Notice Period and Termination Guide in Malaysia

Letting an employee go is one of the hardest decisions you’ll have to make as an employer. Malaysia enforces strict rules around employee termination. There is no "at-will" termination here as in the U.S. You cannot end a contract without a valid reason that the law recognizes, even if you hand out notice and severance. 

Every dismissal has to stand on lawful grounds and follow a fair procedure. When either is breached, a routine exit can resurface months later as an Industrial Court claim. If found unlawful, you may be subject to pay up to 24 months of back wages, plus additional compensation in lieu of reinstatement.

This guide walks you through what you need to know before you terminate an employee in Malaysia. We will cover the applicable laws, the step-by-step procedure, and other essential considerations to ensure a smooth and lawful process.

Understanding Legal Grounds for Termination in Malaysia

The most fundamental concept in Malaysian labor law is the requirement of "just cause or excuse." Codified under Section 20 of the Industrial Relations Act 1967 (IRA 1967), this principle means you cannot dismiss an employee arbitrarily. You must prove to the Industrial Court that you had a fair, verifiable, and legally recognized reason to end their contract.

If a dispute arises, the burden of proof rests entirely on you as the employer. You must demonstrate both substantive fairness (a valid reason) and procedural fairness (a fair process).

Termination with Cause (Misconduct under Section 14)

Termination with cause refers to dismissing an employee due to major behavioural issues or misconduct. Section 14 of the Employment Act 1955 gives employers the right to take action against an employee for misconduct after a proper investigation.

Examples of misconduct include:

• Theft, fraud, or dishonesty.
• Insubordination (refusing reasonable, lawful work orders).
• Harassment or creating an unsafe work environment.
• Unexcused absence from work (absence for more than two consecutive working days without a reasonable excuse constitutes a breach of contract under Section 15(2) of the EA 1955).

Crucially, you cannot fire an employee on the spot when a misconduct occurs. You must first issue a Show Cause Letter. If their explanation is unsatisfactory, hold a formal Domestic Inquiry (DI) to present charges before an independent internal panel.

Termination with Excuse (Most Common Route) 

In most everyday cases, you will not be dealing with dramatic misconduct. More often, you need to end a contract because of business operational changes or ongoing performance issues. These situations fall under termination with excuse. The most common excuses recognized by Malaysian courts include:

• Poor performance: An employee consistently falls short of their performance targets. You have to show that you gave them clear warnings, formal support, and a reasonable period to improve.
• Redundancy: Organisational restructuring, mergers, or changes in technology make a specific job role unnecessary.
• Retirement: The employee reaches the statutory retirement age or the age agreed in their employment contract.

Although you don’t need to prove personal wrong-doing, you must still have valid justification (e.g. redundancy or proven performance) and follow the correct legal sequence. We will tackle more on this process in the step-by-step section below. 

Notice Periods and Statutory Minimums

Your employment contract typically defines the required notice period. Many employers align this with a standard 30-day pay cycle, allowing termination via written notice or by paying salary in lieu of notice.

However, if your contract is silent or offers terms less favorable than the law, the statutory minimums under Section 12 of the EA 1955 apply:

Severance Pay Rules for Employers in Malaysia 

The Employment (Termination and Lay-Off Benefits) Regulations 1980 dictate how much compensation you must pay. The final payout covers everything owed through the last day, including:

• severance pay
• any payment in lieu of notice
• unused annual leave
• any guaranteed contractual allowances

These statutory regulations apply strictly to employees covered under the Employment Act 1955 who earn RM4,000 or less per month (or manual workers regardless of salary). Eligible employees must also have at least 12 months of continuous service to qualify for lay-off benefits.

Restructure, Redundancy or New Technology

At some point, most growing companies will reorganize their operations. You may restructure a team, automate a manual process, or consolidate overlapping functions, and those changes can leave certain roles without a purpose. Under Malaysian law, redundancy refers to a situation where a job role is no longer needed. Retrenchment is the act of terminating the employee who holds that redundant role.

To legally retrench employees, you should follow the Code of Conduct for Industrial Harmony. This code recommends that you take steps to minimize retrenchment, such as limiting overtime or stopping new recruitment. If retrenchment is unavoidable, you should apply the Last-In, First-Out principle within the affected department. This principle means you retrench the most recently hired employees first, unless you have clear reasons to do otherwise.

Relocation of Business

If you decide to relocate your physical office or factory to a different state or region, your current employees might not be able to move with you. If an employee cannot reasonably relocate due to the distance, and you cannot offer them a similar role at the original location, you must treat this as a redundancy. In this scenario, you must pay termination and lay-off benefits to eligible employees in Malaysia.

How to Calculate Severance Pay

For employees earning RM 4,000 or less, the law sets out clear statutory minimums for severance pay Malaysia. The amount of compensation depends on how long the employee has worked continuously for your business.

The statutory rates are as follow: 

For an incomplete year of service, you must calculate the amount on a pro-rata basis to the nearest month.

Under the regulations, you calculate the statutory minimum severance payment using the following formula:

Severance Payment = Daily Rate of Pay x Length of Service (years) x Eligible Statutory Days

Daily Rate of Pay = Wages in the Preceding 12 Months / 365 

You must pay this severance amount to the employee within 7 days of their final day of work.

If your employees earn more than RM 4,000 per month, they do not fall under the statutory regulations for termination benefits. Their severance pay will depend entirely on the terms of their individual employment contracts.

Even if their contract does not require severance pay, many foreign investors choose to offer a goodwill severance package to maintain positive relations and reduce the risk of disputes.

Procedure to Terminate an Employee in Malaysia

To protect your business from costly legal disputes, you must treat the termination process as a series of mandatory administrative steps. Here is the compliant procedure to terminate an employee in Malaysia.

Step 1: Establish a Just Cause and Gather Documentation

The foundation of a safe termination is evidence. You must keep detailed records of all issues. This records trail should include:

• Performance reviews
• Written warnings
• KPI dashboards
• Email exchanges, and 
• Signed meeting minutes of past counseling sessions. 

Keep in mind that the Industrial Court heavily discounts verbal warnings.

Step 2: Issue a Formal Show Cause Letter

If the termination is 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.

Step 3: Hold a Domestic Inquiry or Execute a Performance Improvement Plan (PIP)

If the employee's response to the show cause letter is not satisfactory, you must take the next appropriate action. 

• For Performance Issues: Place the employee on a formal Performance Improvement Plan (PIP) lasting 30 to 90 days. Set clear, realistic targets and document weekly review sessions.
• For Misconduct: If their response to the show cause letter is unsatisfactory, you may suspend the employee on half-pay for up to 14 days (under Section 14(2) of the EA) to run an investigation. You must then hold a Domestic Inquiry (DI) with an independent internal panel to hear the evidence before making a final decision.

Step 4: Draft and Deliver the Termination Letter

If the PIP fails or the DI panel finds the employee guilty of major misconduct, draft the termination letter. The letter must state the exact, transparent grounds for dismissal, notice terms, and their final date of employment.

Step 5: Notify the Labor Department (Submit Form PK)

If you are retrenching employees due to redundancy, you must notify the nearest Labour Office (Jabatan Tenaga Kerja - JTK) by submitting the Employment Retrenchment Notification (PK Form). 

This must be done progressively, starting at least 30 days before the retrenchment date. Failure to submit is an offense under Section 63 of the EA 1955, punishable by fines up to RM50,000.

Step 6: Settle Final Payments and Close Statutory Accounts

Once you set the exit date, the deadlines are fixed. The Employment Act (Sections 20 to 22) requires you to pay the employee's final wages by the last working day. Statutory termination benefits run on a tighter clock. Regulation 10 of the 1980 Regulations gives you seven days from the last day to pay them.

After the final payroll run, close the employee's statutory accounts so contributions stop cleanly:

• EPF: Update your i-Akaun to drop the employee from the next contribution cycle.
• SOCSO and EIS: File the cessation through the ASSIST portal.

Leaving these accounts open keeps generating contributions and automated late-payment penalties for someone who no longer works for you. Finally, issue the employee their Form EA for the year so they can file their own taxes. A clean, documented handover here also strengthens your position if the exit gets challenged later.

Step 7: Cancel Work Passes and Arrange Repatriation (For Foreign Employees)

If the employee holds an Employment Pass or other work pass, your sponsoring duties outlast their final day. You must cancel the pass through the Expatriate Services Division (ESD) portal within 30 days of the termination, which Immigration clears through a Check Out Memo (COM). Companies registered under ESD or MDEC now also have to complete an Exit Clearance before the person departs the country.

The cost of skipping this lands on both sides. Immigration can restrict your ESD portal access, which blocks you from sponsoring new hires, and your former employee risks overstaying or a blacklist through no fault of their own. You also usually carry the repatriation cost, since Malaysian practice puts a foreign worker's return home on the employer once employment ends.

Understanding Wrongful Dismissals in Malaysia 

In Malaysia, a dismissal is considered wrongful if you terminate an employment contract without just cause or excuse, or if you bypass fair procedures. The Industrial Court heavily prioritizes the principle of natural justice. This means that even if you have a rock-solid operational or disciplinary reason to let someone go, a rushed or legally flawed administrative process can still cost you the case.

To help you understand how the local courts view common workplace scenarios, we have summarized key situations below:

What Happens if a Dismissal is Ruled Wrongful

If the Industrial Court of Malaysia decides that you dismissed an employee wrongfully, the financial consequences can be high.

The court can order the following remedies:

• Reinstatement: Ordering you to give the employee their old job back.
• Backwages: You may have to pay the salary the employee would have earned from the date of dismissal to the date of the court decision. This is capped at 24 months of salary for confirmed employees, and 12 months for probationers.
• Compensation in Lieu of Reinstatement: If returning to the company is not practical, the court will often order you to pay one month of salary for each year of service as compensation.

How Disputes Get Resolved

When an employee believes they were wrongfully dismissed, they have 60 days from their termination date to file a representation at the Industrial Relations Department.

The department will then schedule a conciliation meeting. A reconciliation officer will try to help both parties reach an amicable settlement, which usually involves a financial payout. If conciliation fails, the Minister of Human Resources may refer the case to the Industrial Court of Malaysia for a formal hearing.

Effectively Manage Employee Termination in Malaysia with RecruitGo 

Navigating local employment regulations while trying to grow a business in a new country can feel overwhelming. A single procedural mistake during a restructure or performance management process can result in costly legal battles that can drain your resources.

To protect your business, you can partner with RecruitGo, who will ensure your full compliance throughout the process. As your Employer of Record, we become the legal employer of your team and assume the statutory responsibilities that would otherwise fall to you.

Our agents can manage your local payroll, benefits, and contract compliance. If you ever need to restructure your team or handle a difficult exit, our local HR experts will guide you through every step of the procedure to terminate an employee in Malaysia.

Ready to build and manage your team in Malaysia with confidence? Book a free consultation with our local team via the form below.