Termination of Employment Contracts in Malaysia: Essential Rules and Procedures
Learn the legal process of employment termination in Malaysia, including dismissal, retrenchment, resignation, and final salary settlement. This guide helps employers and employees understand notice periods, compliance requirements, and their rights under the Employment Act 1955.
Introduction to Termination of Employment in Malaysia
In Malaysia, the termination of an employment contract is governed by a blend of statutory requirements and contractual obligations. Whether due to company restructuring, disciplinary issues, or voluntary resignation, it’s crucial for both employers and employees to understand the legal procedures to avoid disputes. This article provides a comprehensive guide on the lawful termination of employment contracts in Malaysia.
Termination Without Notice (Dismissal)
Not all terminations require prior notice. Under specific circumstances, employers can immediately dismiss an employee.
- Grounds for Immediate Dismissal
Immediate termination without notice must be justified with valid reasons.
- Serious Misconduct
Acts such as theft, fraud, physical violence, or gross insubordination qualify as serious misconduct and can result in instant dismissal.
- Willful Breach of Contract
Employees who deliberately violate critical terms of their contract—such as unauthorized disclosure of confidential information—can also be terminated without notice.
- Requirement of Domestic Inquiry
Before executing an immediate dismissal, employers must conduct a domestic inquiry to ensure fair hearing and due process. This protects against potential claims of wrongful dismissal and supports the principle of natural justice.
Retrenchment and Layoffs: What Employers Must Know
Economic challenges may sometimes necessitate retrenchments or layoffs. Employers must adhere to specific legal protocols to avoid penalties.
- Obligation to Notify the Labour Department
Employers must submit a PK Form to the Department of Labour at least 30 days prior to retrenchment. This allows authorities to monitor employment trends and safeguard worker rights.
- Calculation of Severance Pay
Under the Employment Act 1955, retrenched employees are entitled to termination benefits based on their tenure:
- Employees not covered by the Act may still receive benefits under company policies or collective agreements.
Employee Resignation Procedures in Malaysia
Employees who wish to resign must follow specific steps to ensure a smooth transition.
Resignation Notice Period
Just like terminations by employers, employees must provide notice according to their contract or the Employment Act’s minimum standards.
- Less than 2 years: 4 weeks
- 2–5 years: 6 weeks
- More than 5 years: 8 weeks
Alternatively, employees can opt for payment in lieu of notice.
Writing a Proper Resignation Letter
A formal resignation letter should typically include:
- Date of notice
- Intended last working day
- Optional reason for leaving
- Expression of gratitude for the opportunity
This document ensures clarity and professionalism in the resignation process.
Exit Process After Resignation
Upon resignation:
- Handover Duties: Ensure all projects and responsibilities are properly transferred.
- Exit Interview: Provide feedback that can help the company improve.
Final Clearance: Return any company property and settle outstanding obligations.
Final Salary Settlement After Termination or Resignation
Employees must receive their full and final salary promptly after leaving the organization.
Components of Final Salary Payment
The final paycheck typically includes:
- Unpaid wages
- Payment in lieu of notice (if applicable)
- Encashment for unused annual leave
- Outstanding overtime payments
Mandatory deductions for EPF, SOCSO, EIS, and PCB (tax) must also be made.
Timeline for Final Salary Payment
1.Final Salary Payment Deadline
- Employers are required to pay the employee’s final salary, including any outstanding wages, bonuses, and benefits, within 7 days from the last day of employment.
- If the termination is due to resignation, the final salary should be paid within 7 days of the last working day.
- For terminations due to dismissal, the final salary is also due within 7 days after the termination.
2. Final Pay Includes:
- Unpaid Salary: Any salary owed up to the last day worked.
- Unused Annual Leave: Payment for unused leave days, as per the employee’s entitlement.
- Overtime Pay: Any overtime worked but not yet compensated.
- Other Benefits or Allowances: Any additional benefits or reimbursements due.
3. Deductions from Final Salary
- Employers can deduct any outstanding loans, advance payments, or unreturned company property from the final salary. These deductions should be clearly explained and documented.
4. Severance Pay or Compensation
- In cases of retrenchment or redundancy, the employee may be entitled to severance pay based on their years of service, in addition to their final salary.
- If the employee was dismissed without proper cause, they may be entitled to compensation for wrongful dismissal.
5. Payment Method
- The final salary should be paid using the same method as regular salary payments (e.g., bank transfer or cheque), unless otherwise agreed upon.
6. Tax Considerations
- Employers should ensure that any applicable taxes or deductions (e.g., EPF, SOCSO, and income tax) are withheld from the final payment.
7. Employee’s Acknowledgment
- Employers should ask employees to sign an acknowledgment receipt confirming they have received the final salary and any applicable documents related to termination.
Tax Clearance Requirements Upon Cessation of Employment
For certain employees, obtaining tax clearance from the Inland Revenue Board (LHDN) is necessary.
Submitting Form CP22A
Employers must file Form CP22A at least 30 days before the employee’s last day if they are retiring, leaving Malaysia permanently, or have unpaid taxes.
Withholding of Final Payment Pending Clearance
Final payments must be withheld until the tax clearance is received to avoid penalties and ensure compliance.
Common Mistakes Employers and Employees Should Avoid
- Failing to document reasons for dismissal
- Not conducting a domestic inquiry before termination
- Ignoring statutory notice periods
- Delaying final salary payments
- Overlooking tax clearance obligations
Avoiding these pitfalls helps maintain professionalism and legal compliance.
Conclusion
Ensuring Fair and Legal Employment Termination
Understanding and adhering to Malaysian employment laws ensures smoother transitions, reduces conflicts, and protects the rights of both employers and employees. By following proper procedures for termination, retrenchment, or resignation, organizations build a trustworthy and compliant workplace culture.
Frequently Asked Questions
Can an employer terminate an employee’s contract in Malaysia?
Yes, an employer can terminate an employee’s contract, but they must follow proper procedures and provide the required notice or compensation.
How much notice must be given for termination?
The notice period depends on the employment contract, but generally, it’s 1 to 2 months. For employees with less than 2 years of service, it’s 4 weeks.
Can an employee resign without notice?
An employee can resign without notice, but they may have to pay compensation for the notice period not given.
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