Introduction

Malaysia’s labour market is characterised by a complex web of regulations aimed at balancing the interests and rights of both employers and employees. The country’s labour laws are designed to ensure fair treatment, job security, and clear guidelines for managing employment relationships. Termination of employment is one of the most sensitive aspects of these relationships, often involving significant emotional and financial consequences for the employee, as well as potential legal and reputational risks for the employer.

Handling terminations improperly can lead to disputes, claims of unfair dismissal, and costly legal battles. Therefore, it is crucial for employers to navigate the termination process with a thorough understanding of Malaysian labour laws. Compliance with these regulations not only helps in avoiding legal repercussions but also fosters a fair and respectful work environment.

According to the Department of Statistics Malaysia, the country’s unemployment rate stood at 3.3% in May 2024, underscoring the competitive nature of the job market and the critical importance of adhering to employment laws. With the labour market being highly competitive, any lapses in following proper termination procedures can lead to significant challenges, including the risk of losing skilled talent to competitors and facing legal action from disgruntled former employees.

This article aims to provide a comprehensive guide on the legal requirements for firing in Malaysia. It will cover the permissible grounds for termination, necessary documentation, and the steps employers must take to stay compliant with the law. By understanding and implementing these guidelines, employers can ensure that terminations are conducted legally and ethically, thereby protecting their business interests and maintaining their reputation in the market.

Permissible Grounds for Termination

In Malaysia, the termination of employment is governed by various legal frameworks such The Employment (Termination and Lay-Off Benefits) Regulations 1980 to protect both employers and employees. To stay compliant with Malaysian labour laws and avoid legal repercussions, employers must understand the permissible grounds for termination and the necessary steps to document and justify each case. Here are the key permissible grounds for termination in Malaysia, along with detailed actions employers need to take to stay compliant and avoid being sued by employees.

Before we proceed, here are the key terms employers need to know when it comes to termination:

• Continuous Contract of Service: This means uninterrupted service with an employer. Even if the service is interrupted due to sickness, authorised leave, or other reasons beyond the employee’s control, it still counts as continuous service.
• Entitlement to Benefits: Employees who have worked under a continuous contract of service for at least 12 months are entitled to termination or layoff benefits.
• Exclusions: Employees who are dismissed for misconduct, voluntarily resign, or refuse reasonable offers of re-employment are not entitled to termination benefits.

1. Misconduct

Misconduct refers to unacceptable behaviour by an employee, such as theft, fraud, or repeated absenteeism. To legally terminate an employee for misconduct, employers must follow a fair and transparent process:

Steps for Employers:

1. Conduct a Thorough Investigation: Before taking any action, conduct a detailed investigation to gather evidence of the misconduct. This includes reviewing documents, interviewing witnesses, and collecting any relevant data.
2. Issue a Show Cause Letter: If misconduct is suspected, issue a show-cause letter to the employee detailing the allegations and asking for an explanation. This provides the employee with an opportunity to respond to the charges.
3. Hold a Disciplinary Hearing: Organise a disciplinary hearing where the employee can present their defence. Ensure that this hearing is fair and unbiased.
4. Document Everything: Keep detailed records of the investigation, show cause letter, employee’s response, and the disciplinary hearing proceedings. This documentation is crucial in case of any legal challenges.
5. Make an Informed Decision: Based on the evidence and the employee’s response, make a fair decision. If termination is decided, provide a written termination letter clearly stating the reasons for dismissal.

2. Poor Performance

Termination due to poor performance involves an employee’s consistent failure to meet job performance standards. To terminate an employee for poor performance, employers must demonstrate that they have provided adequate opportunities for improvement.

Steps for Employers:

1. Set Clear Performance Standards: Clearly outline job performance expectations and communicate these to the employee.
2. Provide Regular Feedback: Conduct regular performance reviews and provide constructive feedback. Document these reviews and any feedback given.
3. Offer Support and Training: Provide additional training or support to help the employee improve. Document any training sessions or support provided.
4. Implement a Performance Improvement Plan (PIP): If performance does not improve, implement a PIP detailing specific areas for improvement, actions to be taken, and a timeline.
5. Monitor Progress: Regularly monitor the employee’s progress during the PIP period and provide feedback.
6. Document Performance Issues: Keep detailed records of performance issues, feedback given, training provided, and progress monitored.
7. Conduct a Final Review: At the end of the PIP period, conduct a final review. If performance has not improved, provide a written termination letter clearly stating the reasons for dismissal.

3. Redundancy

Redundancy occurs when an employee’s position becomes unnecessary due to organisational restructuring, technological changes, or other business-related reasons. Employers must follow a fair process to avoid claims of unfair dismissal.

Steps for Employers:

1. Justify the Redundancy: Clearly define the business reasons for redundancy, such as cost-cutting measures, restructuring, or technological advancements.
2. Consult with Employees: Communicate the redundancy plans to affected employees and consult with them about possible alternatives.
3. Seek Alternative Employment: Where possible, offer alternative positions within the company to the affected employees.
4. Provide Notice: Give affected employees adequate notice as per their employment contract or statutory requirements.
5. Pay Severance: Calculate and pay severance benefits as required by law. Ensure all outstanding payments, including accrued wages and unused leave, are settled.
6. Document the Process: Keep detailed records of the redundancy process, including business justifications, consultations, alternative positions offered, and payments made.

4. Health Reasons

Termination due to health reasons involves an employee’s inability to perform their duties due to medical conditions. Employers must handle such cases sensitively and in compliance with legal requirements.

Steps for Employers:

1. Obtain Medical Evidence: Require the employee to provide medical evidence or obtain an independent medical assessment to confirm the inability to perform job duties.
2. Consider Reasonable Adjustments: Explore reasonable adjustments or accommodations that could enable the employee to continue working.
3. Consult with the Employee: Engage in open discussions with the employee about their health condition and possible adjustments.
4. Evaluate Options: If adjustments are not feasible, consider alternative roles within the company that the employee might be able to perform.
5. Provide Notice: If termination is the only option, provide adequate notice as per the employment contract or statutory requirements.
6. Document the Process: Keep detailed records of medical evidence, consultations, adjustments considered, and the final decision.

5. Mutual Agreement

Termination by mutual agreement occurs when both the employer and employee agree to end the employment relationship. This is often formalised through a separation agreement.

Steps for Employers:

1. Negotiate Terms: Discuss and negotiate the terms of termination with the employee, including the final working day, severance pay, and other benefits.
2. Draft a Separation Agreement: Prepare a written separation agreement outlining the terms agreed upon by both parties.
3. Ensure Voluntary Agreement: Ensure that the employee voluntarily agrees to the terms without any coercion.
4. Seek Legal Advice: Consider seeking legal advice to ensure that the agreement complies with employment laws and protects the interests of both parties.
5. Document the Agreement: Keep a signed copy of the separation agreement for records.

Source: The Malaysian Lawyer (n.d.). Guide to Malaysian Employment Law, and The Employment (Termination and Lay-Off Benefits) Regulations 1980.

Severance Pay

Severance pay in Malaysia varies based on the service length and the termination reason. The Employment Act 1955 outlines the following severance payment structure for employees:

• Less than 2 years: 10 days’ wages for each year of service.
• Between 2 to 5 years: 15 days’ wages for each year of service.
• More than 5 years: 20 days’ wages for each year of service.

These payments are mandatory in cases of redundancy, and failure to comply can result in legal penalties.

Source: Employment (Termination and Lay-off Benefits) Regulations 1980

Compensation Pay

In addition to severance pay, employees may be entitled to additional compensation, such as:

• Accrued but unpaid wages: Payment for any work completed up to the termination date. For example, if an employee worked for 15 days in their final month of employment, they should be paid for those 15 days.
• Unused annual leave: Compensation for any accrued but unused leave days. For instance, if an employee has 10 days of unused annual leave at the time of termination, they are entitled to payment equivalent to those 10 days of leave.
• Other contractual entitlements: Any additional payments stipulated in the employment contract. Examples include:
  • Bonuses: If the employment contract includes a performance bonus and the employee has met the performance criteria, they should receive the bonus. For example, if an employee is entitled to a yearly performance bonus and has met their targets up to the termination date, the bonus should be prorated and paid.
  • Commission: Sales staff often have commission-based pay. Any commission earned but not yet paid at the time of termination must be settled. For example, if a salesperson closed a deal that entitles them to a commission, the commission should be paid even if it falls due after the termination date.
  • Expense Reimbursements: Employees who have incurred business-related expenses that have not yet been reimbursed should be paid these amounts. For example, if an employee travelled for work and submitted travel expenses for reimbursement, these should be paid upon termination.
  • Stock Options or Shares: If the contract includes stock options or shares that have vested, the employee should receive these benefits. For example, if an employee has vested stock options that they are entitled to exercise, this should be facilitated even after termination.
  • Health Insurance: Some contracts may include continued health insurance coverage for a certain period post-termination. For instance, if an employee’s contract stipulates that they are covered by health insurance for three months following termination, this benefit should be honoured.

Employers must ensure all outstanding payments are settled promptly to avoid disputes. It is crucial to review the employment contract carefully and consult with legal professionals to ensure compliance with all financial obligations upon termination. By ensuring these payments are made, employers not only comply with legal requirements but also maintain a good reputation and foster trust among current and future employees.

Special Provisions

• Change of Business Ownership: Employees are not entitled to termination benefits if they unreasonably refuse an offer of re-employment from the new owner under equivalent terms.
• Death of Employer or Employee: Specific rules apply to the transfer of termination benefits in case of the death of the employer or the employee

Terminating Foreign Employees in Malaysia

Terminating the employment of foreign workers in Malaysia involves additional layers of complexity compared to terminating local employees. This complexity arises primarily due to the work permits and immigration status that foreign employees hold. Employers must be diligent in complying with both labour and immigration laws to avoid severe penalties, including fines and legal actions. This article provides an in-depth guide on the considerations and legal obligations employers must adhere to when terminating foreign employees.

Legal Considerations

Notification to the Immigration Department

One of the primary steps an employer must take when terminating a foreign employee is to notify the Immigration Department of Malaysia. Effective 1 January 2023, employers must also inform the Director General (DG) of the Ministry of Human Resources. This notification is crucial as it ensures that the employee’s work permit and visa status are updated accordingly. Failure to notify the Immigration Department and the DG can result in significant legal issues for the employer, including fines and restrictions on hiring foreign workers in the future.

Employers must inform the Director General (DG) within 30 days after the end of a foreign national’s employment due to the expiry of their Employment Pass, their repatriation or deportation, or their termination by the employer. If a foreign employee resigns or absconds without notice, the employer must notify the DG within 14 days.

Compliance with Immigration Laws

Employers must ensure that the termination process complies with all relevant immigration laws. This includes managing the cancellation of work permits and visas. Employers should consult with legal experts or immigration consultants to navigate the complexities of these regulations effectively.

To ensure compliance, employers should:

1. Maintain Accurate Records: Keep detailed records of all foreign employees, including their work permits, visa status, and employment contracts.
2. Submit Timely Notifications: Ensure all required notifications to the DG and the Immigration Department are submitted within the specified timeframes.
3. Consult with Legal and Immigration Experts: Regularly consult with legal and immigration professionals to stay updated on regulatory changes and ensure all procedures are correctly followed.

Rights of Terminated Foreign Workers

Foreign workers in Malaysia are entitled to specific rights that must be respected throughout the termination process. These rights are designed to protect foreign employees from unfair treatment and ensure they receive the benefits they are entitled to.

Right to Fair Treatment

Foreign workers must be treated fairly and without discrimination during the termination process. This means that the reasons for termination should be legitimate and documented, and the process should be transparent. Employers should avoid any form of bias or unfair practices that could be construed as discriminatory.

Right to Appeal

Foreign workers have the right to appeal against unfair dismissal through the Industrial Court. This right provides a mechanism for employees to seek justice if they believe their termination was unjustified. Employers should be prepared to defend their actions and provide substantial evidence to support the termination decision if challenged in court.

Legal Obligations for Terminating Foreign Employees

Providing Notice

Employers are required to provide notice of termination as stipulated in the employment contract or as per statutory requirements. The notice period allows the employee to prepare for the transition and seek alternative employment. Employers should ensure that the notice period complies with both the contract terms and local labour laws.

Settlement of Wages

All outstanding wages and benefits must be settled promptly upon termination. This includes:

• Accrued but unpaid wages: Payment for all work completed up to the termination date.
• Unused annual leave: Compensation for any accrued but unused leave days.
• Other contractual entitlements: Any additional payments stipulated in the employment contract, such as bonuses, commissions, or expense reimbursements.

Employers should ensure that these payments are made in a timely manner to avoid disputes and legal claims.

Repatriation

Employers are responsible for covering the cost of repatriating the foreign employee to their home country, if applicable. This includes travel expenses and any other costs associated with the return journey. Repatriation should be arranged promptly to ensure compliance with immigration requirements and to support the employee in their transition.

Source: Immigration Department of Malaysia and EY: Mobility: Immigration Alert

Relevant Legal Basis

The primary laws governing employment termination in Malaysia include:

• Employment Act 1955: Covers employees earning up to RM 2,000 per month and certain manual workers.
• Industrial Relations Act 1967: Governs the relationship between employers and employees, including dispute resolution.
• Immigration Act 1959/63: Pertains to the employment and termination of foreign workers.
• Employment (Termination and Lay-off Benefits) Regulations 1980: These regulations provide guidelines regarding workers’ rights to receive benefits in case of termination or lay-off.

Employers should familiarise themselves with these laws to ensure compliance during the termination process.

Conclusion

Terminating foreign employees in Malaysia requires careful consideration of labour and immigration laws. Employers must ensure that they follow the correct procedures, provide fair treatment, and respect the rights of foreign workers. By adhering to these legal obligations, employers can mitigate the risk of legal repercussions and maintain a fair and respectful work environment.

To navigate the complexities of terminating foreign employees, employers should seek advice from legal professionals and immigration consultants. Ensuring compliance with all relevant laws and regulations will help protect the employer’s interests and uphold the rights of their employees.

Consider partnering with Eos Global Expansion for seamless management of employment and termination processes. Our expertise in handling compliance with local labour laws and immigration regulations can significantly reduce the risk of legal disputes and ensure that all terminations are conducted fairly and legally. With Eos Global Expansion, businesses can focus on growth and expansion while leaving the complexities of employment regulations to our team of experts. Contact us today to learn how we can assist you in navigating these challenging processes effectively.

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