Terminating employment in Malaysia

An employer in Kuala Lumpur decides on Monday that a manager is not working out. Legal counsel elsewhere would ask about the notice clause. In Malaysia the first question is different, and it is the one that decides the case: what is the reason, and can you prove it?

Malaysia has no at-will employment. None. There is no version of the contract, no probation clause, no “termination for convenience” wording, and no amount of notice pay that lets an employer end a contract of service simply because it wants to. Section 20 of the Industrial Relations Act 1967 gives any workman who considers himself dismissed without just cause or excuse the right to seek reinstatement — and at the Industrial Court the burden of proving both the reason and the fairness of the process sits squarely on the employer.

This is the single most consequential difference between Malaysian employment law and the US-influenced HR material that dominates search results. A contractual right to terminate on notice is a right to determine when the contract ends. It is not a right to determine whether it may end.

What “just cause or excuse” actually means

The phrase is not defined in the Act, and that is deliberate. It requires two things at once:

Substantive justification. A genuine reason, grounded in fact, falling within a recognised category — misconduct, incapacity or poor performance, redundancy, or the natural end of the relationship.

Procedural fairness. A process appropriate to that reason, carried out before the decision, and documented.

Employers lose on the second far more often than the first. A dismissal for theft supported by CCTV still fails if the employee was never told what he was accused of. Conversely, an immaculate process cannot rescue a reason that was invented after the decision.

The four lawful routes out

Almost every defensible termination in Malaysia runs through one of four channels. They are not interchangeable, and picking the wrong one is itself a defect.

1. Misconduct

Section 14(1) of the Employment Act 1955 permits an employer, on the grounds of misconduct inconsistent with the express or implied conditions of service and after due inquiry, to dismiss without notice, downgrade, or impose a lesser punishment.

Three things follow. First, “after due inquiry” is a statutory precondition — the domestic inquiry is not optional decoration. Second, dismissal under this route is without notice, so no notice pay arises. Third, where the lesser punishment is suspension without wages, s.14(1)(c) caps it at two weeks.

Section 14(2) governs suspension during the inquiry: not more than two weeks, and the employer must pay not less than half the employee’s wages. If the inquiry discloses no misconduct, the employer must forthwith restore the full amount of wages withheld.

The full procedure, and the defects that most often sink it, are in domestic-inquiry-malaysia.

2. Poor performance

This is not misconduct, and treating it as misconduct is the most common structural error in Malaysian dismissals. Underperformance is a question of capability, and the process that answers it is not a hearing but a cycle:

• a clear, measurable statement of the standard expected;
• specific, written feedback that the standard is not being met;
• a documented performance improvement plan with a defined period;
• genuine support — training, supervision, resources, a reduced load if the failure is one of volume;
• a fair assessment at the end of the period;
• warnings that escalate, so that dismissal is never the first the employee hears of it.

Termination on this route is a termination with notice under s.12, not a summary dismissal. The employee also keeps the statutory termination benefit, because poor performance is not one of the exclusions in reg 4(1) of the Employment (Termination and Lay-Off Benefits) Regulations 1980.

Probationers are not exempt from any of this. A probationer dismissed without just cause or excuse can bring a s.20 claim; probation reduces the backwages cap from twenty-four months to twelve, and nothing else.

3. Redundancy

Where the job disappears rather than the person failing, the route is retrenchment. The reason attaches to the position, and the employer must show a genuine business case — closure, restructuring, a diminished requirement for work of a particular kind.

Section 12(3) is important and widely overlooked. Where the termination is attributable wholly or mainly to cessation of business, cessation at the place of work, a diminished requirement for work of a particular kind, a refused transfer the contract did not require, or a change in ownership of the business, then the employee is entitled to notice not less than the s.12(2) statutory minimum regardless of anything to the contrary in the contract. A contract that stipulates one week’s notice cannot be used to shorten a redundancy exit.

Part XIIB of the Act adds a rule with no equivalent in most jurisdictions: where an employer reduces the workforce by reason of redundancy, s.60N provides that it shall not terminate a local employee unless it has first terminated all foreign employees employed in a similar capacity. Permanent residents are not foreign employees for this purpose — s.60O exempts them from the Part. A separate provision, s.60M, prohibits terminating a local employee for the purpose of employing a foreign one. (The former s.60L was deleted by Act A1651.)

Retrenchment also triggers notification duties to JTKSM on their own clocks — see retrenchment-malaysia.

4. Mutual separation

A mutual separation agreement ends the employment by consent. There is no dismissal, so there is nothing for s.20 to attach to — which is exactly why it is attractive, and exactly why it attracts scrutiny.

The Industrial Court looks at whether the consent was real. An agreement presented as “sign this or be dismissed”, signed on the spot, without an opportunity to consider it or take advice, is vulnerable to being characterised as a dismissal in a different envelope. Give time, put the terms in writing, state the consideration clearly, and never make the offer contingent on immediate signature.

Notice periods: the statutory tiers

Section 12(1) lets either party give notice of intention to terminate. Section 12(2) then fixes the length: it shall be the same for both employer and employee, determined by a written provision in the contract, or in the absence of such a provision, not less than —

Length of service at the date notice is given	Minimum notice
Less than 2 years	4 weeks
2 years or more but less than 5 years	6 weeks
5 years or more	8 weeks

Read the mechanics carefully, because three details do real work:

The bands are measured at the date the notice is given, not at the date employment ends. An employee two weeks short of five years gets six weeks, not eight.

A contract may lengthen the period but the parties must be treated alike. Section 12(2) requires the length to be the same for both sides. A contract giving the employer two weeks and the employee three months does not comply.

Section 12(4): notice must be written, and the day it is given is included in the period. A four-week notice handed over on 1 March expires on 28 March, not 29 March. Payroll systems routinely get this off by a day.

The proviso to s.12(2) allows either party to waive the right to notice — but a waiver has to be a genuine, informed one, not a clause buried in a contract signed on day one.

None of this depends on salary. Paragraph 1A of the First Schedule disapplies only ss.60(3), 60A(3), 60C(2A), 60D(3), 60D(4) and s.60J to employees earning above RM4,000 a month. Sections 12, 13, 14, 20 and 21 are not on that list. Notice, payment in lieu and final-wages timing apply to every employee under a contract of service, at any salary.

Payment in lieu of notice

Section 13(1) allows either party to terminate without notice — or, where notice has been given, without waiting for it to expire — by paying the other an indemnity equal to the wages that would have accrued during the notice or its unexpired portion.

Four points employers get wrong:

It runs both ways. An employee who leaves without serving notice owes the employer the same indemnity, and s.69(2)(iii) expressly lets an employer claim it before the Director General.

It is “wages”, as defined in s.2(1). Not basic salary alone where the definition captures more, and not a notional gross-up.

It does not replace termination benefits. Regulation 6(4) of the TBLB Regulations 1980 provides that the statutory benefit is in addition to any s.13 payment. Employers who pay two months in lieu and call the matter closed have paid one of two separate obligations.

It does not make a dismissal fair. Paying in lieu discharges the notice obligation and nothing else. The dismissal still needs just cause or excuse.

Section 13(2) is the separate summary route: either party may terminate without notice in the event of any wilful breach by the other of a condition of the contract. An employee who leaves under s.13(2) keeps the statutory termination benefit, because reg 4(1)(c) excludes only voluntary resignations that are not made under s.13(2) or s.14(3).

When final wages actually fall due

This is the deadline Malaysian employers miss most often, because payroll instinct says “next cycle”. The Act says otherwise, and it sets three different dates.

Scenario	Statute	Deadline
Normal termination — contract expires or notice runs its course	s.20	On the day the contract terminates
Employer terminates without notice under s.13(1) or (2), or dismisses under s.14(1)(a)	s.21(1)	On the day of termination, plus the s.13(1) indemnity where applicable
Employee terminates without notice under s.13(1)/(2) or s.14(3)	s.21(2)	Not later than the third day after termination

Note the asymmetry. When the employer ends it, payment is due the same day. Only when the employee walks does the employer get three days. Waiting for the month-end payroll run to pay a leaver who finished on the 8th is a breach, and s.15(1) deems an employer who fails to pay wages in accordance with Part III to have broken the contract — which can convert a resignation into a constructive dismissal claim.

Statutory termination benefits run on their own clock: seven days after the relevant date under reg 11(1), with a written calculation statement due at the same time under reg 12(1).

Termination by operation of the Act

Two deeming provisions in s.15 sit outside the four routes.

Section 15(1): an employer who fails to pay wages in accordance with Part III is deemed to have broken the contract. This is the statutory backbone of many constructive dismissal claims.

Section 15(2): an employee absent for more than two consecutive working days without prior leave is deemed to have broken the contract — unless he has a reasonable excuse and informed, or attempted to inform, the employer before or at the earliest opportunity during the absence.

Section 15(2) is heavily over-relied on. It creates a deemed breach; it does not create an automatic, unchallengeable termination. Employers who treat day three of an absence as self-dismissal, without attempting contact and without any inquiry into the reason, regularly find the Industrial Court unimpressed. Send the show-cause letter to the last known address, document the attempts, and keep the file.

What it costs to get wrong

A dismissal without just cause or excuse exposes the employer to backwages of up to twenty-four months of last-drawn salary (twelve for a probationer) under the Second Schedule to the Industrial Relations Act 1967, plus compensation in lieu of reinstatement at one month’s salary per completed year of service under Industrial Court Practice Note No. 3 of 2019.

Separately, breaches of the Employment Act 1955 carry a general penalty under s.99A of a fine up to RM50,000 where no specific penalty is provided, and orders of the Director General under s.69 carry interest of up to 8% per annum from the thirty-first day, with non-compliance punishable by a fine up to RM50,000 plus a daily fine up to RM1,000.

The employee’s clock is sixty days from dismissal — or, where notice was given, up to sixty days from its expiry. See unfair-dismissal-malaysia.

Common mistakes

Believing notice pay buys the right to dismiss. It buys the right to end the contract early. The reason still has to hold.

Using a misconduct inquiry for a performance problem. Wrong route, wrong evidence, and it forfeits the improvement-plan defence.

Applying the RM4,000 threshold to notice. It does not touch ss.12, 13, 20 or 21. It reaches s.60J and four overtime and holiday-pay subsections.

Paying final wages on the next payroll date. Section 20 and s.21(1) both say the day of termination.

Counting notice from the day after it is given. Section 12(4) includes the day of giving.

Treating notice pay and severance as alternatives. Regulation 6(4) makes them cumulative.

Retrenching local employees while foreign employees remain in similar roles. Part XIIB prohibits it outright.

Backdating the resignation letter to tidy up the file. In a s.20 hearing, documentary inconsistency does more damage than the original defect.

Assuming this law applies nationwide. Sabah and Sarawak run on their own Labour Ordinances with their own JTK departments. Their notice periods are identical to the Peninsular tiers — four, six and eight weeks under Sabah Cap 67 s.11(2) and Sarawak Cap 76 s.12(2) — but the final-pay deadlines differ in one respect: where the employee terminates without notice, wages fall due by the seventh day after termination (Sabah s.108(5), Sarawak s.109(5)), not the third day as under Peninsular s.21(2).

What’s next

Before any termination, settle three things in writing: which of the four routes applies, what notice is owed under s.12(2) measured at the date of giving, and what falls due on the final day under s.20 or s.21. Then work the procedure for that route — domestic-inquiry-malaysia for misconduct, retrenchment-malaysia for redundancy — and close out the statutory filings in offboarding-statutory-checklist, where the tax-clearance withholding duty creates personal exposure for directors and payroll officers.