Termination of Employment Contracts in Malaysia: Essential Rules and Procedures

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.

  • Immediate termination without notice must be justified with valid reasons.
  • Acts such as theft, fraud, physical violence, or gross insubordination qualify as serious misconduct and can result in instant dismissal.
  • Employees who deliberately violate critical terms of their contract—such as unauthorized disclosure of confidential information—can also be terminated without notice.
  • 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.

1.Resignation Notice Period

  1. 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

2. Alternatively, employees can opt for payment in lieu of notice.

2.Writing a Proper Resignation Letter

  1. A formal resignation letter should typically include:
  • Date of notice
  • Intended last working day
  • Optional reason for leaving
  • Expression of gratitude for the opportunity

2. This document ensures clarity and professionalism in the resignation process.

3.Exit Process After Resignation

  1. Upon resignation:
  • Handover Duties: Ensure all projects and responsibilities are properly transferred.
  • Exit Interview: Provide feedback that can help the company improve.

2. 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

  • 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.
  • 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.
  • Employers can deduct any outstanding loans, advance payments, or unreturned company property from the final salary. These deductions should be clearly explained and documented.
  • 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.
  • The final salary should be paid using the same method as regular salary payments (e.g., bank transfer or cheque), unless otherwise agreed upon.
  • Employers should ensure that any applicable taxes or deductions (e.g., EPF, SOCSO, and income tax) are withheld from the final payment.
  • 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.

FAQs

Yes, an employer can terminate an employee’s contract, but they must follow proper procedures and provide the required notice or compensation.

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.

An employee can resign without notice, but they may have to pay compensation for the notice period not given.

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.

Need Professional Payroll Management Solutions?

Our certified payroll specialists ensure accurate, compliant, and efficient payroll processing, allowing you to focus on strategic business priorities.

Explore AutoCount solutions that make your business run smoothly

Payroll / HRM Solutions

Paying your workers easy! With AutoCount, you can simplify how you give out salaries and employee benefits.

POS System Solutions

Selling things easy! Use our strong cash register system to handle sales quickly. This is super important for stores!

E-Commerce Solutions

Sell things online easily! With AutoCount, you can handle online sales and process orders smoothly using our e-commerce solutions.

Mobile App Business Solutions

Manage your business data on-the-go with AutoCount's mobile solutions. Handle your information conveniently from your phone.

Accounting Solutions

Money tasks easy! Use AutoCount to write down and see how your money is doing, from the start to the reports.

F&B Solutions

Get special help for food and drinks! We have solutions that take care of orders, keeping track of food, and selling things – perfect for restaurants and cafes!

Customized Accounting Software

Make your own special money program! AutoCount can create customized accounting software just for you, addressing exactly what you need.

Discover more AutoCount modules and enhance your inventory management!

Leave a comment

Your email address will not be published. Required fields are marked *