How to Deal with Termination of Employment in Malaysia

Termination of employment is one of the most sensitive responsibilities for employers and HR managers.

While businesses sometimes have no choice but to let employees go, whether due to misconduct, redundancy, or performance issues, the law in Malaysia requires employers to handle termination fairly, transparently, and in compliance with the Employment Act 1955, the Industrial Relations Act 1967, and the Employment (Termination and Lay-Off Benefits) Regulations 1980.

Handled poorly, termination can expose employers to unfair dismissal claims at the Industrial Court, resulting in reinstatement orders or compensation payments. Handled correctly, it protects both the business and the dignity of the employee.

What is Termination of Employment

Termination occurs when an employment contract between an employer and employee comes to an end. It can happen through:

Resignation
Retirement
Dismissal (the employer ends the contract, often for misconduct or poor performance)
Retrenchment (roles are made redundant due to restructuring or business closure)

Even probationary employees are protected by the law. They cannot be dismissed arbitrarily and are entitled to due process before termination

Is it Legal to Terminate Employees in Malaysia?

Yes, but only if done in line with the Employment Act 1955 and the employment contract. Employers must show “just cause and excuse,” meaning there must be a valid and fair reason for dismissal.

Employers can:

Terminate with notice, according to the contract or statutory minimums.
Terminate without notice, but only for serious misconduct or if paying payment in lieu of notice.

Payment in lieu of notice means the employer pays the employee’s wages for the notice period instead of requiring them to serve it.

How Long is the Notice Period for Termination

Under Section 12 of the Employment Act 1955, the minimum notice depends on years of service:

Less than 2 years → 4 weeks’ notice
2 to 5 years → 6 weeks’ notice
More than 5 years → 8 weeks’ notice

During the notice period, employees are entitled to use their annual leave or receive encashment if unused. Employers must ensure these obligations are honoured.

Valid Reasons for Termination

Employers must establish clear grounds before termination. Common lawful reasons include:

Misconduct, such as theft, fraud, harassment, absenteeism, or breach of company rules.
Poor performance after sufficient warnings and opportunities to improve.
Redundancy or retrenchment due to restructuring, downsizing, or closure.
Expiry of fixed-term contract if not renewed.
Medical grounds: inability to perform due to long-term illness or disability.

What Constitutes Unfair Dismissal and Industrial Court?

If an employee feels they were dismissed without just cause, they can lodge a dismissal claim under Section 20 of the Industrial Relations Act 1967 within 60 days of termination.

The case may be referred to the Industrial Court, which can order:

Reinstatement: returning the employee to their job.
Compensation in lieu of reinstatement: usually 1 month’s wages per year of service.
Back wages: capped at 24 months for confirmed employees, or 12 months for probationers.

How Much Do Employees Get for Compensation for Termination

Under the Employment (Termination and Lay-Off Benefits) Regulations 1980, employees who have completed at least 12 months of continuous service are entitled to termination benefits, unless dismissed for misconduct. The entitlement is:

10 days’ wages per year of service → Less than 2 years
15 days’ wages per year of service → 2 to 5 years
20 days’ wages per year of service → More than 5 years

The benefits are calculated based on the employee’s ordinary rate of pay (ORP), usually monthly wages ÷ 26 working days.

Calculation Examples

Example 1: Employee with 1.5 years of service

Monthly salary: RM2,600
ORP: RM2,600 ÷ 26 = RM100 per day
Entitlement: 10 days × 1.5 years = 15 days’ wages
Calculation: RM100 × 15 = RM1,500 termination benefit

Example 2: Employee with 3 years of service

Monthly salary: RM3,900
ORP: RM3,900 ÷ 26 = RM150 per day
Entitlement: 15 days × 3 years = 45 days’ wages
Calculation: RM150 × 45 = RM6,750 termination benefit

Example 3: Employee with 6 years of service

Monthly salary: RM5,200
ORP: RM5,200 ÷ 26 = RM200 per day
Entitlement: 20 days × 6 years = 120 days’ wages
Calculation: RM200 × 120 = RM24,000 termination benefit

Additional Notes

Benefits are in addition to unpaid wages, overtime, and encashment of unused annual leave.
Part-years of service are calculated pro-rata (e.g., 3 years 6 months = 3.5 years).
Employees with less than 12 months of continuous service are not entitled to termination benefits, but still must be paid wages and leave balances.

Steps Employers Should Take Before Termination

Ending employment should never be the first option. Under Malaysian law and best HR practice, termination must be the last resort, only after due process is followed.

Below are the steps every employer should take to ensure compliance and fairness:

1. Set Clear Expectations and Performance Goals

At the start of employment, job descriptions, KPIs, and performance standards should be communicated clearly.

If employees fail to meet expectations, HR must provide structured performance management plans (PIP), regular feedback, and timelines for improvement.

Example: A sales executive underperforming should be given a PIP with measurable targets (e.g., RM100,000 in sales within 3 months) before termination is considered.

2. Issue Verbal and Written Warnings

For poor performance or minor misconduct, issue a verbal warning first. If the issue persists, escalate to written warnings, which should detail the problem, expected improvement, and consequences of failing to improve.

Keep copies of all warnings in the employee’s personnel file, these may be required in the Industrial Court if a dismissal claim arises.

3. Show Cause Letter

For serious issues (e.g., repeated absenteeism, insubordination), employers must issue a show-cause letter asking the employee to explain in writing why disciplinary action, including termination, should not be taken.

Employees should be given a reasonable time (usually 48 hours) to respond.

This demonstrates that the employer acted fairly by allowing the employee to defend themselves.

4. Conduct a Domestic Inquiry (DI)

If the explanation in the show cause letter is unsatisfactory, a domestic inquiry should be convened.

The inquiry must:

Be chaired by a neutral panel.
Give the employee a chance to present evidence and call witnesses.
Keep detailed minutes of proceedings.

Termination should only proceed if the inquiry panel concludes that misconduct or poor performance has been proven.

5. Consider Alternatives Before Termination

Employers should explore less severe measures first, such as:

Transfer to a different department/role.
Additional training or reskilling.
Temporary suspension without pay (for misconduct cases).
Redeployment (for redundancy situations).

This shows the employer made reasonable efforts before dismissal.

6. Ensure Compliance with Notice Requirements

Follow statutory or contractual notice periods under Section 12 of the Employment Act 1955. If termination is immediate, pay wages in lieu of notice. During the notice period, confirm if the employee will serve or encash annual leave.

7. Calculate Final Entitlements Accurately

Wages up to the last working day.
Encashment of unused annual leave.
Overtime pay (if applicable).
Termination benefits (15, 20, or 25 days’ wages per year of service, depending on tenure).
Return of company property and clearance.

Employers should keep a termination settlement statement signed by both parties.

8. Document Everything

Maintain records of warnings, correspondence, inquiry reports, and termination letters. Documentation is the employer’s strongest defence against unfair dismissal claims.

By following these steps, employers demonstrate they have acted with just cause and excuse, which is crucial if the termination is later challenged in the Industrial Court.

Letters of Termination

Below are some letters of termination samples that you can utilize as a reference:

1. Letter of Termination of Full Timer

[Company Letterhead]
Date: [DD/MM/YYYY]

To: [Employee’s Name]
[Employee’s Position]
[Department]

Termination of Employment

Dear [Employee’s Name],

We refer to your employment with [Company Name] as [Job Title] since [Start Date]. After careful consideration, we regret to inform you that your employment will be terminated with effect from [Last Working Day].

This decision is made in accordance with the terms of your employment contract dated [Contract Date] and the provisions of the Employment Act 1955. As required, you will be provided with [X weeks/months] notice period/payment in lieu of notice in line with Section 12 of the Act.

Upon termination, you will receive:

Salary up to and including your last working day.
Payment in lieu of notice (if applicable).
Encashment of unused annual leave (if any).
Any other benefits as required under Malaysian law and company policy.

Please ensure all company property (laptop, ID card, documents, etc.) is returned to the HR Department before your last working day.

We thank you for your contributions to the company and wish you all the best in your future endeavors.

Sincerely,
[Authorized Signatory]
[Designation]
[Company Name]

2. Letter of Termination of Contract Workers

[Company Letterhead]
Date: [DD/MM/YYYY]

To: [Employee’s Name]
[Employee’s Position]
[Department]

Termination of Contract Employment

Dear [Employee’s Name],

We refer to your employment with [Company Name] under the fixed-term contract dated [Contract Date] for the position of [Job Title].

Please be informed that your contract will be terminated effective [Last Working Day], in accordance with the terms stated in your employment contract. The reason for termination is [e.g., completion of project/restructuring/non-renewal of contract].

You will be paid the following entitlements upon termination:

Salary up to and including your last working day.
Payment for any unused annual leave (if applicable).
Other contractual benefits (if any) as per your employment agreement.

Kindly ensure that all company property in your possession (such as laptop, mobile phone, access card, and documents) is returned to the HR Department by your last day of employment.

We appreciate the services you have provided during your contract period and wish you success in your future endeavors.

Sincerely,
[Authorized Signatory]
[Designation]
[Company Name]

3. Letter of Termination of Interns

[Company Letterhead]
Date: [DD/MM/YYYY]

To: [Intern’s Name]
[Internship Position]
[Department]

Termination of Internship Placement

Dear [Intern’s Name],

We refer to your internship placement with [Company Name] as [Internship Position], which commenced on [Start Date].

We regret to inform you that your internship will be terminated with effect from [Last Day of Internship]. This decision was made due to [state reason clearly – e.g., performance issues, breach of company rules, project discontinuation, or mutual agreement].

Please note that you will receive:

Any outstanding allowance (if applicable) up to your last day.
A certificate of internship/confirmation of hours completed (if applicable).

You are required to return all company property (such as ID card, laptop, or documents) to the HR Department before your last day.

We thank you for your time and contribution during your placement, and we wish you the very best in your academic journey and future career.

Sincerely,
[Authorized Signatory]
[Designation]
[Company Name]

4. Letter of Termination of Part-Time

[Company Letterhead]
Date: [DD/MM/YYYY]

To: [Intern’s Name]
[Internship Position]
[Department]

Termination of Part-Time Employment

Dear [Employee’s Name],

We refer to your employment with [Company Name] as a part-time [Job Title] since [Start Date].

Please be informed that your employment will be terminated with effect from [Last Working Day]. The reason for termination is [e.g., end of part-time arrangement, performance-related, or restructuring].

You will be paid the following entitlements upon termination:

Wages up to and including your last working day, based on hours worked.
Payment for any unused annual leave (if applicable).

Kindly ensure that all company property (uniforms, ID card, equipment, etc.) is returned to your supervisor or HR before your last working day.

We thank you for your contributions during your time with us and wish you success in your future endeavors.

Sincerely,
[Authorized Signatory]
[Designation]
[Company Name]

5. Letter of Termination of Freelancer

Company Letterhead]
Date: [DD/MM/YYYY]

To: [Freelancer’s Name]
[Role/Project Title]

Notice of Termination of Freelance Engagement

Dear [Freelancer’s Name],

This letter serves as formal notification that your freelance engagement with [Company Name] for [Project/Assignment Name] will come to an end on [Last Working Day/Completion Date].

The decision to conclude this arrangement is based on [state reason clearly, e.g. project completion, change in business needs, performance concerns, or budget constraints].

As part of this termination, you will be provided with:

Payment for services rendered up to the termination date, in accordance with the agreed rate.
Reimbursement for any approved expenses (if applicable).

Please ensure that all deliverables, documents, and company property (if any) are handed over to [Supervisor/Project Lead] by the above date.

We appreciate your contributions to this project and thank you for your efforts. We wish you success in your future freelance assignments.

Sincerely,
[Authorized Signatory]
[Designation]
[Company Name]

6. Letter of Termination for Special Reason

[Company Letterhead]
Date: [DD/MM/YYYY]

To: [Employee’s Name]
[Employee’s Position]
[Department]

Termination of Employment Due to [Specific Reason]

Dear [Employee’s Name],

It is with regret that we must inform you that your employment with [Company Name] as [Job Title] will be terminated effective [Last Working Day].

This decision is not a reflection of your performance, but is necessitated by [state the special reason clearly, e.g., company restructuring, role redundancy, business closure, or financial constraints]. After reviewing all options, the company has determined that this step is unavoidable in order to protect long-term business sustainability.

As required by the Employment Act 1955 and your employment contract, you will be entitled to the following:

Salary up to and including your last working day.
Encashment of any unused annual leave.
Statutory termination benefits of [X days’ wages per year of service], in accordance with the Employment (Termination and Lay-Off Benefits) Regulations 1980.
Any other benefits as stated in your contract of employment.

We will also provide you with a formal Certificate of Service upon request to assist in your future job applications.

Please arrange with HR to return all company property (equipment, ID card, documents) and to complete the clearance process before your final working day.

We truly value the contributions you have made during your time with us, and we extend our sincere thanks for your dedication. We wish you every success in your future career.

Sincerely,
[Authorized Signatory]
[Designation]
[Company Name]

7. Letter of Termination of Foreign Employee

[Company Letterhead]
Date: [DD/MM/YYYY]

To: [Employee’s Name]
[Passport Number: XXXXXXXX]

[Work Permit/Pass Number: XXXXXXXX]

[Position]
[Department]

Termination of Employment

Dear [Employee’s Name],

It is with regret that we must inform you that your employment with [Company Name] as [Job Title] will be terminated effective [Last Working Day].

As required by the Employment Act 1955 and your employment contract, you will be entitled to the following:

Salary up to and including your last working day.
Encashment of any unused annual leave.
Statutory termination benefits of [X days’ wages per year of service], in accordance with the Employment (Termination and Lay-Off Benefits) Regulations 1980.
Any other benefits as stated in your contract of employment.

We will also provide you with a formal Certificate of Service upon request to assist in your future job applications.

Please arrange with HR to return all company property (equipment, ID card, documents) and to complete the clearance process before your final working day.

We truly value the contributions you have made during your time with us, and we extend our sincere thanks for your dedication. We wish you every success in your future career.

Sincerely,
[Authorized Signatory]
[Designation]
[Company Name]

8. Letter of Termination of Probationer

[Company Letterhead]
Date: [DD/MM/YYYY]

To: [Employee’s Name]

[Position]
[Department]

Termination of Employment During Probation

We refer to your probationary employment with [Company Name] as [Job Title], which commenced on [Start Date].

Following a review of your performance and conduct during the probationary period, we regret to inform you that the company has decided not to confirm your employment. Your last working day will be [DD/MM/YYYY], in accordance with the notice period stated in your letter of offer and the Employment Act 1955.

You will be entitled to:

Salary up to and including your last working day.
Encashment of any unused annual leave (if applicable).
[Optional] Payment in lieu of notice, where relevant.

Please ensure that all company property, including documents, identification cards, and equipment, is returned to HR before your final working day.

We thank you for your efforts during your probation and wish you success in your future career.

Sincerely,
[Authorized Signatory]
[Designation]

FAQs

1. What is the minimum notice period for termination in Malaysia?

Under Section 12 of the Employment Act 1955, notice depends on the length of service:

Less than 2 years → 4 weeks
2 to 5 years → 6 weeks
More than 5 years → 8 weeks

Employers and employees may agree to longer notice in the employment contract, but not shorter.

2. What happens if an employer fails to follow the Employment Act?

Failure to comply, such as not giving notice, not paying wages in lieu, or denying statutory entitlements, can lead to:

Complaints to the Labour Department (JTK).
Claims at the Industrial Court for unfair dismissal.
Financial penalties or orders for reinstatement/compensation.

3. Can an employee be terminated immediately?

Yes, but only under two conditions:

Serious misconduct proven after due inquiry (e.g., theft, fraud, violence).
If the employer pays payment in lieu of notice equal to the employee’s wages for the notice period.

4. What is considered unfair dismissal in Malaysia?

Any termination without “just cause and excuse,” such as:

Dismissing without a valid reason.
Skipping due process (warnings, show cause, inquiry).
Termination motivated by discrimination or retaliation.

Such cases may be challenged under Section 20 of the Industrial Relations Act 1967.

5. How does the Industrial Court decide on dismissal cases?

The Industrial Court examines whether the employer had just cause and excuse and followed procedural fairness. Outcomes may include:

Reinstatement of the employee.
Compensation in lieu of reinstatement (usually one month’s wages per year of service).
Back wages (up to 24 months for confirmed staff, 12 months for probationers).

6. Do employers need to pay compensation if termination is due to misconduct?

No. If misconduct is proven through proper inquiry, the employee can be dismissed without termination benefits. However, unpaid wages, overtime, and leave encashment (if any) must still be settled.

7. Is annual leave encashment required upon termination?

Yes. Employers must pay for all unused annual leave at the employee’s ordinary rate of pay, even in cases of dismissal.

8. Can an employer terminate without prior warning?

Not recommended. Unless the misconduct is very serious (e.g., theft, assault), employers should issue verbal and written warnings before termination. Skipping warnings can expose the company to unfair dismissal claims.

9. What are the differences in termination for employees with 12 months of continuous service vs. less than 12 months?

Employees with less than 12 months are not entitled to termination or lay-off benefits under the Employment (Termination and Lay-Off Benefits) Regulations 1980, but are still entitled to final wages and leave encashment.

Employees with 12 months or more are entitled to termination benefits (10-20 days’ wages per year of service, depending on tenure) if termination is not due to misconduct.

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