Letting someone go is never straightforward, and in Malaysia the legal requirements are detailed enough that a misstep can land you in front of the Industrial Court. If you’re a foreign company with employees in Malaysia, understanding the rules before you act isn’t just good practice; it’s essential. This guide covers the key obligations: notice periods, severance pay, the misconduct procedure, unfair dismissal risks, and final pay timelines.
The legal framework for termination in malaysia
Employment termination in Malaysia is governed by two main pieces of legislation: the Employment Act 1955 and the Industrial Relations Act 1967. The Employment Act sets out minimum entitlements covering notice periods, severance pay, and final pay obligations. The Industrial Relations Act covers the dispute resolution process, including claims of unfair dismissal.
A significant change came into effect following the 2022 amendments to the Employment Act. Coverage was extended to all employees regardless of salary, which means the statutory minimums now apply across your entire workforce in Malaysia, not just lower-wage workers. If you’ve been relying on older guidance that carved out higher-earning employees, it’s worth revisiting your practices.
Probation periods
Malaysian law doesn’t set a fixed probation length. In practice, probation periods of three to six months are standard, and the terms are set out in the employment contract. During probation, the same legal protections broadly apply, so don’t assume a probationary employee can be dismissed without process. The contract should specify the probation length, and you should still follow a fair procedure before terminating someone who hasn’t passed their probation.
Notice periods
The Employment Act sets out statutory minimum notice periods based on length of service:
- Less than 2 years’ service: 4 weeks’ notice
- 2 to 5 years’ service: 6 weeks’ notice
- More than 5 years’ service: 8 weeks’ notice
These are minimums. Employment contracts can and often do specify longer notice periods, which you’re bound by. You can also choose to pay wages in lieu of notice rather than requiring the employee to work through the notice period; either party can do this, subject to the contract terms.
Severance pay
Severance pay in Malaysia, referred to as termination benefits, applies in cases of redundancy and business closure. It doesn’t apply to dismissal for misconduct. The rates are:
- 1 to 2 years’ service: 10 days’ wages per year of service
- 2 to 5 years’ service: 15 days’ wages per year of service
- More than 5 years’ service: 20 days’ wages per year of service
These figures are statutory minimums under the Employment Act. If an employee’s contract or a collective agreement provides for higher benefits, those apply instead. Make sure you’re calculating based on the correct daily rate and full years of completed service.
Dismissal for misconduct: the domestic inquiry
When you’re considering dismissing an employee for misconduct, you can’t simply hand them a termination letter. Malaysian law requires employers to conduct a Domestic Inquiry (DI) before dismissal. This is a formal internal process, and skipping it creates real legal exposure.
What the di process involves
The Domestic Inquiry is an internal hearing that gives the employee an opportunity to respond to the allegations against them. The key steps are:
- Issue a written show cause letter setting out the specific charges or allegations.
- Give the employee a reasonable opportunity to respond in writing.
- Convene the Domestic Inquiry hearing, where the employee can present their case.
- Make a finding based on the evidence.
- If the finding is one of misconduct, determine the appropriate disciplinary action, which may include dismissal.
The DI doesn’t need to follow courtroom formality, but it does need to be genuine. The employee must know what they’re accused of and have a real chance to defend themselves.
Consequences of skipping the di
If you dismiss an employee for misconduct without conducting a Domestic Inquiry, the employee can file an unfair dismissal complaint. In that situation, the absence of a DI will count heavily against you at the Industrial Court. Courts have found dismissals without DI to be without just cause even when the underlying misconduct was genuine. The procedural obligation is separate from whether the employee was at fault; you need both a valid reason and a fair process.
Unfair dismissal and the industrial court
Any employee who believes they’ve been dismissed without just cause can file a complaint with the Industrial Relations Department. This referral must be made within 60 days of the dismissal. If the case isn’t resolved at conciliation stage, it can be referred to the Industrial Court.
The Industrial Court has two main remedies available: reinstatement to the employee’s previous position, or compensation of up to 24 months’ back wages. Reinstatement is the default remedy, though courts often award compensation instead when reinstatement isn’t practicable. Either way, the potential cost of getting a dismissal wrong is substantial.
The burden is on you as the employer to show that the dismissal was for just cause. Keeping clear documentation throughout the employment relationship, and following the correct procedures at every stage, is what protects you if a claim is filed.
Final pay obligations
When an employee’s employment ends, you have seven days from their last day of service to settle all outstanding amounts. This includes:
- All outstanding wages up to the termination date
- Accrued but untaken annual leave (paid out at the daily rate)
- Applicable severance or termination benefits
- Wages in lieu of notice, if notice was not served
Missing the seven-day deadline is a breach of the Employment Act. Build this timeline into your offboarding process so payment is ready before the last day wherever possible.
Managing terminations in malaysia through an EOR
For foreign companies without a registered entity in Malaysia, terminating employment compliantly means working through an Employer of Record (EOR). The EOR is the legal employer of record, which means termination obligations fall on them, and a good EOR will handle the Domestic Inquiry process, calculate severance correctly, and ensure final pay lands within the statutory deadline.
If you’re not familiar with how this model works, it helps to understand what an EOR does before you find yourself needing to use it for an offboarding. When you’re evaluating options, looking at the quality of EOR services available in the region is a good starting point.
Book a demo to see how RemotePass handles compliant terminations in Malaysia.
Frequently asked questions
Can you dismiss an employee during probation in malaysia?
Yes, but you still need to follow a fair process. The Employment Act and Industrial Relations Act apply during the probation period. If you’re dismissing for performance, a written warning and an opportunity to improve are recommended. For misconduct during probation, the DI process still applies.
What counts as “just cause” for dismissal in malaysia?
Just cause includes misconduct (such as dishonesty, insubordination, or serious breach of company policy), poor performance where the employee has been given a reasonable opportunity to improve, and redundancy arising from genuine business needs. The dismissal must be both substantively justified and procedurally correct.
Do you have to pay severance if you dismiss someone for poor performance?
No. Termination benefits under the Employment Act apply to redundancy and business closure only. A dismissal for poor performance or misconduct doesn’t trigger a severance obligation, though you should still follow proper procedure and settle all outstanding wages and accrued leave within seven days.
How long does the industrial court process take in malaysia?
Timelines vary, but cases can take anywhere from several months to over a year to reach a hearing and award. That’s one reason to get the process right from the start; a contested dismissal ties up management time and carries significant compensation risk even before you factor in legal costs.
