For workers and employers in Malaysia, their relationship is governed by two main pieces of legislation: the Industrial Relations Act (IRA) 1967, as well as the Employment Act 1955.

The basis for this law is fairness—trying to find a balance between giving employees security of tenure, and letting the employer retain the right to dismiss employees. The right process must be followed by any employer wishing to terminate staff; it avoids unfairness or unwanted consequences for both parties involved. Without fairness, staff may be entitled to termination benefits or other awards.

The Malaysian employment law system is thought by some to favour the employee too much; some foreign businesses wonder if it will disadvantage them if they need to dismiss staff, or if it will simply be too difficult.

But in reality, anyone who understands Malaysian employment law will see it is based on equality, giving equal rights to employer and employee. Where there are areas of the legislation that need clarifying, the Industrial Court has made several important rulings which show Malaysian labour law to be relevant and fit for modern business needs.

When can I dismiss an employee?

In Malaysia, companies cannot simply hire and fire people at will, with no good reason. However, if they have a good reason, and do so in good faith, following the correct procedure, then they can terminate staff.

The rights of both parties should be respected; the employee has the right to be employed fairly, and the employer has the right to make their own decisions for the commercial good of the company (section 13(3) of the IRA describes dismissal of employees as a management prerogative).

In this article, we’ll look at private-sector terminations which happen without good reason and which are unfair.

Substantive fairness (acceptable reasons for termination)

Employers are free to run their own business in their own way, but the court will step in if they dismiss staff for unfair reasons. The dismissal of staff must be as a result of a ‘just cause or excuse’, otherwise the employee could bring a claim for unfair dismissal.

An employee who was dismissed without just cause and excuse can ask the Director-General of Industrial Relations to reinstate them, according to section 20(3) of the IRA.

What does ‘just cause and excuse’ mean?

This phrase is not defined precisely in the act, so it will differ from business to business according to their circumstances.

The phrase may include:

  • Closure of the business resulting in redundancy
  • Poor performance
  • Being negligent in performing duties
  • Major misconduct in the workplace such as fighting, stealing, lateness, harassment, alcohol abuse or unsafe behaviour. Any conduct which means the employee can no longer faithfully discharge their duties, or which adversely impacts those duties, could be classed as major misconduct. The misconduct must have been in relation to the staff member’s duties or their work. A court will distinguish between major and minor misconduct.
  • Private misconduct by the employee, jeopardising their employer’s interests.

Above all, when an employee is dismissed, the employer must give the grounds for that dismissal, to ensure the fairness of the procedure.

Dismissal is a right of an employer, as long as you have reasonable cause and you tell the employee those reasons. By law, you must set the grounds out in the letter of termination.

Simply relying on a clause in the contract which allows termination is not enough; employers must clearly show a just cause and excuse for the termination.

How to terminate employment in Malaysia fairly

The manner of dismissal must be fair, as well as the reason for it. There are several steps to the fair dismissal process:

  1. The employee should be issued with a termination notice by their employer, giving the reason for the termination.
  2. The employee must be given the opportunity to explain or respond to it and given adequate time to do so.
  3. If things have not been resolved, schedule a domestic inquiry as soon as possible, to investigate the facts about the alleged poor conduct or performance.
  4. Ensure the inquiry panel members are impartial. An enquiry is not merely a ‘formality’ but an important part of the process.
  5. If relevant, witnesses may be called to give evidence at the enquiry.
  6. Enough information should be gathered to decide whether the dismissal was just or not.
  7. Records of the proceedings should be kept.

Note that the IRA does not specifically mention carrying out a domestic enquiry; sometimes the failure to conduct a domestic inquiry doesn’t necessarily mean that the procedure was unfair.

A domestic inquiry is essential for employees who work under the Employment Act. It is always better to be safe and act fairly.

If the employee feels they were dismissed unfairly, what can they do?

An employee who feels they were treated unfairly can file a complaint with the Director-General of Industrial Relations (IR). This must happen within 60 days of employment termination. A conciliation meeting must then be arranged for both parties, so a solution can be found.

At the meeting, an officer from IR will adjudicate. If a settlement is reached, its terms must be recorded in an agreement, and the matter will be resolved.

Note that at this meeting, no legal representation is permitted – the employee must speak for themselves, though they can be represented by a trade union officer.

Where no agreement can be reached, the matter will be referred to the Minister of Human Resources, who has the power to decide whether to refer the case to the Industrial Court. They will do this if they think the claim involves a serious issue in law, or a fact that needs to be ruled on by the Court.

The Industrial Court

At an Industrial Court, things run in a similar way to a civil lawsuit. A Chairman will sit alone, and it is the responsibility of the employer to prove just cause and excuse for the dismissal.

According to section 30(5) of the Ira, the industrial Court will follow “equity, good conscience and the substantial merits of the case without regard to the technicalities and legal form”. This doesn’t mean things are informal, just that there is a more relaxed approach. The merits of the case will be the focus, rather than strict legal technicalities. In other words, substance will prevail over form.

The Industrial Court may reinstate the employee, but they also have other awards available to them. For example, reinstatement may not be appropriate or possible if the relationship between the employee and employer is irreparable, so compensation may be a better option.

Employees who are ‘forced’ to resign – constructive dismissal

In some cases, the employer doesn’t fire the worker but instead creates an atmosphere at work that makes it impossible for them to remain. This is a kind of indirect dismissal. The worker feels they have no other choice but to resign. One example of this would be a worker who is being harassed by a fellow worker, and the employer refuses to take any action. When the employee has felt ‘forced’ to resign, it is known as constructive dismissal.

To successfully bring a claim for constructive dismissal, an individual must demonstrate that a part of their employment contract was breached by their employer. It is not enough that the worker disliked their co-workers or office environment – it must be shown that the employer failed to create a safe working environment, thus breaching the contract of employment. Where that breach leads directly to an employee resigning, there is an entitlement to compensation.

An employee has the legal right to resign without giving a reason. However, if they want to claim unfair dismissal, they will still need to stick to substantive and procedural fairness. 60 days are allotted in which to file a claim, so it is a good idea to have records and documents ready to prove the case for unfair dismissal.

Remedies for unfair dismissal and compensation

When a case is referred to the Industrial Court, the court will decide whether there was a just cause and excuse for the dismissal. Where there was none, they can choose to award the following:


However, unless the parties agree to it, it is rare to grant reinstatement as a remedy.

Back pay

Back wages can be given for the period running from the date of dismissal to the date of award, up to a maximum of 24 months. If the employee found a new job during that period, that will be taken into account when the back pay is calculated.

Compensation in lieu of reinstatement and back pay

Compensation for termination in Malaysia is usually based on one month’s salary for each year of service. Therefore, if a senior, highly paid employee who has been in the role for a long time is dismissed unfairly, it could cost the employer hundreds of thousands of ringgit.

The employee also has the right to file a civil claim for damages against their employer.

Defending a claim for unfair dismissal

An employer will have a successful defence against claims of unfair dismissal if they can show that:

  • They had just cause and excuse to dismiss the employee, and
  • They followed the correct and fair procedure.

The employer can lose the case—even if they prove just cause—if they don’t follow the right and fair procedure.

To conclude, you will see that both employer and employee are protected from unfair practice by Malaysian Labour Law. The rights of both are recognised: the employer is entitled to take decisions in the best interest of the company; the employee is entitled to be protected from unfair dismissal, and only dismissed for just reasons, following the correct procedure.

This content was written and reviewed by a lawyer but it does not constitute legal advice. We always recommend engaging a lawyer before taking any legal action.