Saturday, June 11, 2016

Malaysia - Navigating the Complex Laws Governing Employee Termination in Malaysia

By Yap Yeong Hui, Skrine

It is common to see a clause in employment contracts in Malaysia stating that “either party may give to the other two months’ written notice to terminate the employment contract”. The clause has led many employers in Malaysia to assume that by giving due notice pursuant to such a clause, it is safe from any form of action by the dismissed employee. However, this is not the case in Malaysia.

An employment agreement is not the final word on the parties’ respective rights and liabilities. The rights and liabilities of the employer and the employee are subject to and governed by the prevailing employment laws, in addition to and despite the contents of the written contract.

The Industrial Relations Act 1967

The Malaysian Industrial Relations Act 1967 creates a procedure which effectively protects an employee from being dismissed save with just cause or excuse. An employee who believes that he was dismissed without just cause or excuse may submit a representation to the Director General of Industrial Relations. An Industrial Relations Officer would then make attempts to reconcile the parties through mediation. If the matter is not settled, the Director General of Industrial Relations will notify the Minister of Human Resources who will then make a decision whether to refer the representation to the Industrial Court for adjudication. It has been held that the Minister should refer all representations to the Industrial Court unless it is frivolous or vexatious.

Termination by due notice but without just cause or excuse is a dismissal in respect of which the Industrial Court can make an order of:

(a) reinstatement and up to 24 months back wages from the date of dismissal to date of reinstatement; or
(b) up to 24 months last drawn salary as back wages and one month’s salary for each year of service in lieu of reinstatement (less payments already made to the employee, if any).

Employee Enjoys Security of Tenure

An employee in Malaysia therefore enjoys security of tenure. The employer may not terminate the contract of service as it pleases. The rationale for this protection can be found in the judgment of the Malaysian Federal Court in the case of Dr A Dutt V Assunta Hospital [1981] 1 MLJ 304. The Court in that case held referred to the following paragraph in the judgment of the Indian court in Gajendragadkar J. in RB Diwan Badri Dass & Ors v Industrial Tribunal Punjab Patiala & Ors AIR 1963 SC 630:

“The doctrine of the absolute freedom of contract has thus to yield to the higher claims for social justice. … Industrial adjudication does not recognise the employer's right to employ labour on terms below the terms of minimum basic wage. This, no doubt, is an interference with the employer's right to hire labour; but social justice requires that the right should be controlled. Similarly the right to dismiss an employee is also controlled subject to well-recognised limits in order to guarantee security of tenure to (industrial) employees. …”

Therefore despite clear words in an employment contract expressly providing that the employer may terminate the contract with notice, such termination by an employer with notice may still amount to be unjust dismissal, if the employer does not prove that it had just cause or excuse to dismiss the employee.

This by no means mean that employees enjoy absolute security of tenure and employers can never in any circumstance exercise their contractual right to terminate an employment contract. In certain instances, the law recognises the right of the employer to terminate the contract of employment in accordance with its terms, such as upon expiry of a genuine fixed term contract and upon retirement.

As for what amounts to just cause or excuse validating the dismissal of an employee, it depends on the grounds for the dismissal. There are two common reasons for dismissing an employee: due to poor performance or misconduct.

Poor Performance

A poor performing employee generally refers to an employee who is performing below the standard of performance expected of him by his employer. The Malaysian courts recognises the employer’s right to take disciplinary action for poor performance including and up to dismissal. This does not mean however that the employer has a carte blanche to terminate any time and any how whenever he becomes dissatisfied with the performance of his employee. Industrial jurisprudence as developed by the Courts points unequivocally to the requirement of a fair process which an employer ought generally to follow before it can come to a considered decision that due to an employee's poor or unsatisfactory performance the latter's services can no longer be retained.

Generally speaking, an employer should warn the employee before action is taken for the employee’s poor performance. In the case of I.E. Project Sdn. Bhd. v. Tan Lee Seng [1987] 1 ILR 165, the Court held that “[a]n employer should be very slow to dismiss upon the ground that the employee is found to be unsatisfactory in his performance or incapable of performing the work which he is employed to do without first just telling the employee of the respects in which he is failing to do his job adequately, warning him of the possibility or likelihood of dismissal on this ground and giving an opportunity of improving his performance. It is for the employer to find out from the employee why he is performing unsatisfactorily to warn him that if he persists in doing so he may have to go.”

The requirement is not so stringent in the case of an employee who occupies a senior management position on the basis that senior personnel should by reason of his seniority be aware of what is expected of him in discharging his functions and whether he is meeting the expectations of management.

Additionally, the employee must be given sufficient opportunity to improve. In this regard, the employer is expected to set standards or criteria of improvement for the employee.

The standards or criteria of improvement in the employee’s performance set by the employer must be fair and attainable. This is especially relevant in cases where the employees are required to meet a certain target or quota. In assessing whether the target is reasonable, the Industrial Court is entitled to consider targets met by other personnel who occupy the same or similar position at the same time, before or even after the employee’s tenure of employment. Similarly, if the employee alleges that the targets were not reasonable, he must be shown to have requested the employer to lower the target or make some changes to the target or sales system.


The term “misconduct” is not defined in any statute in Malaysia but attempts have been made to define this term by the Courts. Misconduct is defined by the Malaysian High Court in Syarikat Kenderaan Melayu Kelantan Sdn. Bhd. v Transport Workers Union [1990] 1 MLJ 5, as “… conduct so seriously in breach of the accepted practice that, by standards of fairness and justice, the employer should not be bound to continue the employment”.

Some accepted examples of types of misconduct are insubordination, wilfully disobeying lawful and reasonable orders or procedures, unprofessional conduct and breach of company policy, absence without leave, habitual lateness, breach of duty of trust and confidence, theft and using violence or abusive language at the workplace.

Burden and Standard of Proof – Employer Bears the Burden

In the Industrial Court, in a dismissal case, the burden of proof lies on the employer. It must prove the employee was guilty of a misconduct or performed poorly, and it is not the employee who must prove himself not guilty or that his work performance was satisfactory.

For this reason, unlike in a usual court action where it is the claimant who must start the case, the employer has to start the case, calling its witnesses and adducing evidence, whether oral or documentary, to prove the facts and circumstances which it contends constituted just cause or excuse for dismissing an employee.

The employer is under an obligation to produce convincing evidence to prove on a balance of probabilities that the employee committed the misconduct complained of or performed poorly.

Disciplinary Process – Should You Hold a Domestic Inquiry

When an employee is suspected of having committed misconduct, an employer must conduct an investigation. This will involve collecting and studying all relevant documents and taking statements from relevant persons. Once the investigation is complete, the employer must determine if misconduct has in fact been committed, if there sufficient evidence that the employee has in fact committed the misconduct and whether the misconduct justifies further action being taken.

The normal disciplinary process after completion of investigation will entail the employer issuing a letter to the employee setting out the allegations against the employee and asking the employee for an explanation or to produce evidence in his defence. If the employer is not satisfied with the explanation or the evidence provided, employers can commence a domestic inquiry.

A domestic inquiry is an inquiry held by the employer against an employee against whom certain acts of misconduct are alleged. The requirements for a domestic inquiry in light of decisions of the Malaysian Courts are more stringent than in other countries. The proceedings are conducted as if the inquiry is a criminal court action where:

(a) A panel consisting of at least 3 other independent employees of the employer will preside over the proceedings.
(b) The charges against the employee will be read to the employee and he will be asked whether he pleads guilty or not guilty.
(c) If he pleads not guilty, the ‘prosecutor’ will present the employer’s case and the produce witnesses who will tender the evidence relied on by the employer. The employee will be given the opportunity to cross examine the witnesses. Thereafter the employee will be invited to present his case in a similar manner. Verbatim notes will be taken of the proceedings.
(d) Both parties will then be given an opportunity to summarise their cases and the employee can raise mitigating factors in the event the panel finds him guilty of the charges.
(e) The panel will then deliberate and record its findings and recommendations in writing. The findings and recommendations will be forwarded to the relevant decision maker.

Thereafter the employer’s decision maker will study the evidence, notes and findings and recommendations and will make a decision on whether the employee is guilty of any misconduct and what punishment, if any, the employer will mete out to the employee.

The proceedings, which is akin to a criminal court hearing, is rather complex so employers need to decide if they wish to hold a domestic inquiry. The Malaysian Courts have held that the failure to hold one is cured by proceedings before the Industrial Court. So the failure to hold a domestic inquiry is not fatal. Nevertheless there are advantages to holding such inquiries which is summarised in the case MAS vs Mohd. Salem Abd. Majid [1997] 3 ILR 783 as follows:

“A due inquiry properly conducted and well-documented serves to ensure that a disciplinary authority has acted only after giving fair consideration to the matter. It also provides a reliable record for the employer to turn to when, due to the effluxion of time witnesses have become unavailable or memories have faded, the employer is faced with difficulties in having to prove his case before an industrial tribunal. Confronted with such forensic difficulties, an employer might well have to make extensive references to the records of the domestic inquiry”

Finally, in relation to what punishments are appropriate, not all misconduct will or should result in dismissal. Some misconduct on the part of an employee although acknowledged to be misconduct inconsistent with the terms of the employee’s employment may not be serious or grave enough to justify dismissal. The punishment that is meted out for misconduct must be commensurate with the misconduct.


Three key takeaways from this article which show that dismissal of employees in Malaysia can be tricky are as follows. The first is that despite clear wording in the contract allowing for termination of an employment contract by one party serving on the other termination notice, the dismissal of an employee by the employer must still be for just cause or excuse. Secondly, if an employee is dissatisfied with his dismissal and the Minister refers his claim to the Industrial Court, it is the employer who starts the proceedings and has the burden of showing that the dismissal is for just cause or excuse. Thirdly, before dismissing an employee for misconduct, where possible the employer may wish to conduct a domestic inquiry. There are numerous requirements to be complied with if an employer conducts such an inquiry in order for the Courts to accept that the inquiry was conducted in accordance with the principles of natural justice.

It is hoped that this article demonstrates why employers, especially those new to the country, should seek advice from local advisors when it contemplates taking any disciplinary action, especially dismissing an employee. This may go a long way to ensuring that the employer can satisfy its burden of showing that a dismissal of an employee is with just cause and excuse.