Unfair Dismissal in Malaysia: Laws, Procedures, and Real Case Examples

Letting an employee go is always difficult, but doing it the wrong way can create bigger problems for your business. Unfair dismissal claims are common when employers skip proper procedures or act without just cause. Understanding what counts as fair versus unfair dismissal and knowing your responsibilities before taking action can save your company from costly disputes.

What is Unfair Dismissal in Malaysia?

Unfair dismissal happens when an employee is terminated without just cause or valid reason, or when the employer fails to follow due process under Malaysian employment law.

Examples of unfair dismissal include:

Firing an employee without any documented reason.
Terminating someone without conducting a domestic inquiry.
Retrenching staff under the disguise of performance issues.
Dismissing an employee because of age, gender, pregnancy, or union involvement.

Dismissal is considered unfair when it is arbitrary, discriminatory, or not supported by evidence and procedure.

Laws Governing Unfair Dismissal in Malaysia

Two key laws regulate employee termination and unfair dismissal claims in Malaysia:

Employment Act 1955

Sets out minimum employment standards, including notice periods and termination conditions, particularly for employees earning up to RM4,000 per month (and some categories above that).

Industrial Relations Act 1967

Provides employees the right to challenge unfair dismissal. Under this Act, employees may file claims through the Industrial Relations Department within 60 days of dismissal.

The Industrial Court plays a central role in resolving unfair dismissal disputes. Employers must prove that a termination was carried out with just cause and due process. If the court rules against the employer, it can order reinstatement, compensation, or back wages.

What Constitutes Fair vs. Unfair Dismissal?

Not all dismissals are unlawful. Employers can dismiss employees fairly if there is a valid reason and the correct procedures are followed.

Fair reasons for dismissal include:

Misconduct: Theft, fraud, harassment, or serious breach of company policies.
Poor Performance: After documented performance reviews and opportunities to improve.
Redundancy or Retrenchment: Due to genuine business needs, following fair selection and consultation processes.
Breach of Contract: When employees fail to meet their contractual obligations.

Unfair dismissal occurs when:

An employee is terminated without a valid reason.
The employer fails to conduct a domestic inquiry or disciplinary process.
Retrenchment is used as a cover for personal or discriminatory motives.
Employees are dismissed because of gender, pregnancy, religion, union membership, or whistleblowing.

The key principle is that employers must show both a valid reason and a fair procedure in every dismissal.

Common Reasons for Unfair Dismissal Claims

Unfair dismissal cases typically arise when employers mishandle the termination process or fail to justify the decision. Some of the most common reasons include:

Termination without a Valid Reason

Ending employment without a proper or documented cause often leads to disputes.

Retrenchment without Proper Procedure

Not following the required redundancy or retrenchment process (e.g., LIFO principle, notice to authorities).

Constructive Dismissal (Forced Resignation)

When employees feel pressured or treated unfairly to the point of resigning.

Discrimination or Bias based Dismissal

Terminating employees based on race, gender, religion, or other forms of discrimination.

What Constitutes Fair Dismissal?

To ensure compliance, employers must distinguish between fair and unfair grounds for dismissal. Fair reasons for termination include:

Poor Performance with Documented Proof

The employee has consistently failed to meet performance standards despite warnings or improvement plans.

Employee Misconduct

Serious breaches such as theft, absenteeism, fraud, or harassment that are proven through a fair inquiry.

Redundancy or Company Restructuring

When termination results from legitimate business needs, provided the process is transparent and notice is given.

Employer’s Responsibilities Before Dismissing an Employee

Employers must act carefully before making termination decisions.

Key responsibilities include:

Proper Documentation

Keep records of performance appraisals, warning letters, and disciplinary actions to justify dismissal if challenged.

Conducting a Domestic Inquiry

Give employees the chance to respond to allegations before making a final decision.

Following Company Policies and Laws

Ensure procedures comply with the Employment Act, Industrial Relations Act, and internal HR policies.

Providing Notice or Payment in Lieu

Follow the statutory or contractual notice period requirements unless dismissal is for proven gross misconduct.

Consequences of Unfair Dismissal for Employers

When an employee successfully proves unfair dismissal, the Industrial Court may order remedies such as:

Reinstatement

Returning the employee to their original role (rare in practice due to strained relationships).

Back Wages

Compensation for lost earnings, up to 24 months for confirmed employees and 12 months for probationers.

Compensation in Lieu of Reinstatement

Usually calculated as one month’s salary for each completed year of service.

Beyond financial liability, unfair dismissal cases can damage an employer’s reputation, lower employee morale, and strain relations with regulators and unions.

Steps to Take If an Employee Files an Unfair Dismissal Claim

When an employee lodges a claim with the Industrial Relations Department (IRD), the employer must act promptly and professionally.

1. Respond to the Industrial Relations Department

Submit your written response and supporting documents within the given timeframe. Cooperation during the conciliation process can prevent the case from escalating to court.

2. Prepare Evidence and Documentation

Compile all relevant materials (employment contracts, warning letters, inquiry notes, and performance reviews) to demonstrate just cause.

3. Representation at the Industrial Court

If conciliation fails, the case will be referred to the Industrial Court, where both parties present their arguments. Employers may appoint legal or HR representatives to defend the case.

4. Possible Outcomes and Settlements

The Industrial Court may order reinstatement, compensation in lieu of reinstatement, or dismiss the claim if the employer is found to have acted fairly.

How Employers Can Avoid Unfair Dismissal Claims

Here’s how to prevent unfair dismissal issues before they happen:

Document Everything

Keep proper employee performance and conduct records. Documentation, such as appraisal reports, attendance logs, and meeting notes, serves as vital evidence to justify employment decisions.

Provide Warning Letters

Give verbal and written warnings when performance or behaviour falls short. It shows that the employer gave a reasonable opportunity and notice for improvement before dismissal.

Conduct a Domestic Inquiry

Always hold a fair hearing where the employee can respond to allegations. Record the proceedings and ensure a panel reviews all evidence before deciding on termination.

Follow Due Process

Comply with notice and termination requirements under the Employment Act 1955. Whether termination is due to misconduct, redundancy, or poor performance, every step must follow lawful procedures.

Issue a Proper Termination Letter

The termination letter should clearly state the reasons for dismissal, refer to relevant warnings or inquiry findings, and specify the final date of employment.

Implement Clear HR Policies

Make sure your company handbook or policy manual outlines disciplinary rules, termination procedures, and grievance channels. Clear policies help prevent misunderstandings.

Maintain Transparent Performance Reviews

Provide regular feedback, coaching, and improvement opportunities. Employees should never be surprised by a termination notice. They should already be aware of their performance issues.

Seek HR or Legal Advice Before Dismissal

Consult professionals before taking final action, especially in sensitive or borderline cases, to ensure procedural fairness and protects the company from costly claims.

Consider Alternatives Like Voluntary Separation Schemes (VSS)

In cases of redundancy or restructuring, offering mutual separation can reduce potential disputes and preserve goodwill.

Case Examples of Unfair Dismissal in Malaysia

Unfair dismissal is not just a theoretical issue. It has been tested in Malaysia’s Industrial Court, where employers have been ordered to pay significant compensation when they fail to act with just cause.

Case Study: Sacked Maxis Executive Awarded RM1 Million

In a high-profile case reported by Free Malaysia Today, the Industrial Court awarded more than RM1 million in compensation to former Maxis executive Tung Yoke Leng after ruling she was unfairly dismissed.

Tung, who had worked with the company for 25 years, was placed under a performance improvement plan (PIP) despite previously having an exemplary record. She argued that the process was unfair. Issues were carried over between reviews, she was given inexperienced support staff, and she was not warned that termination could result from the PIP.

The court agreed, finding that Maxis Broadband Sdn Bhd had failed to provide a satisfactory justification for her dismissal. The award included RM416,640 in back wages (after a 30% deduction for post-dismissal earnings) and RM620,000 as compensation in lieu of reinstatement, bringing the total to RM1,036,640.

The case highlights how crucial it is for employers to:

Provide fair opportunities and resources during performance improvement plans.
Document every step of the process, including coaching and warnings.
Clearly inform employees of potential consequences before termination.

This example shows that even large corporations can face heavy financial and reputational costs if they fail to follow fair procedures in dismissal.

FAQ

What is considered unfair dismissal in Malaysia?

A dismissal is unfair if it is done without just cause or without following due process, such as skipping disciplinary inquiries or acting in a discriminatory manner.

How long does an employee have to file an unfair dismissal claim?

Employees must file a claim with the Industrial Relations Department within 60 days of dismissal.

What is the role of the Industrial Court in unfair dismissal cases?

The Industrial Court hears disputes, determines if the dismissal was fair, and may order remedies such as reinstatement, back wages, or compensation.

Can an employer terminate an employee without notice?

Yes, but only for proven gross misconduct. Otherwise, employers must provide notice or payment in lieu.

How much compensation is awarded for unfair dismissal?

Typically, one month’s salary for each completed year of service plus back wages (up to 24 months for confirmed employees and 12 months for probationers).

What should employers do before dismissing an employee?

Document performance or misconduct issues, conduct a domestic inquiry, follow company and statutory procedures, and seek professional advice if needed.

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