Calculation of Termination & Lay-Off Benefits

'Firing' an employee is never easy. Nevertheless, every company in Malaysia needs to be aware of the several laws that preside over the procedure, such as the Labour Relations Act (LRA) 1967 and the Employment Act 1955, as well as contract and case laws. 

Although many believe that the process of employee dismissal is more pro-employee, if one looks closely at Malaysian labour law, it can be noted that the system is relatively well-balanced. 

These systems are outlined to balance both parties in the contract and are designed on the basic concept of fairness. Fundamentally, the termination of an employee can only be done for "just cause or excuse". If not, the worker in question can officially file a complaint to the Director-General of Industrial Relations. 

 

When can you 'fire' an employee?

Malaysia does not have an "at-will employment" process, meaning companies cannot hire and fire "at will". Instead, they can dismiss a worker's services if it is found procedurally fair and done in good faith.

While employees have the right to employment, it also makes sense that employers should have the right to make critical decisions in the company's best interest. Section 13(3) of the IRA says that the termination of employees is considered management liberty.

 

Which employees are qualified to receive lay-off benefits payments? 

Based on the Employment (Termination and Lay-Off Benefits) Regulations 1980, employees are eligible for termination benefits payments when their employment contracts are dismissed for any reason except: 

• When the employee's contract is terminated due to misconduct
• When the employee chooses to terminate their own contract
• When the employee's contract of service is renewed and revised with equal or enhanced benefits (with renewal being in effect immediately)
• When the employee's contract is dismissed upon reaching the retirement age (that is if this clause is written in the contract)

 

How do you calculate termination benefits payment?

The Employment (Termination and Layoff Benefits) Regulations 1980 has established a formula for the calculation of termination or layoff benefits payments, which must not be less than:

• 10 days' compensation for every year of employment under an active service contract with the company if the individual has worked with that company for less than 2 years; or
• 15 days' compensation for every year of employment under a continuous service contract with the company if the employee has been with that company for 2 years period of at least but less than 5 years; or
• 20 days' compensation for every year of employment under a particular set of service conditions with the company if the employee has been with that company for 5 years or more, and pro-rata in the case of an incomplete year, calculated to the nearest month.

 

What are other benefits due to a dismissed employee?

Every employment contract under the Employment Act 1955 would require a notice period of at least 1 month. This notice period applies equally to both parties, including the employer and the employee. However, either party can pay a sum in lieu of notice to buy themselves out of the contract. 

For example, Company X decides to terminate Employee Y's contract, which receives a monthly salary of RM 10,000. A notice period of 2 months was specified in the employment contract. If the employer decides (or requires) the employee to leave immediately, the employer would have to pay RM 20,000 in lieu of notice to the employee. The same applies should the employee leave before their notice period. 

Nevertheless, if both parties intentionally breach a term specified in the contract, the said contract may be terminated without notice. This often applies to misconduct or other wilful violations of agreements like theft, fraud, and corporate espionage. 

In addition, employees can receive other termination benefits, including the encashment of unused annual leave and discretionary pro-rated incentives upon termination. However, note that this also depends on the conditions set out in the contract, which regulate many of the payments that may or may not require making upon termination.  

Last but not least, the terminated employee can also receive gratuity payments - which are made ex gratia (Latin for "by favour"), and retirement plans for individuals who have reached the outlined age in certain companies. 

 

How to terminate employment in Malaysia fairly (procedurally fair)?

Consider following the steps below:

• According to Malaysian labour law, the employer must give the employee a termination notice that specifies the reason for dismissal.
• Officially ask for an explanation from the employee's side.
• Allow sufficient time to respond.
• If this remains unresolved, schedule an inquiry as soon as possible - also known as a domestic inquiry. This objective is to look into the situation and gather facts about the employee's misconduct or poor performance.
• Ensure that the inquiry panel remains unbiased, and witnesses may be called if needed.
• The inquiry must be impartial and not regarded as a mere 'formality' to comply with the procedure.
• After gathering enough information, decide whether the termination would be fair and just.
• Maintain a formal record of the proceedings.

 

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