This country-specific Q&A provides an overview to Employment & Labour Law laws and regulations that may occur in Malaysia.
Does an employer need a reason in order to lawfully terminate an employment relationship? If so, describe what reasons are lawful?
Yes, an employer bears the burden to prove that the termination of an employee’s employment contract is with just cause or excuse.
Recognised grounds for termination of employment include misconduct, poor performance, retrenchment, closure of business and prolonged illness leading to medical board out.
What, if any, additional considerations apply if large numbers of dismissals (redundancies) are planned?
Instances of redundancies would often bring about a retrenchment exercise. The Industrial Court generally recognises an employer’s managerial prerogative to reorganise its business to meet its business and operational needs. However, an employer bears the burden of proving that the retrenchment exercise was done bona fide for the objective of reorganising its business and was not intended to victimise the employee(s).
In the selection process for a retrenchment exercise, employers are required, as a general rule, to comply with the “last in-first out” (“LIFO”) principle i.e. longer serving employees should be given the first right of retention over more junior ones unless there are justifiable reasons to depart from LIFO. The Code of Conduct for Industrial Harmony provides guidelines on the best practice and considerations to be taken into account when carrying out a retrenchment exercise.
Termination benefits (more commonly referred to as retrenchment benefits) are payable to employees who fall within the ambit of the Employment Act 1955 (“EA”) so long as they have been employed for at least 12 months. The sum payable shall not be less than the rate of payment set out in the Employment (Termination and Lay-Off Benefits) Regulations 1980 as follows:
Non-EA employees are not statutorily entitled to retrenchment benefits and their entitlement is as stated in their employment contracts or the company’s policy. However, the Industrial Court has recognised the need to afford some compensation to them as they have lost their livelihood by no fault of their own. Bearing this in mind, most employers exercise their discretion to pay them retrenchment benefits and the formula is usually at the rate of 1 month’s wages for each completed year of service.
The employer must also notify the nearest Labour Department of the retrenchment exercise by submitting the PK Form no later than 30 days before the date of intended retrenchment, otherwise the employer may be fined up to RM10,000.
What, if any, additional considerations apply if a worker’s employment is terminated in the context of a business sale?
A business sale necessarily entails a change of ownership of business and, save in the circumstances set out below, the vendor would have to terminate all its employees’ employment contracts as a result and shall be liable to pay termination benefits to employees who fall within the ambit of the Employment Act 1955 (“EA Employee”). The termination benefits payable are as follows :
However, if the acquirer offers employment to these EA Employees on terms no less favourable than what they had enjoyed with the vendor within 7 days from the date of change of ownership in compliance with the Employment (Termination and Lay-Off Benefits) Regulations 1980, the vendor will not be liable to pay such termination benefits. An employee is not entitled to any termination benefits if he unreasonably refuses the offer.
Although there is no similar requirement for non-EA employees, it is common in practice for the same measures (as per EA Employees) to be taken. Unless stated otherwise in their employment contracts or company’s policy, the formula for termination benefits is usually at the rate of 1 month’s wages for each completed year of service.
If the acquirer does not offer employment to the vendor’s employees, this will inevitably result in a retrenchment exercise. If so, the vendor must notify the nearest Labour Department using the PK Form no later than 30 days before the date of intended retrenchment, otherwise the vendor may be fined up to RM10,000.
What, if any, is the minimum notice period to terminate employment?
Section 12 of the Employment Act 1955 (“EA”) sets out the minimum period of notice of termination which is applicable to EA employees.
The notice period for non-EA employees would be as set out in their employment contracts. In the absence of such a clause, reasonable notice shall be given taking into account the seniority of the position, nature of the job and/or the industry practice of the said business. The provisions in the EA may also be used as guidance.
Notwithstanding the above, Section 20(1) of the Industrial Relations Act 1967 states that the termination of employment may only be for just cause and excuse. Therefore, employers are required to justify the reasons for their decision to terminate employment and cannot rely solely on a notice of termination clause.
Is it possible to pay monies out to a worker to end the employment relationship instead of giving notice?
Yes, salary for the requisite period of notice can be paid in lieu of notice.
However, it must nonetheless be borne in mind that Section 20(1) of the Industrial Relations Act 1967 states that the termination of employment may only be for “just cause and excuse”. Therefore, employers are required to justify terminating employment.
Can an employer require a worker to be on garden leave, that is, continue to employ and pay a worker during his notice period but require him to say at home and not participate in any work?
Yes, an employer may exercise its discretion to place an employee on garden leave during his notice period.
Does an employer have to follow a prescribed procedure to achieve an effective termination of the employment relationship? If yes, describe the requirements of that procedure or procedures.
Taking the necessary measures prior to the termination of employment would place the employer in a better position to defend possible claims of wrongful termination.
In a case of poor performance, the employer must ensure there is a record that the employee had been made aware of his shortcomings and been provided with opportunity to improve together with sufficient support and guidance from the employer. Failure to improve despite these measures will, subject to proof, justify the termination of employment.
In instances involving misconduct, the employer is obliged to comply with the rules of natural justice and to provide the accused employee with an avenue to be heard and defend himself against the allegations made against him. An appropriate punishment (including termination of employment) may only be meted out after due inquiry.
Disciplinary procedures which are set out in the company’s handbooks, policies and regulations are to be complied with unless there are reasons to justify the employer’s decision to depart from its own prescribed procedures.
If the employer does not follow any prescribed procedure as described in response to question 7, what are the consequences for the employer?
There is a likelihood that the Industrial Court may find that the dismissal is wrongful.
If the employee succeeds in his claim, the primary remedy available to him is reinstatement together with payment of backwages (not exceeding 24 months’ salary for confirmed employees). If the Industrial Court decides that reinstatement is not expedient, compensation in lieu of reinstatement at the rate of 1 month’s salary for every completed year of service will be awarded in addition to backwages (not exceeding 24 months’ salary).
Probationers are not entitled to reinstatement and their remedy will be limited to an award of backwages not exceeding 12 months’ salary.
Fixed term employees are only entitled to their salary for the balance duration of their fixed term contract unless they fall within the ambit of the Minimum Retirement Age Act 2012.
How, if at all, are collective agreements relevant to the termination of employment?
A collective agreement (“CA”) commonly sets out the procedures applicable prior to embarking on a retrenchment exercise and the applicable formula for payments to employees in cases of retrenchment, voluntary separation schemes and prolonged illness.
In such instances, the category of employees specified in the CA will be accorded due protection and the employer is duty bound to comply with the terms of the CA.
Does the employer have to obtain the permission of or inform a third party (eg local labour authorities or court) before being able to validly terminate the employment relationship? If yes, what are the sanctions for breach of this requirement?
There is no requirement to obtain permission from a 3rd party prior to termination of employment.
However, for retrenchment exercises, voluntary separation schemes and lay-offs, the employer must notify the nearest Labour Office no later than 30 days before the proposed exercise using the PK Form, otherwise it may be fined up to RM10,000.
What protection from discrimination or harassment are workers entitled to in respect of the termination of employment?
As a general principle, all employees are to be treated fairly with mutual trust and respect. Employees who are unfairly dismissed due to discrimination or victimisation have an avenue for redress through a wrongful dismissal claim under Section 20 of the Industrial Relations Act 1967 (“IRA”).
Specific provisions against discrimination are also set out in the following:
Prohibition against discrimination of an employee due to involvement with a trade union. [Section 5(1) of the IRA]
Prohibition against termination of employment of female employees during maternity leave unless the termination is due to closure of business. [Part IX of the Employment Act 1955 (“EA”)]
Prohibition against discrimination of a local employee in favour of a foreign employee and vice versa, in respect of the terms and conditions of his employment. [Section 60L of the EA]
Meanwhile, protection against sexual harassment is also codified under Part XVA of the EA which imposes a duty on employers to investigate into complaints of sexual harassment at the workplace within 30 days; unless an inquiry had been done previously and the complaint was found not to be proven or the complaint is frivolous, vexatious or mala fide.
If the sexual harassment is proven, the employer shall impose the necessary punishment on the employee who was found guilty. This may include termination of employment without notice, demotion or the imposition of any lesser punishment as deemed fit. If the perpetrator is not an employee, the employer shall make recommendations for the perpetrator to be brought before an appropriate disciplinary authority.
Failure to investigate sexual harassment complaints constitutes an offence and the employer may be liable to a fine of not more than RM10,000.
What are the possible consequences for the employer if a worker has suffered discrimination or harassment in the context of termination of employment?
If the employee is able to prove that the decision to terminate his employment was actuated with bad faith and as a result of discriminatory actions by the employer, the employer would be liable for wrongful dismissal. Meanwhile, deliberate acts of harassment by the employer which drove the employee out of employment amounts to constructive dismissal, if proven.
If the employee succeeds in his claims for wrongful dismissal or constructive dismissal, the primary remedy available to him is reinstatement together with payment of backwages (capped at 24 months’ salary for confirmed employees). If the Industrial Court decides that reinstatement is not expedient, compensation in lieu of reinstatement at the rate of 1 month’s salary for every completed year of service will be awarded in addition to backwages (not exceeding 24 months’ salary).
Probationers are not entitled to reinstatement and their remedy will be limited to an award of backwages capped at 12 months’ salary.
Fixed term employees are only entitled to their salary for the balance duration of their fixed term contract unless they fall within the ambit of the Minimum Retirement Age Act 2012.
Are any categories of worker (for example, fixed-term workers or workers on family leave) entitled to specific protection, other than protection from discrimination or harassment, on the termination of employment?
Employees who fall within the ambit of the Employment Act 1955 (“EA”) cannot be terminated unless they are found guilty after due inquiry into their alleged misconduct. Although there is no specific requirement for non-EA employees, it is advisable for due inquiry to be conducted in compliance with the rules of natural justice.
Female employees cannot be terminated during maternity leave unless the termination of employment is due to closure of business (See: Part IX of the EA).
An employee in the private sector is also protected from being prematurely retired before he reaches the minimum retirement age of 60 years old pursuant to the Minimum Retirement Age Act 2012 (unless he falls within the category of exempted employees specified in the Act).
Are workers who have made disclosures in the public interest (whistleblowers) entitled to any special protection from termination of employment?
The Whistleblower Protection Act 2010 (“WPA”) provides protection to whistleblowers, namely the protection of confidential information, immunity from civil and criminal action and protection against detrimental action. This only extends to disclosure of improper conduct to enforcement agencies.
Taking detrimental action against a whistleblower, which includes the termination of employment, interference with employment including refusal to extend/renew fixed term contracts, discrimination, dismissal, demotion, suspension or any form of disciplinary action which is attributed to the whistleblowing, constitutes an offence under the WPA. If found liable, the employer will be subject to a fine of not more than RM100,000 or imprisonment of not more than 15 years or both.
Provisions in collective agreements and employment contracts which prohibit whistleblowing are void and unenforceable. Termination of employment arising from whistleblowing constitutes wrongful dismissal, if proven.
What financial compensation is required under law or custom to terminate the employment relationship? How do employers usually decide how much compensation is to be paid?
The issue of payment of financial compensation arises only in cases of retrenchment, sale of business (where no offer of employment is made by the acquirer) or where closure of business is involved.
Only employees who are within the ambit of the Employment Act 1955 (“EA”) are statutorily entitled to this payment based on the formula prescribed in the Employment (Termination and Lay-Off Benefits) Regulations 1980 set out below :
There is no entitlement for non-EA employees, unless stated otherwise in their employment contracts or company’s handbook and policies. In line with the approach of the Industrial Court which has recognised the need to provide some compensation to these employees who have lost their livelihood by no fault of their own, most employers do exercise their discretion to make payment (usually at the rate of 1 month’s wages for each completed year of service) to them.
Can an employer reach agreement with a worker on the termination of employment in which the employee validly waives his rights in return for a payment? If yes, describe any limitations that apply.
Yes, the cessation of employment can be brought about by mutual agreement of parties. Voluntariness of the employee is the key – the employee cannot be compelled to enter into such an agreement. The terms agreed are commonly encapsulated in a mutual separation agreement. Statutory payments which are due to the employee must be included in the sums payable under the mutual separation agreement.
Is it possible to restrict a worker from working for competitors after the termination of employment? If yes, describe any relevant requirements or limitations.
An employee cannot be restricted from working for competitors after the termination of employment. Pursuant to the Contracts Act 1950, contractual clauses prohibiting this are void and unenforceable as they constitute a restraint of trade.
Can an employer require a worker to keep information relating to the employer confidential after the termination of employment?
Yes, there is a duty on employees not to disclose any confidential information belonging to an employer even after cessation of employment.
A confidentiality clause is commonly included in employment contracts to remind employees of their confidentiality obligations during and after cessation of employment.
Are employers obliged to provide references to new employers if these are requested?
Employers are not legally obliged to provide references to new employers. However, such references are typically provided upon request as a matter of goodwill to assist an employee’s future employment prospects.
What, in your opinion, are the most common difficulties faced by employers when terminating employment and how do you consider employers can mitigate these?
As stated in Question 4 above, there are statutory notice periods which would apply for the termination of employment of employees who are within the ambit of the Employment Act 1955 (“EA”). As for non-EA employees, their notice period for termination of employment is as stated in their employment contracts.
However, as Section 20(1) of the Industrial Relations Act 1967 states that the termination of employment may only be for “just cause and excuse”, employers are required to justify their decision to terminate the employment. The requirement to provide justification and the inability to terminate the employment simply by serving notice without assigning any reason is a common impediment faced by employers.
Hence, this causes frustration to an employer who, for example, is faced with an employee who is on prolonged illness and is still unfit for work despite prolonged medical leave in excess of his entitlement. In such a scenario, the employee may have to be medically boarded out and this would entail a comprehensive medical assessment (to determine his fitness for work) as well as payment of compensation to the employee to account for his years of service. This may result in a huge lump sum payment in addition to insurance pay-outs which may have been provided by the employer as a form of employment benefit.
Another common issue is the termination of poor performers as well as probationers who do not meet the expected standards. The employee must be made aware of his performance issues and it must be shown that he had failed to improve despite being given the opportunity to do so. As the employer cannot rely on the right to terminate the employment without assigning any reason, it would need to go through a performance improvement process which may be time-consuming and, at times, may not yield any positive results.
Negotiating and entering into a mutual separation agreement is a viable alternative whereby the employment relationship is mutually terminated as agreed by the parties in consideration of a severance payment to the employee. However, obviously, it must be shown the employee had consented to the agreement and had not been coerced.
Are any legal changes planned that are likely to impact on the way employers approach termination of employment? If so, please describe what impact you foresee from such changes and how employers can prepare for them?
As far as we are aware, there are no legal changes planned that are likely to impact on the way employers in Malaysia approach termination of employment.