2. Termination of employment

2.1 Legal requirements

In theory, an employer may terminate an employment contract at any time by giving to the employee the required notice (see below, point 2.2).

An employer may also, in certain circumstances, terminate the employment contract with immediate effect and without notice (ie ‘summary dismissal’). Under the common law, this will be justified where the employee engages in serious misconduct or commits some serious breach of the employment contract.

However, an employee, whether covered by the Employment Act or not, whose employment has been unilaterally terminated (with or without notice) may lodge a complaint of dismissal ‘without just cause or excuse’ under the Industrial Relations Act (see below, point 2.3). Hence, in practice, for employees covered by ‘permanent contracts’, there is a restriction on the power of the employer to terminate by notice. The employer can only do so for ‘cause’ such as misconduct, retrenchment etc.

2.2 Notice periods

The length of notice period is usually fixed by the parties in the employment contract.

The Employment Act (which only applies to covered employees) provides that the following minimum notice periods apply:

• 4 weeks if the length of service is less than 2 years;
• 6 weeks if the length of service is between 2 years and 5 years;
• 8 weeks if the length of service is 5 years or more.

The parties may provide in the contract of employment for a notice period longer than the minimum periods prescribed, provided that the length of notice is the same for both employer and employee. Payment in lieu of notice (or part thereof) is allowed under the Employment Act.

For an employee without an express contractual notice period, to whom the Employment Act does not apply, the courts will imply a term of ‘reasonable notice’ according to the common law. What is seen by a court as ‘reasonable’ will depend on factors such as the nature of the employment and the length of service the employee has with the employer.

2.3 Restrictions on the ability to terminate employment

The Industrial Relations Act specifically provides that it is unlawful to dismiss an employee for trade union membership or activities.

More generally, the ability of employees to lodge a complaint of dismissal ‘without just cause or excuse’ has led to a body of case law on circumstances in which termination of employment will be justified in different circumstances. The courts will examine the fairness of the termination and in particular will subject any summary dismissal to a high degree of scrutiny.

The Employment Act provides that no employer shall terminate the contract of service of a local employee for the purpose of employing a foreign employee. In the case of redundancy, all contracts with foreign employees employed by the employer in a capacity similar to that of the local employees must be terminated before any contracts with local employees are terminated.

2.4 Remedies

Under the Industrial Relations Act, any employee who considers himself dismissed without ‘just cause or excuse’ is entitled to make a representation for reinstatement to the Director General for Industrial Relations. If the Director General is not able to settle the matter, he must notify the Minister who may refer the case to the Industrial Court for an award. The primary remedy in the event of a successful claim is reinstatement and backpay, which may be substantial as it can take a long time for cases to be decided.

2.5 Severance payments

Employees covered by the Employment Act, who have been employed for at least 12 months prior to the date of termination, are also entitled to payment of minimum termination benefits as prescribed by the Employment (Termination and Lay-Off Benefits) Regulations 1980.

The quantum of benefits payable is set out below:

These termination benefits will apply in respect of an Employment Act covered employee unless their contract of employment or a collective agreement applicable to them provides for a more favourable quantum of termination benefit.

Any employees falling outside the scope of the Employment Act will not be expressly entitled to payment of termination benefits, unless they are provided for in their contract of employment and/or any collective agreement applicable to them. Nevertheless, severance payments are often made to such employees in a redundancy situation, to mitigate the risks of a claim of dismissal ‘without just cause and excuse’, as discussed below.

2.6 Specific requirements applicable to redundancy

An employee who has been retrenched may lodge a complaint of dismissal ‘without just cause and excuse’. Should such a claim proceed to hearing before the Industrial Court, the Court will examine in detail whether the retrenchment was bona fide as well as whether the selection criteria that were applied were fair and reasonable in all of the circumstances. The Court may also consider whether a severance payment has been made and the quantum of any such payment.

The Court may also have regard more broadly to other matters set out in the Code of Conduct of Industrial Harmony (Code). The Code is a document agreed between the Malaysia Council of Employers’ Organisation and the Malaysian Trade Unions Congress, with the approval of the Minister of Labour and Manpower. Though strictly the Code is not legally binding, the IRA recognises that the Industrial Court may take into account the content of documents such as the Code in reaching its decisions. For example, the Code recommends that a prior information and consultation procedure should be undertaken with workforce and trade union before retrenchments are implemented, in order to explore different solutions (eg schemes for voluntary separation and retirement).
There are also specific requirements under Malaysian law in relation to the selection of workers for retrenchment. In large part, the Malaysian Courts require the employer to strictly comply with the principle of ‘last in, fist out’ (LIFO) in each employment category. That is, the most junior employee in the  category must be the first to be selected for retrenchment.

Departures from the LIFO rule are allowed by the Industrial Court only sparingly. In such cases, the employer must show sound and valid reasons for departing from the rule, for example, adoption of another objective criteria or special circumstances warranting the retention of the junior in preference to the senior employee.

In implementing retrenchments, an employer should also be aware of the specific prohibition in the IRA on discriminating against employees on the ground of trade union membership or participation. Accordingly, retrenchment procedures and criteria must not have the effect of discriminating in this regard.

Employers who intend to carry out a retrenchment exercise are required to give prescribed notices to the Director General of Labour. The prescribed notification form is in 6 parts. Parts I to IV must be submitted 30 days prior to the retrenchments, part V must be submitted within 14 days after the retrenchment exercise, and part VI must be submitted within 30 days after the retrenchment exercise. Although this requirement comes under the Employment Act, it applies in respect of all employees (ie not just those to whom the Employment Act generally applies).