workplace rules, such as theft, fraud, gross insubordination, harassment, or habitual negligence. Before terminating for misconduct, you are legally required to conduct a fair domestic inquiry.
• Poor Performance: If an employee consistently fails to meet the performance standards reasonably expected for their role, termination may be justified. However, you must provide evidence of this underperformance, such as performance appraisal records, clear communication of shortcomings, warnings, and documentation of opportunities offered to the employee to improve (e.g., a performance improvement plan – PIP).
• Redundancy or Retrenchment: This applies when an employee’s position becomes genuinely superfluous to the business’s needs. This can be due to reorganization, downsizing, closure of the business, or a reduction in business requirements. The redundancy must be bona fide, and employers should follow fair selection criteria and explore alternatives like redeployment where feasible.
• Mutual Separation Agreement (MSA): Both the employer and employee can mutually agree to terminate the employment relationship. The terms of this separation, including any compensation (which may differ from statutory severance), notice period, and other conditions, must be clearly documented in a formal agreement signed by both parties, without any element of duress or undue influence.

If you fail to follow the correct process, the dismissal may be challenged in court. You must be able to justify both the reason and the procedure used. If you are convicted, you can be fined up to RM50,000 or imprisoned for up to one year, or both, under Section 56(3) of the Industrial Relations Act 1967.

Following the Correct Legal Procedure for Termination

In addition to having a just cause, it is also crucial to ensure procedural fairness before giving the final notice of termination to your employees.

Key procedural steps include:

1. Establish and Document Just Cause

Before taking any action, ensure your reasons for considering termination are clear, substantial, and well-documented. This internal record-keeping is your first line of defense.

2. Issue a Show Cause Letter (for Misconduct/Poor Performance):

If termination is contemplated due to misconduct or persistent poor performance, you must issue a formal “show cause” letter to the employee. This letter should:

• Clearly state the specific allegations of misconduct or areas of poor performance.
• Provide sufficient details and, where possible, refer to evidence.
• Give the employee a reasonable period (e.g., 7-14 days) to provide a written explanation or defense.

3. Conduct a Domestic Inquiry (Primarily for Misconduct):

If, after receiving the employee’s explanation (or if no explanation is provided), you find that there are still grounds for serious concern regarding misconduct, a formal domestic inquiry should be conducted.

This internal hearing allows the employee to hear the charges, present their case, call witnesses, and cross-examine the employer’s witnesses.

The inquiry panel should be impartial and keep a proper record of the proceedings. The findings of the domestic inquiry will form the basis for your decision.

4. Decision and Notification of Termination

Based on the evidence, explanation, and (if applicable) the findings of the domestic inquiry, make a clear decision.

If the decision is to terminate, you must provide the employee with a written notice of termination or payment in lieu of notice (PILON), as per the employment contract or the Employment Act 1955 (whichever provides for a more extended notice period). The termination letter should clearly state the reason for termination and the effective date.

Severance Pay Requirements in Malaysia

When an employee is terminated for reasons other than misconduct (e.g., redundancy), they are entitled to statutory severance pay if they have completed at least 12 months of continuous service.

The minimum statutory severance pay rates in Malaysia under the Employment (Termination and Lay-Off Benefits) Regulations 1980 are:

• 1 to less than 2 years of service: 10 days’ wages for each year of service.
• 2 to less than 5 years of service: 15 days’ wages for each year of service.
• 5 years of service and more: 20 days’ wages for each year of service.

(Note: “Wages” for this calculation refers to basic wages and other contractual cash payments. However, it does not include overtime, commissions, and other variable allowances.)

Alongside any severance pay, you must ensure that all final salary components are accurately calculated and paid. This includes unpaid basic salary up to the last day of employment, payment for accrued and unutilized annual leave, and any other outstanding contractual payments or reimbursements.

Legal Risks of Mishandled Termination

Failure to comply with Malaysian employment laws and procedural fairness when terminating an employee can lead to significant legal and financial consequences for your business:

• Unfair Dismissal Claims: An employee who believes they have been unfairly dismissed can file a representation with the Director General of Industrial Relations. If conciliation fails, the matter may be referred to the Industrial Court.
• Industrial Court Awards: If the Industrial Court finds the dismissal to be without just cause or excuse, it can order:
  Reinstatement: Though less common, the court can order the employer to re-employ the individual.
  • Compensation in lieu of reinstatement: The court will typically award monetary compensation, which can include back wages (up to 24 months, or 12 months for probationers) and other compensatory amounts.

  Take the Pressure Off Termination Compliance with RecruitGo

  Navigating the complexities of Malaysian labor law, especially during workforce adjustments or employee replacements, requires careful attention to detail. 

  Working with a local expert ensures that every legal and procedural requirement is met from the start, safeguarding your business.

  RecruitGo serves as your Employer of Record in Malaysia. We manage the full employment lifecycle in accordance with Malaysian labor regulations. This includes compliant contract issuance, statutory registrations, monthly payroll, EPF and SOCSO contributions, benefits administration, and ensuring lawful and fair termination processes.

  Fill out the form below to speak with our team. We will discuss your plans and how RecruitGo can support your workforce needs in Malaysia.