Termination of Employment & Dismissal in Malaysia

Disclaimer: The information in this article is current as at 12th April 2023, and has been prepared by Employment Hero Pty Ltd (ABN 11 160 047 709) and its related bodies corporate (Employment Hero). The views expressed in this article are general information only, are provided in good faith to assist employers and their employees, and should not be relied on as professional employment or legal advice. Any reference to government policies, regulations, or guidance is for informational purposes only and should not be considered official government advice. The information is based on data supplied by third parties. While such data is believed to be accurate, it has not been independently verified and no warranties are given that it is complete, accurate, up to date or fit for the purpose for which it is required. Employment Hero does not accept responsibility for any inaccuracy in such data and is not liable for any loss or damages arising directly or indirectly as a result of reliance on, use of or inability to use any information provided in this article. You should undertake your own research and seek professional advice before making any decisions or relying on the information in this article.

In any case of termination or dismissal, we strongly advise consulting an employment lawyer to get personalised advice to your specific situation.

Note: The Employment Act is not applicable to Sabah and Sarawak, as they have their own Labour Ordinances respectively: Sabah Labour Ordinance and Sarawak Labour Ordinance.

Termination of employment

A lawful dismissal requires valid and substantive justifications, as well as a fair procedure.

Per Section 20(1) of the Industrial Relations Act 1967, employees who are of the view they have been dismissed without ‘just cause or excuse’ may file a complaint with the Department of Industrial Relations to be reinstated to their former employment.

Whilst ‘just cause or excuse’ is not defined by the statute, in general, the most common reasons for termination of employment include:

• Misconduct;
• Retrenchment;
• Poor performance;
• Retirement;
• Expiry of a fixed-term contract;
• Resignation;
• Mutual agreement; and
• Closure of a business.

Employees must be given due notice of termination, as well as the justification for it. Both parties must follow the terms and conditions for termination as stated in the contract of service, with regards to notice periods and compensation (unless termination is attributable to certain events, then statutory notice below must be followed).

If the notice period is not stated in the contract of service, or termination is attributable to certain events such as redundancy or closure of business, employers should abide by the statutory provision in Sections 12(2) and 12(3) of the Employment Act (EA). The notice period should not be less than:

• 4 weeks’ notice if the employee has been employed for less than two years;
• 6 weeks’ notice if the employee has been employed for two years or more but less than five years; and
• 8 weeks’ notice if the employee has been employed for five years or more.

Alternatively, either party can make payment in lieu of the notice period.

Termination due to employee misconduct

If the termination of an employee’s contract is due to misconduct, employers must conduct due inquiry before taking any disciplinary action, as per Section 14 of the EA.

There is no fixed procedure you need to follow for an inquiry, but as a general guide:

• The employee should be told of their alleged misconduct;
• The employee should have the opportunity to present and explain their case; and
• The person investigating the allegations and/or hearing the inquiry should not be in a position which may suggest bias.

In accordance with the EA, employers may suspend the employee from work for a maximum of 2 weeks to carry out the inquiry. Employers are also required to pay the employee at least half their salary during their suspension period.

If no misconduct is found, employers are required to restore the full salary (that was withheld during the suspension period) to the employee.

However, if the inquiry establishes misconduct, employers can either:

• Downgrade the employee;
• Dismiss the employee without notice; or
• Impose any other lesser punishment as deemed just and fit, and if a punishment of suspension without wages is imposed, it shall not exceed a period of two weeks.

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Termination due to poor performance

In the case of an employee’s poor performance, employers bear the burden of proof to show that they have given the employee time and opportunity to improve, before resorting to termination as a final option.

There are several conditions that need to be fulfilled by the company before firing an employee, as shown in the case of IE Project Sdn Bhd v Tan Lee Seng [1987]:

• The employee must be given sufficient notice or warning about his/her poor performance;
• The employee must be given reasonable opportunity and time to improve his/her work performance; and
• Despite sufficient notice and opportunity to improve, the employee failed to improve his/her work performance.

Termination of employment for foreign employees

Effective from 1 January 2023, Malaysian employers must notify the Director General of Labour (DGL) upon termination of a foreign nationals’ employment.

If the service of a foreign employee is terminated:

• By the employer;
• By the foreign employee;
• Upon the expiry of the employment pass issued by the Immigration Department of Malaysia to the foreign employee; or
• By the repatriation or deportation of the foreign employee,

Employers will need to inform the Director General no more than 30 days after.

Prohibition on termination of locals for foreign employees

In order to safeguard the employment of local employees, employers in Malaysia are prohibited from terminating a local employee in order to employ a foreign employee, as per Section 60M of the Employment Act.

In the event of retrenchment or redundancy, employers are also prohibited from terminating the employment of a local employee, unless they have first terminated the services of all foreign employees employed by them in a capacity similar to that of the local employee.

Sivakumar, Minister of Human Resources in Malaysia, confirmed that companies found to commit such an offence could face fines of up to RM50,000 for each offence. The Ministry of Human Resources will also cancel the approval of foreign worker quota for that company.

Wrongful dismissal

In unfair dismissal cases, with the exception of constructive dismissals or forced resignations, the burden of proof lies with the employer to show that they have a justifiable reason for dismissing the employee, and that the dismissal process was carried out fairly.

Employees who believe that they were fired without reason or justification can file a written representation with the Department of Industrial Relations (IRD)within 60 days of their dismissal.

The department will appoint an officer to act as a mediator, and arrange a meeting with both the employer and employee to reach a settlement. If a settlement cannot be made, the matter is then escalated to the Industrial Court.

The Industrial Court will then determine through trial if the dismissal was truly made without just cause or excuse, and grant remedies as it sees fit.

Examples of remedies awarded to employees include reinstatement, or compensation in lieu of reinstatement or the back payment of wages from the date of dismissal up to the date of the award with a maximum of 2 years of the employee’s last drawn salary.

Retrenchment or redundancy

Employers carrying out a retrenchment exercise must lodge a notification with the nearest Department of Labour, submitting the ‘Borang PK’ form at least 30 days before the termination of employment.

If challenged, employers must be able to prove that the retrenchment exercise was carried out due to justifiable reasons.

It is not mandatory, but employers are encouraged to abide by the ‘Code of Conduct for Industrial Harmony’ when implementing a retrenchment exercise. Clause 22(a) of the Code provides the following measures to be taken by the employer:

1. To give as early a warning as practicable to the workers concerned;
2. To introduce schemes for voluntary retrenchment and retirement, and for payment of redundancy and retirement benefits;
3. To retire workers who are beyond their normal retiring age;
4. To cooperate with the Ministry of Labour and Manpower to help the workers find work outside the undertaking;
5. To spread termination of employment over a longer period; and
6. To ensure that no such announcement is made before the workers and their representatives or trade unions have been informed.

Clause 22(b) of the Code also outlines that employers should select employees to be retrenched in accordance with objective criteria, worked out in advance with employees’ representatives or trade unions, such as:

1. The need for the efficient operation of the establishment or undertaking;
2. Ability, experience, skill and occupational qualifications of individual workers required by the establishment or undertaking under part (I);
3. Consideration for length of service and status (non-citizens, casual, temporary, permanent);
4. Age;
5. Family situation; and
6. Other criteria which may be formulated in the context of national policies.

Employers should also use the ‘last-in first-out’ (LIFO) principle, which means an employee who joined a particular position in the company later should be made redundant before an employee who has been in that position for many years.

Retrenched employees have the right to submit a claim to the Industrial Court, should they feel that their termination of service was unfair, and without just cause or excuse.

If the issue of retrenchment is referred to the Industrial Court, it will generally look at the following issues:

1. Whether the retrenchment was justified, by looking at the circumstances of the case;
2. Whether the employer is in a position to give true grounds for the retrenchment;
3. Whether the retrenchment is made bona fide; and
4. Whether the employer complied with accepted standards and procedure when selecting and retrenching employees.

Termination and layoff benefits

Employees who have been lawfully terminated, or unfairly dismissed, are entitled to payments outlined in the Employment (Termination and Lay-off Benefits) Regulations 1980, depending on their tenure of employment.

The amount of statutory termination or lay-off benefits payment to which an eligible employee is entitled in any case shall not be less than:

• 10 days’ wages for every year of employment under a continuous contract of service with the employer, if he has been employed by that employer for a period of less than two years; or
• 15 days’ wages for every year of employment under a continuous contract of service with the employer, if he has been employed by that employer for two years or more but less than five years; or
• 20 days’ wages for every year of employment under a continuous contract of service with the employer if he has been employed by that employer for five years or more; and
• Pro-rated in respect of an incomplete year, calculated to the nearest month.

Any termination or lay-off benefits payment payable under these regulations shall be paid by the employer to the employee, not later than seven days after the relevant date.

Employers also need to provide employees with a written statement, stating the total amount of their termination or lay-off benefits payment, and the manner in which the payment has been calculated.

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