How to Terminate Employees in Malaysia: A Complete HR Guide

Wrongful Dismissal Avoidance

Wrongful dismissal claims arise when an employee believes they have been terminated without a valid reason or that the employer has failed to follow due process. In Malaysia, wrongful dismissal claims can result in substantial penalties for employers, so it’s essential to avoid any missteps.

How to Avoid Wrongful Dismissal Claims:

1. Document Performance or Misconduct:

Proper documentation is key to avoiding wrongful dismissal claims. Whether the reason for termination is performance-related or due to misconduct, maintaining thorough records of warnings, performance reviews, or investigations will help justify the decision to terminate.

2. Provide Fair Warning:

Employers must give the employee adequate warning and an opportunity to rectify the issue. In cases of poor performance, this includes implementing performance improvement plans and offering training or guidance.

3. Follow Contractual and Legal Procedures:

Ensure that you follow both the terms of the employee’s contract and Malaysian labor laws. This includes adhering to the notice period requirements and offering severance where necessary.

By carefully following the legal steps and maintaining transparent communication, employers can reduce the risk of wrongful dismissal claims.

Notice Periods and Pay in Lieu

In Malaysia, the notice period for terminating an employee is generally one month, unless the employment contract specifies otherwise. The notice period serves to give the employee adequate time to prepare for their departure and seek alternative employment.

Key Considerations for Notice Periods:

• Standard Notice Period: The general notice period is one month. However, this can vary based on the terms of the employment contract, with longer periods sometimes being agreed upon for higher-level positions.
• Pay in Lieu of Notice: If an employer wishes to terminate the employee’s contract immediately, they can offer pay in lieu of notice, which compensates the employee for the notice period they would have otherwise received. This payment is typically equivalent to the salary the employee would have earned during the notice period.

Employers must adhere to the notice requirements in the employment contract to avoid potential disputes and legal challenges.

Severance Pay and Long Service Payment

Employees who are terminated under certain conditions in Malaysia may be entitled to severance pay or a long service payment. These payments are designed to provide financial compensation to employees who have been with the company for a significant period of time or who are being terminated due to redundancy.

Eligibility for Severance Pay:

Employees who have been employed continuously for at least 12 months are entitled to severance pay if they are terminated due to redundancy. The amount of severance pay is calculated based on the employee’s years of service and their final monthly salary.

Calculating Severance:

The general formula for calculating severance pay is as follows:

• Less than 2 years of service: 10 days’ wages for every year of employment.
• 2 to 5 years of service: 15 days’ wages for every year of employment.
• More than 5 years of service: 20 days’ wages for every year of employment.

Employers must ensure that severance and long service payments are calculated accurately to avoid disputes and potential legal claims from former employees.

Steps in the Termination Process

Terminating an employee in Malaysia requires a structured approach to ensure compliance with labor laws. The following steps outline the process:

1. Document the Reason for Termination:

Employers must clearly document the reason for the termination, whether due to redundancy, poor performance, or misconduct. Having this documentation on hand will help justify the decision in the event of a dispute.

2. Provide Formal Notice:

The employer must issue a formal written notice to the employee, adhering to the required notice period. If the employer prefers immediate termination, pay in lieu of notice must be provided.

3. Calculate Final Compensation:

This includes any outstanding wages, accrued leave, severance pay, and long service payments, as applicable. Ensuring these calculations are correct is critical to preventing disputes.

4. Conduct an Exit Interview (Optional):

An exit interview can provide valuable feedback and help ensure a smooth offboarding process. It can also help clarify any concerns the employee may have and reduce the risk of disputes later on.

5. Ensure Compliance with Legal Obligations:

Throughout the termination process, employers must ensure that they are fully compliant with Malaysia’s labor laws and the terms outlined in the employment contract. Failing to do so could result in legal disputes and financial penalties.

How AYP Can Help

Managing employee terminations in Malaysia can be complex due to the many legal obligations involved. AYP’s Professional Employer Organisation (PEO) and Employer of Record (EOR) services are designed to help employers navigate these complexities. Our experienced team can assist with:

• Employment Contracts: Ensuring that your contracts are compliant with Malaysian labor laws and clearly outline termination procedures.
• Managing Terminations: From issuing notice to calculating severance and long service payments, AYP ensures that your termination process is handled professionally and in full compliance with the law.
• Legal Compliance: Our team ensures that every step of the termination process follows Malaysian labor laws, helping to prevent wrongful dismissal claims and other legal disputes.

With AYP’s support, you can ensure that employee terminations are managed smoothly, professionally, and without risk of legal issues. Contact us today to learn more about how we can support your HR needs in Malaysia.