Employee termination is rarely a comfortable experience. Because of the inherent difficulties, employers must be extra aware of specific regulations, such as the Employment Act 1955, that govern severance pay in Malaysia. This article will explore the forms of termination and types of severance pay packages in Malaysia.
These regulations work on the fundamental fairness concept that guides Malaysia and balance both ends of any employer-employee agreement.
Employee Termination in Malaysia
How does the termination process in Malaysia work?
In Malaysia, a probation period typically lasts between one and three months. The original probation is extendable for an additional amount of time, up to 3 months. The worker should be given written notice of the renewal before the expiration of the initial period.
A worker may resign by providing written notice to the organization. A company may also terminate a worker by providing written notice of dismissal. As stipulated in the employment contract, the required notification duration is equal in both cases.
Section 12 (2) of the Employment Act 1955 states that the minimum notice period is:
- 4+ weeks if less than 2 years of service
- 6+ weeks if 2 years or more of service but less than 5 years
- 8+ weeks if 5 years or more of service
Either company or the employee can dissolve the employment agreement without proper notice. This would typically require the terminating party to reimburse the other party with compensation in lieu of notice.
Employees are not eligible for severance packages in any of the following situations:
- If the employee has been operating for a period of time less than 12 months (on the date of the dismissal)
- If they renew their employment contract with terms and conditions that are better than in the previous agreement.
- 7 days before the agreement’s end date, the company offered to renew it under no less generous conditions.
- Upon obtaining notice of dismissal, the worker leaves without the company’s prior approval or without reimbursing any compensation stipulated in the contract.
A termination notice is unnecessary in the case of severe misconduct or an “alleged breach” of the terms of employment such as disclosing confidential information or destruction of company property.
How Difficult Is It to Terminate an Employment Contract in Malaysia?
Malaysian employers cannot recruit and dismiss employees “at will” according to their labor system regardless of the type of employment. They can, however, discontinue a worker’s services if the termination is justified, conducted in good faith, and follows proper procedure.
This could involve a company dismissing an employee for disclosing trade secrets, for example.
According to Section 13(3) of the IRA, the resignation and termination of workers are organizational prerogatives. However, it’s important to remember that, just like in most countries, termination of a contract is easier if the employee agrees in advance.
Malaysia law provides less regulation for probationary periods, and as a result firing an employee during this time is simpler.
Severance Pay Laws in Malaysia
The legal foundation of the Malaysian employment and industrial relations environment centers around the Employment Act 1955 and the Industrial Relations Act 1967. The Employment Act establishes mandated minimum benefits and allowances.
However, most of the Employment Act only applies to workers covered by the Act (EA Employees). An EA employee is usually:
- someone whose monthly income does not surpass RM2,000; or
- someone who, regardless of income, performs manual work.
The employment agreement determines the right to severance pay for non-EA employees. A financially capable company should provide fair severance pay in these circumstances.
A “silent” contract means no emphasis is placed if not expressly stated in the agreement. For instance, this could mean the guarantee of local labor conditions or continued past practices.
If a contract is “silent”, employers must follow the notice period stated in Section 12 (2) of the Employment Act 1955,
How Is Severance Pay Calculated in Malaysia?
EA Employees with a 12-month or longer previous employment are provided with appropriate legal minimum severance payouts. The following guidelines are found in the Employment (Termination and Lay-Off Benefits) Regulations 1980:
- 10 days’ compensation for each year of service under a continued employment contract. However, only if employed by the same employer for less than 2 years.
- 15 days’ compensation for each year of service under a continued employment contract. However, only if employed by the same employer for 2 years or more and less than 5 years.
- 20 days’ compensation for each year of service under a continued employment contract. However, only if employed by the same employer for 5 years or more.
Is Severance Pay Taxed in Malaysia?
All payouts obtained in connection with employment are typically subject to tax. However, special laws in the Income Tax Act of 1967 exclude payments received for loss of employment or pension gratuities.
Severance is compensation received as a consequence of early employment termination where the worker could have continued until retirement. The amounts of this payment that can become excluded from tax are:
Unable to work due to illness
Employees are entitled to a full tax deduction.
In other cases
A total of RM10,000 (USD 2,230) of relief is granted for each consecutive year of service in the same company.
A gratuity is typically defined as a set amount given in appreciation of an employee’s services. Hence, gratuity is usually awarded upon resignation or as a pension after a long period of service. In some cases, these may also be exempt from tax:
Retiring due to illness:
This fully exempts gratuities from tax. The Inland Revenue Board’s (IRB) definition of “ill-health” requires an individual to be listed as unsuitable to work permanently.
Fully deductible retirement gratuities are available at or after the age of 55.
Reaching Mandatory retirement age:
From employment that has resulted in 10 years with the same company.
If none of the above criteria can be met, an employee may still claim tax relief. The amount is RM1,000 ($223) on the gratuities for each year of service.
How Can INS Global Assist in the Malaysian Market?
Local employment laws offer workers a point of reference and safety in organizations by managing all dismissal and severance pay regulations on your behalf.
Understanding all relevant statutory employment rights assists your business in avoiding missteps in employee termination. These mistakes could eventually lead to violations and financially impact the firm’s long-term future.
Our consultants can assist you in navigating Malaysia’s employment laws with thorough knowledge of the market and employment laws. Through our payroll outsourcing services, you can be guaranteed compliance with tax and payroll requirements, as well as health insurance, unemployment benefits, and everything employers need to provide in Malaysia.
Whether you are hiring full-time, part-time staff, or independent contractors, our global PEO offers you the necessary guidance to keep your business compliant, from recruitment to the final paycheck.