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 with Notice in Malaysia
Termination with notice is the most common method of ending an employment relationship, ensuring fairness for both parties involved.
Statutory Minimum Notice Periods
If the employment contract does not specify a notice period, the Employment Act 1955 provides the following minimum guidelines:
- Less than 2 years of service: 4 weeks’ notice
- 2 to 5 years of service: 6 weeks’ notice
- More than 5 years of service: 8 weeks’ notice
This ensures that employees have sufficient time to seek alternative employment and that employers can arrange replacements.
Payment in Lieu of Notice
Instead of serving the notice period, either party may opt for payment in lieu of notice. This means compensating the affected party for the notice period without requiring continued work, providing flexibility and immediate closure of the employment relationship.
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:
| Years of Service | Severance Pay |
|---|---|
|
1–2 years |
10 days' wages per year |
|
2–5 years |
15 days' wages per year |
|
More than 5 years |
20 days' wages per year |
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
| Situation | Final Pay Timeline |
|---|---|
|
Proper notice given |
On last working day |
|
No notice given |
Within 3 days after leaving |
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.
Frequently Asked Questions (FAQs)
Yes, but only in cases involving serious misconduct or willful breach of contract, following a domestic inquiry.
Employers must submit a PK Form 30 days prior and provide severance pay based on length of service.
No, only in cases of retrenchment or layoffs. Dismissals due to misconduct may not entitle employees to severance pay.
The required notice period is stipulated in the contract or, if absent, follows the Employment Act’s guidelines.
The employee may lodge a complaint with the Labour Department, leading to potential fines for the employer.
When an employee retires, permanently leaves Malaysia, or owes taxes without prior PCB deductions.
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.
