Termination of Employment in Malaysia

  • Employment
Termination of Employment in Malaysia


In Malaysia, employer-employee relationships are governed by the Labour Relations Act (IRA) 1967 and the Employment Act 1955.

Many believe that the procedure to terminate an employee in Malaysia is overly pro-employee. Some foreign businesses are even nervous of a system perceived as disadvantageous to employers when it comes to termination of employment. Many employers feel that it is too difficult to dismiss employees.

If you’ve just been fired, you probably do not agree.

If one looks at the labour law in Malaysia, it seems that the system is, in fact, relatively well-balanced. The Industrial Court has played a significant role in providing clarity where the statutes are unclear, and in doing so has made sure that Malaysian labour law is up to date with the business environment.

Labour law and termination of employment in Malaysia are based on fairness. It seeks to find a balance between the security of tenure for employees, and the rights or prerogatives of employers to dismiss employees. If employers follow the right procedure to terminate an employee, it can be done without any unfair repercussions to the employer or the employee. If it is not done fairly, employees will be entitled to termination benefits and awards.

When can you dismiss an employee?

Malaysia does not have an “at-will employment” system. Employers cannot just hire and fire “at-will”. They can, however, terminate an employee’s services if it is justified, done in good faith, and is procedurally fair.

Whilst an employee has a right to employment; it makes sense that an employer must also have the right to make decisions in the commercial interest of the business. Section 13(3) of the IRA states that dismissal and termination of employees are regarded as management prerogatives.

In this article, we are focusing on terminations without just cause or excuse and unfair dismissals in the private sector.

Acceptable reasons for termination (substantive fairness)

Generally, the court will allow employers to make decisions to run the business effectively, including dismissing employees. The court will only interfere if the dismissal was unfair. To avoid an unfair dismissal claim, the dismissal must be for “just cause or excuse”.

Sec 20(3) of the IRA states that an employee who was dismissed without just cause and excuse can write to the Director-General of Industrial Relations to request reinstatement.

What does “just cause and excuse” mean?

It is quite challenging to place an exact meaning on this phrase since it will differ from business to business. The Act does not define “just cause and excuse”.

It could include:

  • Major misconduct, like theft, fighting in the workplace, always being late, drunkenness, sexual harassment, or failure to follow safety protocols, etc.
  • The court has described misconduct as any conduct inconsistent with the faithful discharge of duties, or an act that adversely affects employees’ duties towards employers.
  • The misconduct must have some relation to the employee’s duties, or the work entrusted to him.
  • Private misconduct could also justify dismissal if the conduct jeopardised the legitimate interest of the employer.
  • The Court will also distinguish between major and minor misconduct.
  • Negligence in performing duties;
  • Poor performance;
  • Redundancy and closing the business.

The bottom line is, whatever the reason, the employer must provide the employee with grounds for the dismissal. It is part of the procedural fairness of the process.

From the employer’s point of view, you are allowed to dismiss an employee, provided you have reasonable cause, and you inform the employee of the reason. Under Malaysian labour law, any termination letter must set out the reason for termination.

Even if the employer uses a clause in the employment contract giving the employer the right to terminate by giving the employee notice, the employer cannot rely just on that clause to terminate the employee. The employer must still show just cause and excuse.

Procedure to terminate employment in Malaysia fairly (procedurally fair)

Besides providing a fair reason to dismiss an employee, employers must also do so in a procedurally fair manner.

Procedural fairness relates to the steps taken in the dismissal process.

The following would be an example of steps to include in a fair process:

  • Under Malaysian labour law, the employer must issue the employee with a termination notice that sets out the reason for the termination.
  • Request an explanation from the employee.
  • Give time to respond.
  • If not resolved, schedule an inquiry asap, called a domestic inquiry. The purpose of the domestic inquiry is to investigate the situation and to obtain facts and information about the employee’s alleged misconduct or poor performance.
  • The inquiry panel must be impartial.
  • Witnesses should be called, if relevant.
  • The inquiry must be objective and not biased; it must not be treated as a mere “formality” to comply with the procedure.
  • The primary purpose is to gather enough information to decide whether dismissal would be just.
  • Keep a record of the proceedings.

It should be noted that the IRA does not explicitly mention conducting a domestic inquiry. In some cases, the Industrial Court held that failure to conduct a domestic inquiry was not necessarily fatal for procedural fairness under the IRA.

For employees under the Employment Act, a domestic inquiry is essential. And it is always better to err on the side of fairness and natural justice.

What can the employee do if he or she feels that the dismissal was unfair, or no reason was given for the dismissal?

An employee can file a complaint with the Director-General of Industrial Relations (IR) within sixty days of termination of your employment. The IR Department would then arrange for a conciliation meeting between the employer and employee to try and reach a solution.

An IR officer will act as a mediator at the meeting. If you can reach a settlement, an agreement will be drawn up setting out the terms of the agreement, and the matter will be considered resolved.

It is important to note that no legal representation is allowed at this meeting. The worker must speak for him or herself or may be represented by an officer of a trade union.

If an agreement cannot be reached, the matter will be referred to the Minister of Human Resources. The Minister has the discretion to decide whether or not to refer the case to the Industrial Court. This will usually be done when the Minister is of the opinion that the claim involves a serious issue in law or fact that should be resolved by the Industrial Court.

The Industrial Court

The Industrial Court will run similar to a civil lawsuit, with the Chairman sitting alone. The onus is on the employer to prove just cause and excuse.

Sec 30(5) of the IRA states that the Industrial Court will act according to “equity, good conscience and the substantial merits of the case without regard to the technicalities and legal form”. This does not mean that there are no formalities; it merely means that the approach is more relaxed; the focus is on the merits of the case instead of on strict legal technicalities. Each case will be determined on its own set of circumstances, and substance will prevail over form.

Although an employee can apply to be reinstated, the Industrial Court may give any other award instead of reinstatement. In some cases, the employee-employer relationship is damaged beyond repair, and the court may decide that reinstatement is impossible. The Court can then award other forms of Malaysian labour law termination compensation.

What if the employee was “forced” to resign?

Sometimes employers don’t fire an employee but create a work environment that makes it impossible for an employee to remain in the environment. It is a form of indirect dismissal. For example, employees are entitled to a safe working environment. If you are being harassed by a co-worker in the workplace and your employer refuses to do something about it, even though you have asked for help, you might feel that you have no other choice but to resign. This is called constructive dismissal.

To succeed with a constructive dismissal claim, the employee must show that the employer breached a part of the employment contract. Resigning because you don’t like your office, or you don’t get on with a co-worker, won’t qualify as constructive dismissal. Resigning because your employer is failing to provide a safe working environment is different. That is a breach of your employment contract. If you leave as a direct response to that breach, you will be entitled to compensation.

Remember that as the employee, under Malaysian termination law, you are entitled to resign without providing a reason.  Still, if you want to file an unfair dismissal claim, you also need to adhere to substantive and procedural fairness. You have sixty days to file your claim, and it would be wise to have proper records and documentation ready to prove that you were unfairly dismissed or “forced” to resign.

Unfair dismissal remedies and compensation

Once an employee’s case is referred to the Industrial Court, the court will determine if the dismissal was for just cause and excuse. If the court finds that the dismissal was without just cause and excuse, it can award the following:


In practice, reinstatement is not granted often, unless the parties agree to reinstatement.

Back wages

Back wages are rewarded to cover the period from the date of dismissal to the date of the award, to a maximum of twenty-four months. If the employee found new employment in that time, it will be taken into account when calculating back payment.

Compensation, in lieu of reinstatement and back wages

Malaysian labour law termination compensation is typically awarded based on one month’s salary for every year of service. This could be significant to the employer. Unfairly dismissing a senior, highly paid employee with many years of service, could cost the employer hundreds of thousands of ringgit.

The employee is also entitled to file a civil claim for damages against the employer.

Defending an unfair dismissal claim

An employer can successfully defend a case of unfair dismissal if the employer can show the following:

  • There were proper justification and reasons for the dismissal – it must be for “just cause and excuse”, and
  • The employer followed all the steps of a fair procedure.

Even if the Industrial Court decides that there was just cause and excuse, the employer can still lose the case if the employer did not follow a fair dismissal procedure.

In summary, it seems that Malaysian Labour Law provides a framework within which both employer and employee are protected against unfair practices. It recognises the rights and prerogatives of employers to make decisions in the commercial interest of the business. At the same time, it protects employees against unfair dismissals.

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