Managing employment terminations in Malaysia requires careful adherence to local labour laws, primarily governed by the Employment Act 1955 (as amended) and principles established through case law by the Industrial Court. Employers must navigate specific requirements regarding notice periods, grounds for termination, procedural fairness, and potential severance entitlements to ensure compliance and mitigate the risk of legal challenges. Understanding these regulations is crucial for any company operating or employing staff in Malaysia.
Properly handling the termination process is not just a legal necessity but also impacts employee relations and the company's reputation. Employers must ensure that any termination is carried out for just cause and with due process, providing clarity and fairness to the affected employee while adhering to statutory obligations.
Notice Period Requirements
The minimum notice period required for terminating an employment contract in Malaysia is stipulated by the Employment Act 1955, based on the employee's length of service. This applies unless the employment contract specifies a longer notice period, in which case the contractual period prevails. Either party (employer or employee) can terminate the contract by providing the required notice or by paying an indemnity in lieu of notice equivalent to the salary for the notice period.
The statutory minimum notice periods are as follows:
| Length of Service (with current employer) | Minimum Notice Period |
|---|---|
| Less than 2 years | 4 weeks |
| 2 years but less than 5 years | 6 weeks |
| 5 years or more | 8 weeks |
It is important to note that the employment contract may specify notice periods longer than these statutory minimums. In such cases, the longer contractual period must be observed. Payment in lieu of notice must be calculated based on the employee's gross salary for the notice period.
Severance Pay Calculations and Entitlements
Severance pay, often referred to as termination and lay-off benefits, is generally payable to eligible employees whose contracts are terminated under specific circumstances, such as redundancy or company closure. Employees terminated for misconduct or who resign are typically not entitled to statutory severance pay. Eligibility and calculation are primarily governed by the Employment (Termination and Lay-Off Benefits) Regulations 1980.
The minimum rates for termination benefits are based on the employee's length of service:
| Length of Service (with current employer) | Minimum Termination Benefit Rate |
|---|---|
| Less than 2 years | 10 days' wages for each year of service |
| 2 years but less than 5 years | 15 days' wages for each year of service |
| 5 years or more | 20 days' wages for each year of service |
- Calculation Basis: The "days' wages" is typically calculated based on the employee's average daily wages over the 12 months preceding the termination.
- Pro-rata Calculation: Benefits for incomplete years of service are calculated on a pro-rata basis to the nearest month.
- Applicability: These benefits are generally applicable to employees covered by the Employment Act 1955 (those earning below a certain threshold or engaged in manual labour). However, employment contracts or collective agreements may provide for more generous benefits applicable to other employee categories.
Severance pay is a significant cost consideration during redundancy exercises and must be calculated and paid correctly to avoid disputes.
Grounds for Termination With and Without Cause
Termination of employment by the employer can broadly be categorised based on whether there is "just cause or excuse".
-
Termination With Cause: This occurs when an employer terminates an employee due to reasons related to the employee's conduct or performance.
- Misconduct: Serious breaches of company rules, policies, or terms of employment (e.g., dishonesty, insubordination, harassment).
- Poor Performance: Consistent failure to meet required performance standards despite being given adequate warning and opportunity to improve.
- Medical Incapacity: Inability to perform job duties due to prolonged illness or injury, subject to specific legal requirements. Termination with cause requires the employer to prove the reason for dismissal and demonstrate that a fair procedure was followed.
-
Termination Without Cause: This typically refers to termination for legitimate operational requirements of the employer, unrelated to the employee's fault.
- Redundancy: The employer no longer requires the employee's position due to restructuring, downsizing, automation, or closure of business. Redundancy must be genuine and not a disguised dismissal.
- Company Closure: The business ceases operations. In cases of redundancy, employers must follow fair selection criteria and provide notice and potentially severance pay as required by law or contract.
Terminating an employee without just cause or excuse, or without following proper procedure, can lead to a claim of wrongful dismissal.
Procedural Requirements for Lawful Termination
Regardless of the grounds for termination, employers must adhere to procedural fairness to ensure the dismissal is lawful. Failing to follow due process is a common pitfall leading to wrongful dismissal claims.
Key procedural steps, particularly for termination with cause (misconduct or poor performance), often include:
- Investigation: Conduct a thorough and impartial investigation into the alleged misconduct or performance issues. Gather evidence and interview relevant parties.
- Show Cause Letter: Issue a letter to the employee clearly stating the allegations or performance issues, the specific clauses of the contract or policy violated, and providing the employee with an opportunity to explain their conduct or performance within a specified timeframe.
- Employee's Response: Consider the employee's written or verbal explanation.
- Domestic Inquiry (Optional but Recommended for Misconduct): For serious misconduct allegations, holding a domestic inquiry (a formal internal hearing) is highly recommended. This allows the employee to present their case, call witnesses, and cross-examine company witnesses before a panel. While not strictly mandated by the Employment Act for all cases, the Industrial Court often views the absence of a domestic inquiry unfavourably in misconduct cases.
- Decision: Based on the investigation and the employee's response (and domestic inquiry, if held), the employer makes a decision on the appropriate action, which may include dismissal.
- Termination Letter: If termination is decided, issue a clear termination letter stating the reason for dismissal, the effective date, and details regarding the notice period (or payment in lieu) and any other final entitlements (e.g., outstanding salary, leave pay).
- Final Dues: Ensure all final payments, including salary up to the termination date, payment in lieu of notice (if applicable), accrued leave pay, and severance pay (if applicable), are calculated and paid promptly.
For redundancy, the procedure involves identifying the redundant roles, applying fair and objective selection criteria (often referred to as LIFO - Last In, First Out, though other criteria can be used if justified), providing notice, and paying severance benefits.
Maintaining detailed documentation throughout the process is critical. This includes investigation notes, show cause letters, employee responses, minutes of meetings or inquiries, and the final termination letter.
Employee Protections Against Wrongful Dismissal
Employees in Malaysia are protected against unfair dismissal. Section 20 of the Industrial Relations Act 1967 allows an employee who believes they have been dismissed without just cause or excuse to make representations to the Director General of Industrial Relations.
Key aspects of this protection include:
- Conciliation: The Industrial Relations Department will first attempt to resolve the dispute through conciliation between the employer and employee.
- Referral to Industrial Court: If conciliation fails, the case may be referred to the Industrial Court.
- Burden of Proof: In the Industrial Court, the burden of proof lies on the employer to demonstrate that the dismissal was for just cause or excuse and that due process was followed.
- Remedies: If the Industrial Court finds the dismissal to be wrongful, it can order reinstatement of the employee to their former position or award monetary compensation in lieu of reinstatement. Compensation typically includes back wages (limited to a certain period, usually 24 months) and severance pay (if applicable).
Common pitfalls leading to wrongful dismissal claims include insufficient evidence of misconduct or poor performance, failure to provide the employee with an opportunity to be heard (lack of due process), using redundancy as a pretext for dismissing an unwanted employee, and failing to follow internal disciplinary procedures or statutory requirements. Employers must approach termination with diligence and ensure all legal and procedural requirements are met.
