Foreign employers in Malaysia are usually careful about hiring and careless about firing. The employment contract says either party may terminate on two months' notice, the manager gives two months' notice, HR processes the final pay — and four months later a letter arrives from the Industrial Court. The mistake is structural, not administrative: in Malaysia, a contractually valid termination and a lawful dismissal are two different things. Contract law governs the first; the Industrial Relations Act 1967 governs the second, and it asks a question your contract cannot answer — was there just cause or excuse? This guide sets out who can sue, how long they have, what evidence you need before you dismiss, how a retrenchment must be run and notified, and what an adverse award actually costs, so you can price the decision before you make it rather than after.
Two statutes, two forums — and only one of them cares about your contract
Almost every expensive mistake starts here. Malaysia runs employment disputes through two parallel regimes, and foreign employers routinely prepare for the wrong one.
The Employment Act 1955 is the minimum-standards statute: notice periods, leave, hours, termination benefits. Since the Employment (Amendment) Act 2022 took effect on 1 January 2023 it covers all employees regardless of wage, though a handful of entitlements — overtime, rest-day and public-holiday premiums, and statutory termination and lay-off benefits — remain limited to those earning RM4,000 a month or less (manual workers aside). Claims run to the Labour Court under section 69.
The Industrial Relations Act 1967 is the security-of-tenure statute, and it is the one that generates the large numbers. Under section 20, a "workman" dismissed without just cause or excuse may seek reinstatement — and the definition of workman in the IRA carries no salary ceiling. A country manager on RM45,000 a month has exactly the same right to file as a warehouse assistant on RM1,700. Foreign employees on Employment Passes have it too.
| Employment Act 1955 | Industrial Relations Act 1967 | |
|---|---|---|
| What it protects | Minimum statutory entitlements | Security of tenure — the right not to be dismissed without cause |
| Who is covered | All employees since 1 Jan 2023; some benefits capped at RM4,000/month | Any "workman" — no salary ceiling, including expatriates |
| Forum | Labour Court (JTK), section 69 | Director General of Industrial Relations → Industrial Court |
| Time limit | Generally 60 days from the amount becoming payable | 60 days from the date of dismissal — strict |
| Typical remedy | Unpaid wages, notice pay, termination benefits | Reinstatement, or back wages up to 24 months + compensation in lieu |
| Can the contract override it? | No — contracting below the Act is void | No — and a generous notice clause is not a defence |
The section 20 clock: 60 days, conciliation, then straight to court
The procedure is short and unforgiving:
- Representation. The dismissed workman files a representation with the Director General of Industrial Relations within 60 days of the dismissal. Miss it and the claim is gone; that is the single best protection an employer has, and it expires quickly.
- Conciliation. The Industrial Relations Department convenes conciliation. Most matters that settle, settle here — a negotiated sum, a mutual-separation letter, and a withdrawal.
- Referral. Since 1 January 2021, when conciliation fails the Director General refers the case directly to the Industrial Court. The old ministerial filter that used to weed out weak claims is gone, so materially more cases now reach a hearing.
- Award, then appeal. The Industrial Court issues an award. Either side may appeal to the High Court within 14 days under section 33C — a much tighter window than the three months once available for judicial review, and no leave is required.
Note the asymmetry of remedy: the workman must ask for reinstatement. A claim framed purely as a demand for money can see the court decline jurisdiction. In practice reinstatement is rarely ordered years after the event, and the court converts it into money — but the framing matters procedurally.
What counts as "just cause or excuse"
There is no statutory list. In practice dismissals fall into four buckets, each with its own evidential burden.
| Ground | What the employer must prove | Where employers lose |
|---|---|---|
| Misconduct | That the act happened, that it amounts to misconduct, and that dismissal is proportionate | No inquiry held; the employee was never told the specific allegation; the same conduct was tolerated in others |
| Poor performance | Standards were communicated, shortfall was measured, warnings and a genuine chance to improve were given | Appraisals rated the employee "meets expectations" right up to the dismissal; no PIP, or a PIP designed to fail |
| Redundancy / retrenchment | The role genuinely became surplus, and selection was fair | The position is re-advertised months later; a junior stays while a senior goes with no explained criteria; no Form PK filed |
| Probation failure | Assessment, guidance and a fair opportunity — probationers are not dismissible at will | Assuming "still on probation" is itself a reason; back wages here are capped at 12 months, not zero |
Two rules do most of the work in Malaysian awards. First, proportionality: even proven misconduct may not justify dismissal if a warning or suspension would have met the case. Second, consistency: if two employees did the same thing and only one was dismissed, the employer must explain the difference in terms the court can accept.
The domestic inquiry: not compulsory, and you should almost always hold one
For misconduct dismissals a domestic inquiry — an internal disciplinary hearing — is the standard route. It is not, strictly, a statutory precondition for every dismissal, and a defective inquiry can be cured at the Industrial Court, which hears the matter afresh. But the practical calculus is one-directional: an employer who held a proper inquiry arrives with contemporaneous evidence, while one who did not spends the hearing reconstructing events from memory.
A defensible inquiry has a recognisable shape: a show-cause letter setting out specific charges with dates; a real chance to reply in writing; a panel that excludes the complainant and the decision-maker; the employee's right to be present, to hear the evidence and to ask questions; minutes; a finding on each charge; and only then a decision on penalty that takes length of service and prior record into account. Suspension pending inquiry should follow the Employment Act limits and be on at least half pay.
Retrenchment: a business decision that still has to be run properly
Redundancy is a legitimate reason to dismiss. Malaysian law does not require you to keep a role you no longer need. What it requires is that the redundancy be real, that selection be defensible, and that the state be told.
On selection, the conventional starting point is LIFO — last in, first out, within the affected category. Departing from LIFO is permitted where you can show objective criteria (skills, qualifications, documented performance) applied consistently. Departing from it without documented criteria is one of the most common ways a genuine restructuring becomes an unfair dismissal.
Then the notification. Under section 63 of the Employment Act and the Employment (Retrenchment) Notification 2004, employers must file Borang PK with the nearest Labour Office, in stages:
| Step | Deadline | Note |
|---|---|---|
| Form PK Parts I–IV | At least 30 days before the retrenchment takes effect | Filed with the nearest JTK office; covers the employer, the exercise and the affected employees |
| Form PK Part V | Within 14 days after the date of retrenchment | Confirms what was actually carried out |
| Form PK Part VI | Within 30 days after the exercise | Closing report |
| Penalty for failure | Fine of up to RM10,000 per offence | Section 63, Employment Act 1955 — and non-filing is evidence the exercise was not genuine |
| EIS reporting | Notify SOCSO of the loss of employment | Enables the employee's Job Search Allowance claim under the Employment Insurance System |
The money side: notice, termination benefits, and the final payment
Two separate payments are often confused. Notice compensates for ending the relationship early; termination and lay-off benefits compensate for the loss of the job itself, and are payable on retrenchment to eligible employees with at least 12 months' continuous service.
| Length of service | Statutory notice (s.12(2) EA 1955) | Termination benefits (Regs 1980) |
|---|---|---|
| Less than 2 years | 4 weeks | 10 days' wages per year of service |
| 2 years to under 5 years | 6 weeks | 15 days' wages per year of service |
| 5 years or more | 8 weeks | 20 days' wages per year of service |
| Contractual notice | Longer contractual notice applies; shorter is void | Incomplete years pro-rated to the nearest month |
| Payment in lieu | Either party may pay an indemnity equal to wages for the unexpired notice | Not payable on retirement, resignation, proven misconduct, or renewal on equal or better terms |
| Wage limit | Notice applies to all employees | Statutory entitlement limited to those earning ≤ RM4,000/month (manual workers aside) |
Above RM4,000 the statutory scale stops, but the commercial expectation does not — and neither does the Industrial Court, which will look at what comparable employees in the same exercise received. Most foreign employers running a retrenchment in Malaysia end up applying the 10/15/20 scale across the board, because the alternative is a settlement negotiation with everyone above the line. Remember too that minimum wage has been RM1,700 a month for all employers nationwide since 1 August 2025, which lifts the base on which every one of these calculations runs.
What losing actually costs
The Industrial Court's arithmetic is more predictable than most employers expect, which is precisely why it should be run before the dismissal.
| Component | Basis | Worked example: RM12,000/month, 6 years' service |
|---|---|---|
| Back wages | Last-drawn salary × months since dismissal, capped at 24 months (12 for probationers) | RM12,000 × 24 = RM288,000 |
| Compensation in lieu of reinstatement | One month's last-drawn salary per completed year of service (Practice Note 3 of 2019) | RM12,000 × 6 = RM72,000 |
| Possible deduction | Post-dismissal earnings and contributory conduct may reduce back wages | Commonly a 20–50% cut where the employee found comparable work |
| Gross exposure before deduction | Back wages + compensation | ≈ RM360,000, plus your own legal costs |
| Appeal | To the High Court under s.33C within 14 days, no leave required | Adds cost and delay; the award stands unless set aside |
Set that against the alternative. A negotiated mutual separation at conciliation stage for the same employee typically lands in the range of a few months' salary, is paid once, closes the file, and carries a signed release. The gap between those two numbers is what proper process buys you.
Constructive dismissal: the resignation that becomes a claim
Employers who want to avoid a dismissal sometimes engineer an exit instead — a demotion, a transfer to an unreasonable location, a unilateral pay cut, stripped duties, sustained hostility. If the employee resigns and can show the employer committed a fundamental breach of the employment contract, and that they resigned promptly in response to it rather than acquiescing, the law treats it as a dismissal by the employer. The section 20 claim then proceeds exactly as if a termination letter had been issued — except the employer now also has to explain the conduct that triggered it.
Six traps foreign-owned employers fall into
- Treating the notice clause as authority to dismiss. It governs timing, not legitimacy.
- Assuming senior expatriates are outside the system. There is no salary ceiling on a section 20 claim, and Employment Pass holders file them.
- Documenting performance only after the decision. Appraisals that suddenly turn negative in the final month read as reconstruction.
- Running a retrenchment without written selection criteria — and then re-hiring for the same role within months.
- Skipping Form PK, which is both a RM10,000-per-offence offence and evidence the redundancy was not genuine.
- Retrenching local staff while comparable foreign staff remain, contrary to section 60N.
What to do before you dismiss anyone
The practical sequence is short. Decide which of the four grounds you are actually relying on, and be honest internally — "poor performance" dressed up as redundancy fails on both tests. Assemble the evidence that already exists, and if there isn't any, fix that first with warnings and a genuine improvement plan rather than proceeding. For misconduct, run a proper inquiry. For redundancy, write the selection criteria down before applying them, check section 60N, and diarise Form PK's three deadlines. Calculate notice, termination benefits and the Industrial Court exposure side by side, then decide whether a negotiated separation is the better commercial outcome — very often it is.
Malaysia's employment framework is not hostile to employers; it is hostile to undocumented decisions. Employers who keep contemporaneous records, follow a visible process and treat the 60-day window as a real deadline rarely see the inside of the Industrial Court. For the underlying entitlements this all sits on, see our guides to the Employment Act 1955 for foreign employers and to EPF, SOCSO, EIS and PCB payroll obligations; if a dispute escalates beyond employment into contract enforcement, our guide to commercial dispute resolution in Malaysia covers the wider litigation and arbitration map.
If you are planning a restructuring, a performance exit or a first dismissal in Malaysia and want the process reviewed before the letter goes out, talk to our team or see our legal consultation service. Getting the sequence right costs a fraction of getting the award wrong.
Frequently asked questions
Our contract allows termination with two months' notice. Isn't that enough?
No. Paying notice satisfies the contract; it does not satisfy section 20 of the Industrial Relations Act 1967. A dismissed workman may still claim that the dismissal was without just cause or excuse, and in that claim the employer carries the burden of proof — both that the misconduct or redundancy actually occurred, and that dismissal was a proportionate response. A generous notice clause is not a defence; it only determines how the relationship ends in time, not whether ending it was lawful.
Can a highly paid expatriate manager file an unfair dismissal claim?
Yes. Unlike the Employment Act 1955, where certain entitlements stop at RM4,000 a month, the definition of "workman" in the Industrial Relations Act carries no salary ceiling. A country manager on RM45,000 a month has the same right to file a section 20 representation as a warehouse assistant, and Employment Pass holders file them. Because back wages are calculated on last-drawn salary, senior expatriate claims are also the most expensive ones an employer can face.
How long does the employee have to bring a claim?
60 days from the date of dismissal, to file a representation with the Director General of Industrial Relations. The deadline is strict — once it passes the claim is gone, which makes it the single most useful protection an employer has. If conciliation fails, the Director General since 1 January 2021 refers the matter directly to the Industrial Court, without the ministerial filter that previously screened out weaker claims. An Industrial Court award may then be appealed to the High Court under section 33C within 14 days.
What do we have to do when retrenching staff?
Four things. Make sure the redundancy is genuine — the role, not the person, must be surplus. Apply written selection criteria, with LIFO as the conventional starting point and any departure justified by documented, consistently applied objective criteria. Observe section 60N: local employees may not be retrenched ahead of foreign employees in the same capacity. And file Borang PK with the nearest Labour Office — Parts I–IV at least 30 days before, Part V within 14 days after, Part VI within 30 days after. Failure to notify is an offence under section 63 of the Employment Act carrying a fine of up to RM10,000 per offence, and is also treated as evidence that the exercise was not genuine.
If we lose at the Industrial Court, how much will it cost?
Two components. Back wages at last-drawn salary for the months since dismissal, capped at 24 months for a confirmed employee (12 months for a probationer), and compensation in lieu of reinstatement at one month's last-drawn salary per completed year of service under Practice Note 3 of 2019. For an employee on RM12,000 a month with six years' service that is RM288,000 plus RM72,000 — roughly RM360,000 before any deduction for post-dismissal earnings or contributory conduct, and before your own legal costs. A negotiated separation at the conciliation stage typically settles for a few months' salary, which is the practical reason process discipline pays for itself.
Sources & references
- Industrial Relations Act 1967 (Act 177) — Laws of Malaysia, Attorney General's Chambers
- Employment Act 1955 (Act 265) — Labour Department of Peninsular Malaysia (JTKSM), MOHR
- Employment (Termination and Lay-Off Benefits) Regulations 1980 — JTKSM, MOHR
- Employees' Retrenchment — Notification (Borang PK), JTKSM, Ministry of Human Resources
This article is general information only, not legal, tax or immigration advice. Policies, thresholds and official fees are set by the relevant Malaysian authorities and may change. Talk to our consultants about your specific situation.