How do you terminate an employee in Malaysia in 2026?
Malaysia's unfair dismissal protection starts from day one of employment. There is no qualifying period. On top of that, termination benefits are owed after just 1 year of service, with rates of 10 days to 20 days of pay per year depending on tenure, and no monetary ceiling on total severance.
· Malaysia guide
Illustration · Kuala Lumpur, Malaysia
Malaysia gives employees unfair dismissal rights from day one. Any dismissed employee can file a representation under the Industrial Relations Act 1967. You do not need to wait for a qualifying period.
Termination benefits start after 1 year of continuous service. The rate is 10 days of salary per year for the first two years, 15 days per year from two to five years, and 20 days per year beyond five years. There is no cap on total payout.
Notice is banded by tenure. Under two years: 4 weeks. Two to five years: 6 weeks. Over five years: 8 weeks. Final pay must reach the employee within 7 days of the termination date.
What are the valid grounds for dismissal in Malaysia?
You can dismiss an employee for just cause or excuse. The main grounds are misconduct, poor performance, redundancy, and genuine business restructuring. Dismissal without a valid reason exposes you to an Industrial Court claim from day one.
Firing someone for being pregnant, a union member, or a whistleblower is not valid. These are automatic wins for the employee at the Industrial Court. (Industrial Relations Act 1967)
The Industrial Relations Act 1967, section 20 gives any dismissed employee the right to seek reinstatement or compensation regardless of how long they have worked. The Industrial Court assesses whether dismissal was with "just cause or excuse." There is no minimum service requirement before this right kicks in.
Valid grounds for dismissal
- Gross misconduct, theft, fraud, dishonesty, violence, or serious breach of company rules
- Sustained misconduct, repeated lesser offences after warning
- Performance, failure to meet a defined standard after a genuine improvement opportunity
- Redundancy, genuine role elimination driven by operational or economic need
- Frustration of contract, the employee becomes permanently unable to perform the role, for example due to long-term illness where no accommodation is possible
Protected categories
Dismissal connected to pregnancy, maternity leave, trade union membership or activity, whistleblowing, race, religion, sex, or disability is treated as an unlawful dismissal. The Industrial Court does not require the employee to prove the connection beyond reasonable inference. Your defence must show the dismissal was genuinely unrelated to the protected characteristic.
Domestic inquiry
For misconduct cases, conducting a domestic inquiry (a formal internal disciplinary hearing) before dismissal is not legally required but is strongly advised. Courts treat the absence of one as evidence that the employer did not follow natural justice, which makes an unfair dismissal finding more likely. Give the employee written notice of the charge, the date of the inquiry, and the right to respond. Record the outcome in writing.
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Establish the valid ground
Anchor the dismissal to a recognised ground: misconduct, performance, redundancy, or business closure. Document the reason before you notify the employee.
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Conduct a domestic inquiry for misconduct
Give the employee written notice of the charge and a hearing date. Record the outcome in writing. Skipping this step is the most common reason the Industrial Court rules against employers.
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Issue written notice of termination
Serve notice in writing, stating the last day of employment and the reason. Confirm whether notice is being worked or paid out, and the total amount due.
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File the PK Form with the Labour Office
For any retrenchment, file the Borang PK at least 30 days before the termination takes effect. Keep a stamped copy of the filing receipt.
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Calculate and pay final amounts
Final pay must include notice pay (or payment in lieu), accrued annual leave, and termination benefit where applicable. All amounts must reach the employee within 7 days of the termination date.
How much notice must you give an employee in Malaysia?
Notice is banded by length of service. Under two years: 4 weeks. Two to five years: 6 weeks. Over five years: 8 weeks. The same bands apply symmetrically to employee resignation notice.
You can pay notice out instead of working it. The contract must allow this, or both parties must agree. The payment replaces the notice period. (Employment Act 1955, section 12)
Put it in writing
| Length of continuous service | Statutory minimum notice |
|---|---|
| Less than 2 years | 4 weeks |
| 2 to 5 years | 6 weeks |
| Over 5 years | 8 weeks |
These are the minimum floors under the Employment Act 1955. A written contract may set a longer notice period. It cannot set a shorter one. Senior roles often carry three to six months' contractual notice, which overrides the statutory band.
Notice during probation
During probation, notice is typically 7 days by contract. The Employment Act does not prescribe a separate shorter period for probation, so this is governed by whatever the offer letter says. If the offer letter is silent, the statutory band applies. Probation periods run up to 6 months in Malaysian practice; courts do not recognise extensions beyond that without fresh consent from the employee.
Summary dismissal
You can dismiss without notice for gross misconduct. This is summary dismissal. You must still have just cause. A summary dismissal that fails the just-cause test is treated by the Industrial Court as a wrongful dismissal, which triggers the same back wages and compensation exposure as a notice failure.
How is Malaysia termination benefit calculated?
Termination benefit is owed on retrenchment, redundancy, or company closure. It applies once an employee has 1 year of continuous service.
The rate goes up with tenure. First two years: 10 days of salary per year. Two to five years: 15 days per year. Over five years: 20 days per year. There is no monetary cap on the total amount. (JTKSM FAQ on termination benefits)
| Length of continuous service | Termination benefit rate |
|---|---|
| Under 2 years | 10 days of salary per year of service |
| 2 to 5 years | 15 days of salary per year of service |
| Over 5 years | 20 days of salary per year of service |
Termination benefit is calculated on the employee's last-drawn monthly salary divided across the working days in a month. Proportionate credit is given for completed months within each service year, so a partial year at the end counts on a pro-rata basis.
When termination benefit is payable
- Retrenchment, genuine role redundancy, business restructure, or closure
- Employer-initiated termination that is not disciplinary, including mutual agreement where the employer is initiating
- Constructive dismissal, where the employee resigns because the employer fundamentally changed their contract terms
Termination benefit is not payable where the employee resigns voluntarily, is dismissed for misconduct, or abandons their post. Misconduct dismissal still requires just cause, and a finding at the Industrial Court that the misconduct was insufficient overrides the dismissal and reinstates the termination benefit obligation.
No monetary cap
Unlike many countries with a ceiling on total severance, Malaysia's Employment (Termination and Lay-Off Benefits) Regulations 1980 do not impose any monetary cap. A 20-year employee retrenched on a high salary will receive the full formula amount with no ceiling.
What rules apply to retrenchment in Malaysia?
Any retrenchment triggers a notification requirement. You must file a PK Form (Borang PK) with the nearest Labour Office at least 30 days before retrenchment takes effect.
This applies from the very first redundancy. There is no headcount threshold. Missing the filing carries a fine. (JTKSM Retrenchment FAQ)
Malaysia requires employers to file the PK Form with the Labour Office at least 30 days before any retrenchment takes effect. There is no minimum headcount. One redundancy is enough to trigger the obligation. Non-compliance carries a fine under section 63 of the Employment Act 1955.
Last-in, first-out
Malaysian labour practice expects employers to follow the Last-In First-Out (LIFO) principle when selecting employees for retrenchment. Courts and the Labour Department look unfavourably on employers who retrench longer-serving staff while retaining newer hires without a documented reason. If you are departing from LIFO, document the selection criteria clearly before the decision is made.
Retrenchment versus mutual agreement
Some employers offer a voluntary separation scheme (VSS) as an alternative to forced retrenchment. Where employees accept voluntarily, the same termination benefit formula applies. A VSS does not reduce the termination benefit entitlement; it changes the process, not the payment.
Foreign national employees
The PK Form filing requirement and the termination benefit formula apply equally to foreign national employees covered by the Employment Act 1955. Where an employee holds a work permit, retrenchment also triggers a notification to the Immigration Department. Coordinate both obligations simultaneously to avoid permit overstay issues.
Can you end employment by mutual agreement in Malaysia?
Yes. Mutual separation agreements are recognised in Malaysia. Both parties sign a written agreement that the employment ends on agreed terms. The employee gives up the right to file a section 20 representation in exchange for an agreed payout.
The agreed amount should meet or exceed the formula termination benefit. Courts look closely at agreements where the payment falls below what the employee would have received through the standard formula.
A mutual separation agreement (MSA) in Malaysia does not require court approval or authority sign-off before it takes effect. Both parties sign, and the employment ends on the agreed date. The agreement should state the last day of employment, the total payment, any notice pay, accrued annual leave payment, and the waiver of Industrial Court claims.
Why use mutual agreement
- Speed: avoids the notice period by paying it out, and ends employment cleanly without a domestic inquiry
- Certainty: the employee waives the right to challenge the termination at the Industrial Court
- Senior exits: standard for director-level and senior management separations where the relationship is strained
- Performance cases: where a dismissal on performance grounds carries Industrial Court risk, mutual agreement provides finality
Independent advice requirement
Unlike the UK, Malaysia does not require the employee to take independent legal advice before signing a mutual separation agreement. However, agreements signed by employees under duress or without genuine opportunity to consider terms can be set aside by the Industrial Court. Allow a reasonable consideration period and document that the employee signed freely.
Tax on separation payments
Termination benefit payments to employees who are retrenched or whose employment ends due to company closure may qualify for income tax exemptions under the Income Tax Act 1967. The exemption does not apply to payments made on voluntary resignation. Confirm the tax treatment with a qualified Malaysian tax adviser before finalising the separation package.
How Teamed runs Malaysia terminations
Teamed is your legal employer of record in Malaysia. The cost is from $599 per employee per month, with zero FX mark-up in any currency. All Malaysia termination procedures run through Teamed's local partner network.
We handle the valid-grounds assessment, notice calculation, PK Form filing, termination benefit calculation, and final-pay reconciliation. All of it runs on one platform. The decision on who to dismiss, why, and on what terms is always yours.
Real HR and legal experts handle your Malaysia hires from the first contract through every payroll run and EPF submission. An actual person, not a pooled queue. There is no setup fee and no exit fee, and employer cost passes through at cost, itemised on every invoice.
The split of responsibilities under EOR for Malaysia terminations:
| What Teamed handles | What the client decides |
|---|---|
| Notice period calculation against statutory bands | Whether to dismiss, why, and on what timeline |
| Domestic inquiry process guidance and documentation | The performance standard and what counts as a breach |
| PK Form filing with the Labour Office within the required window | Whether retrenchment is genuine and which roles are affected |
| Termination benefit calculation across tenure bands | Whether to enhance the statutory formula above the minimum |
| Mutual separation agreement drafting with local legal partners we engage | The commercial terms and payout amount |
| Final payroll: notice pay, accrued leave, termination benefit, EPF deregistration | Communication to the wider team |
| Coordination of Industrial Court support if a section 20 claim is filed | Settlement versus contest strategy |
EOR payroll, contractor onboarding, and entity setup all live on one platform. A Malaysia contractor who moves to PAYE payroll keeps their record, and that same employee can graduate to your own Malaysia entity without switching systems. Run the Crossover Calculator to see the month when the model flips. EOR is the right model for a first Malaysia hire, until it isn't. Start from the Malaysia hiring overview; each guide here takes one layer of Malaysian employment law.
Key sources: JTKSM Retrenchment FAQ, JTKSM Termination Benefit FAQ, and Industrial Relations Act 1967 guide.
Frequently asked questions
How much notice must you give an employee in Malaysia in 2026?
Notice is banded by tenure under the Employment Act 1955 section 12: 4 weeks for employees with less than two years of service, 6 weeks for two to five years, and 8 weeks for over five years. These bands apply symmetrically to employee resignation. Notice can be paid out rather than worked if the contract permits. During probation, contracts typically provide 7 days.
Who is entitled to termination benefit in Malaysia?
Employees with at least 1 year of continuous service who are retrenched, made redundant, or whose employer closes are entitled to termination benefit under the Employment (Termination and Lay-Off Benefits) Regulations 1980. The benefit is not payable on voluntary resignation or dismissal for misconduct.
How is termination benefit calculated in Malaysia?
The rate depends on tenure: 10 days of last-drawn salary per year of service for the first two years, 15 days per year for two to five years, and 20 days per year beyond five years. There is no monetary cap on the total amount. Partial years count on a pro-rata basis.
Does an employee in Malaysia need a qualifying service period before making an unfair dismissal claim?
No. The Industrial Relations Act 1967 section 20 gives any dismissed employee the right to file a representation for unfair dismissal from day one of employment. There is no minimum service period, unlike the two-year qualifying period in the UK. Back wages at the Industrial Court are capped at 104 weeks of last-drawn salary for confirmed employees.
What is the PK Form and when must it be filed?
The PK Form (Borang PK) is the mandatory retrenchment notification form filed with the nearest Labour Office. It must be submitted at least 30 days before any retrenchment takes effect, regardless of how many employees are affected. There is no headcount threshold. Non-compliance is an offence under section 63 of the Employment Act 1955.
When must final pay be made after termination in Malaysia?
All termination-related payments, including notice pay, accrued annual leave, and termination benefit, must be made within 7 days of the termination date under the Employment (Termination and Lay-Off Benefits) Regulations 1980.
The PK Form filing is the step most international employers miss on their first Malaysia retrenchment. The form goes to the Labour Office before the termination takes effect, not after. File it late and you are already non-compliant before the employee has left the building.
Malaysia's termination benefit formula has no ceiling. A senior employee retrenched after ten years receives the full 20 days of salary per year, with nothing capped.
There is also no qualifying period for unfair dismissal. The Industrial Court is open to any dismissed employee from day one.
Know the formula before you start the conversation. The numbers do not negotiate.
