Malaysia Termination and Retrenchment: Rules, Notice, and Severance (2026)

Malaysia's Employment Act 1955 and Industrial Relations Act 1967 govern employment termination. Employers must provide notice (4-8 weeks based on tenure), follow due process for misconduct dismissal, and pay termination/retrenchment benefits. Wrongful dismissal claims go to the Industrial Court with potential reinstatement and back wages. Malaysia has one of the strictest termination frameworks in ASEAN.

What Notice Periods Apply for Termination in Malaysia?

These are minimum statutory notice periods. Employment contracts can specify longer periods but not shorter. Either party can pay salary in lieu of notice. Notice must be in writing. During the notice period, the employee is entitled to reasonable time off for job interviews.

What Are the Lawful Grounds for Termination in Malaysia?

The Industrial Court recognizes termination for: poor performance (after documented warnings), misconduct (after domestic inquiry), redundancy/retrenchment, closure of business, frustration of contract (imprisonment, loss of required license), and mutual agreement. Termination without proper grounds or procedure constitutes unfair dismissal.

Misconduct dismissal requires a domestic inquiry: written notice of charges, opportunity for the employee to respond, hearing with the employee present, and a written decision. The inquiry panel should include at least one management representative. The employee can be represented by a fellow employee or union representative. Summary dismissal without inquiry is permitted only for gross misconduct where the evidence is undisputed.

What Are the Termination and Retrenchment Benefits in Malaysia?

The Employment (Termination and Lay-Off Benefits) Regulations 1980 set minimum termination benefits for employees with 12+ months of service. The rates depend on tenure and apply to all terminations except misconduct dismissal, voluntary resignation, contract expiration, and retirement.

Example: Employee with 7 years of service earning RM 6,000/month (RM 200/day). Termination benefit: 20 days × 7 years × RM 200 = RM 28,000 ($5,950). These are minimum statutory amounts. Companies often pay more generous retrenchment packages, particularly for senior employees.

What Is the Retrenchment Process in Malaysia?

Retrenchment requires employers to follow the LIFO (Last In, First Out) principle within each job category. The employer must attempt to redeploy the employee to another suitable position before retrenching. Foreign workers in similar positions must be retrenched before local employees. The employer must notify the Nearest Labour Office at least 30 days before retrenchment takes effect.

The Code of Conduct for Industrial Harmony recommends: explore alternatives (reduced hours, temporary lay-offs), apply fair selection criteria, provide adequate notice, pay retrenchment benefits, and assist with outplacement. Non-compliance with LIFO or the foreign-first rule can result in the Industrial Court ordering reinstatement.

Aniday's EOR Malaysia (Aniday EOR Malaysia) manages all retrenchment compliance including benefit calculations, Labour Office notifications, and domestic inquiry procedures.

What Is Unfair Dismissal in Malaysia?

An employee who believes they were dismissed without just cause or excuse can file a complaint with the Director General of Industrial Relations within 60 days of dismissal. If conciliation fails, the case is referred to the Industrial Court. The Industrial Court can order reinstatement with back wages or compensation in lieu of reinstatement.

Compensation in lieu of reinstatement: up to 24 months back wages. Back wages are calculated from the date of dismissal to the date of the Industrial Court award, capped at 24 months. The employee must mitigate losses by seeking alternative employment. Income from alternative employment during the back wages period is deducted from the award.

Can an employer terminate during probation in Malaysia?

Yes. Probation termination is easier but not automatic. The employer should provide a valid reason (unsatisfactory performance based on documented assessments). Termination during probation still requires notice (as per contract, typically 1-4 weeks). Dismissal during probation without valid reason can be challenged as unfair dismissal at the Industrial Court.

Is constructive dismissal recognized in Malaysia?

Yes. Constructive dismissal occurs when the employer fundamentally breaches the employment contract, leaving the employee no reasonable choice but to resign. Examples: significant pay cut, hostile work environment, unreasonable transfer. The employee must resign promptly after the breach. Filing deadline: 60 days from the date of resignation.

What is the Industrial Court?

The Industrial Court is a specialized tribunal established under the Industrial Relations Act 1967. It handles unfair dismissal claims, trade disputes, and collective bargaining issues. The Court consists of a President (appointed by the Yang di-Pertuan Agong) and panels. Awards are binding. Appeals go to the High Court on points of law only. Average case duration: 12-24 months.

Must foreign workers be retrenched before locals?

Yes. The Code of Conduct for Industrial Harmony requires employers to retrench foreign workers before local workers in similar positions. This applies to all work pass categories. The rationale is to protect Malaysian employment. Non-compliance is grounds for unfair dismissal claims by local employees who were retrenched while foreign workers were retained.

How is final salary calculated upon termination?

Final salary includes: salary up to the last working day, pro-rated annual bonus (if contractual), payment for unused annual leave, termination/retrenchment benefits (if applicable), notice period pay (if terminated without notice), and any outstanding allowances. Payment must be made on the last day of employment or within 7 days of termination.

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