Can an Employer Terminate Based on Performance? A Malaysia Employer's Guide

Terminating an employee based on performance is one of the most sensitive and legally exposed decisions an employer can make in Malaysia. The short answer is yes — you can terminate for poor performance — but "can" comes with real conditions attached, and getting the substance or the process wrong is exactly what turns a routine performance issue into a costly Industrial Court claim.

The Legal Framework: Employment Act and Industrial Relations Act

Two pieces of legislation govern this territory, and they do different jobs.

The Employment Act 1955 sets minimum employment standards — notice periods, termination benefits, working conditions — and applies fully to most employees, with some provisions (like overtime and certain termination benefits) excluded for those earning above RM4,000 per month.

The Industrial Relations Act 1967 is where the real legal risk lives. Under Section 20 of the IRA, every dismissal in Malaysia must be carried out with "just cause and excuse." This is the single most important legal concept in this entire topic: it means an employer can't dismiss someone without a valid, substantive reason and without following a fair process to get there. Both elements are required — a valid reason delivered through an unfair process, or a fair process applied to a reason that isn't actually valid, both fail the test.

Critically, the burden of proof sits with the employer, not the employee. If a dismissed employee challenges the termination, the employer must prove — on a balance of probabilities — that a valid reason existed, that it was the real reason (not a pretext for something else), and that a fair procedure was followed.

What Counts as a Valid Performance-Based Ground for Termination?

Not every complaint about an employee's work qualifies. The Industrial Court generally expects to see:

Consistent, documented underperformance — not a single bad month, but a sustained pattern measured against clear standards.
Clear job descriptions and performance expectations set in advance, so the employee genuinely knew what "meeting expectations" looked like.
Objective, evidence-based performance evaluations — ratings and assessments that can be backed up with specifics, not just a manager's general impression.

A recurring theme in Industrial Court decisions is that vague performance complaints don't hold up. "He wasn't a good fit" or "she lacked initiative" are the kind of statements that get picked apart in a hearing; specific, measurable shortfalls tied to the employee's actual role hold up far better.

Due Process: Why "Just Cause" Alone Isn't Enough

Here's a misconception worth correcting directly, because it trips up more employers than almost anything else in this area: giving proper notice, or paying salary in lieu of notice, does not by itself make a termination lawful. Malaysian courts have consistently held that complying with the contractual notice provision satisfies the contract but says nothing about whether the dismissal was fair under the IRA. An employee terminated with full notice and full pay can still successfully claim unfair dismissal if the underlying reason wasn't valid or the process wasn't fair.

In practice, due process for a performance case means:

A thorough, unbiased investigation into the performance concerns — not a decision made and then justified after the fact.
A genuine opportunity for the employee to respond to the concerns and present their side before any final decision is made.
A termination decision grounded in reasons that can be independently justified, not just asserted.

Performance Improvement Plans (PIPs): The Backbone of a Defensible Termination

If there's one document that determines whether a performance termination survives a legal challenge, it's the PIP. The Industrial Court's expectations are specific:

The process must be genuine. A PIP created with the predetermined outcome of termination — a formality on the way to a decision already made — is bad faith, and courts treat it as exactly that. The employer's actual goal has to be helping the employee succeed, not building a paper trail.
Goals must be specific and measurable, not vague. "Reduce documented customer complaints by 50% over 60 days" holds up; "show more initiative" does not.
The timeframe must be reasonable — typically 30 to 90 days — long enough for genuine improvement to be possible given the nature of the role.
The employer must actually provide the support promised — training, coaching, tools, whatever the plan commits to. A PIP that lists support the employee never actually receives undermines the whole process.
Document everything — discussions, feedback given, support provided, and the employee's response at each stage.

For the operational side of running this process well — not just the legal minimum, but genuinely helping someone improve — see our guides on What is a PIP at Work? and Improving KPI: Strategies for Managing Underperformers and Setting KPIs.

Case Study: How One Company Got It Right

In Syed Mohd Azinuddin bin Syed Azmi v Petroliam Nasional Berhad (Industrial Court Award No. 667 of 2026), the Court upheld a performance-based dismissal after examining a genuinely thorough process. The employee had received sustained low performance ratings over several years, was offered voluntary separation (which he declined), and was subsequently placed on a PIP in 2020. After the first PIP didn't resolve the concerns, the company ran a second one — with the employee explicitly warned that failure to improve during it could lead to termination.

The employee argued his self-ratings showed he'd met expectations, that the COVID-19 pandemic made the targets unreasonable, and that a successful project milestone proved his competence. The Court rejected all three arguments: it relied on the company's official ratings rather than the employee's self-assessment, noted the company was an essential service that continued operating through the pandemic (so the excuse didn't hold), and found that the project's success was actually due to additional support the company had to deploy to cover for the employee's shortfalls — not evidence of his own performance.

The Court found the company had provided nearly 23 months of genuine opportunity, support, and warning before terminating — and ruled the dismissal was with just cause and excuse. This is a useful template precisely because it shows what "doing it right" looks like in practice, not just in theory: repeated documented warnings, real time to improve, actual support provided, and a decision based on evidence rather than a predetermined outcome.

Notice Period and Termination Benefits

Under Section 12 of the Employment Act, minimum statutory notice periods scale with length of service — commonly structured as roughly 4 to 8 weeks depending on tenure, unless the employment contract specifies a longer period (contracts can extend notice, not shorten it below the statutory minimum). Either party can choose to pay salary in lieu of notice instead of serving it out.

Where termination benefits apply, they're generally calculated based on length of service and the reason for termination — this differs for retrenchment/redundancy versus other termination grounds, and doesn't apply in cases of proven serious misconduct. Final settlement — outstanding salary, any pro-rated contractual bonus, payment for unused annual leave, and applicable termination benefits — should generally be settled within 7 days of the employee's last working day.

Consultation and Communication Throughout the Process

Open, transparent communication about performance concerns — well before termination becomes a live option — does double duty: it's genuinely good management, and it's also exactly the kind of evidence that supports "just cause and excuse" if the decision is ever challenged. Document every discussion, every piece of feedback given, and every form of support offered along the way, not just the final decision.

Legal Risks If You Get It Wrong

If an employee believes they were dismissed without just cause or excuse, they can file a written representation with the Director General of Industrial Relations within 60 days of the dismissal — a strict deadline that's rarely extended. The Department will attempt conciliation between the parties; many cases settle at this stage. If conciliation fails, the case is referred to the Industrial Court, where the burden falls on the employer to prove just cause and due process.

If the Court finds the dismissal unfair, it can order:

Reinstatement (relatively rare in practice, given how strained relationships usually are by that point), or
Compensation in lieu of reinstatement, often calculated around one month's salary per year of service, plus
Back wages from the date of dismissal to the date of the award, typically capped at 24 months for confirmed employees and 12 months for probationers.

Probationary status offers no shortcut here — Malaysian courts have confirmed that probationary employees are still protected by the same "just cause and excuse" requirement as confirmed staff, with the main difference being a lower back-wages cap if the claim succeeds. Given the financial exposure involved, it's worth seeking legal advice before finalising a termination in any case that isn't completely clear-cut.

Conducting the Termination Meeting

However solid the legal groundwork, the meeting itself matters — both for the employee's dignity and for how the process holds up if scrutinised later. Conduct it professionally, respectfully, and with genuine empathy. Give a clear explanation of the performance-related reasons for the decision, and where appropriate, offer practical support for what comes next — job search assistance, a reference, or information on relevant support services.

Settling Up: Employee Rights and Final Dues

Respect the employee's privacy and confidentiality throughout — how a termination is handled becomes visible to the rest of the team whether you intend it to or not. Settle all outstanding dues promptly: salary, benefits, and accrued leave. Provide the necessary documentation, including a termination letter (stating the reason clearly) and a certificate of service.

Beyond Termination: Building a Culture That Reduces the Need for It

The best performance-termination process is the one you rarely need to use. Regularly evaluate how well your performance management process is actually working — are issues caught early, or only at crisis point? Investing in training and development, and building a genuine culture of ongoing feedback rather than once-a-year evaluation, tends to reduce how often a termination decision becomes necessary in the first place.

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