How to Terminate Employees in Malaysia: A Complete HR Guide
Key Takeaways:
- Grounds for lawful termination in Malaysia
- Notice periods and severance requirements
- Avoiding wrongful dismissal disputes
Introduction
Terminating employees in Malaysia involves following labor laws and ensuring that all legal obligations are met. This guide helps employers navigate the process.
Types of Termination Scenarios in Malaysia
In Malaysia, there are several reasons an employer may need to terminate an employee, each requiring specific legal procedures to ensure compliance and fairness. The three most common scenarios are:
1. Redundancy:
Redundancy occurs when a role is no longer required, often due to restructuring, downsizing, or technological advancements. In such cases, the employee is not terminated due to poor performance, but because the position itself is being eliminated.
Employers must ensure they provide valid reasons for redundancy, and if a collective dismissal is necessary, such as in cases of mass layoffs, additional requirements like notifying the Ministry of Human Resources may apply. It’s also important to explore alternative options, such as redeployment, before terminating an employee for redundancy.
2. Misconduct:
Serious misconduct, such as fraud, theft, harassment, or other serious breaches of company policy, can warrant immediate dismissal. However, even in cases of gross misconduct, employers are required to follow a proper disciplinary process.
This process includes issuing warnings, conducting investigations, and offering the employee an opportunity to defend themselves. Failing to adhere to the legal framework around misconduct can expose the employer to wrongful dismissal claims.
3. Poor Performance:
If an employee consistently fails to meet performance expectations, termination may be considered. However, it is crucial for employers to give the employee a reasonable opportunity to improve before resorting to dismissal. This could include offering additional training, feedback sessions, or setting measurable performance goals over a specified period of time.
Only after these steps have been documented and exhausted should termination for poor performance be considered. This ensures that the employer has acted fairly and legally throughout the process.
Grounds for Lawful Termination in Malaysia
In Malaysia, employment is governed by the Employment Act 1955 and various statutory regulations. To terminate an employee lawfully, employers must provide a valid reason and follow a fair process.
Valid grounds for termination include:
- Redundancy: If the role is no longer needed.
- Serious misconduct: When an employee’s behavior breaches company rules or employment terms.
- Contractual breach: When either party fails to fulfill their employment contract obligations.
- Poor performance: After sufficient documentation and steps to improve have been taken.
It’s important to note that terminations cannot be based on discriminatory reasons, such as race, gender, religion, or pregnancy. Employers must be able to justify the termination in a fair and transparent manner, or they risk facing legal repercussions for wrongful dismissal.
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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.
