Termination of employment is a crucial aspect of Malaysia’s labour laws, impacting both employers and employees. Whether due to business restructuring, redundancy, or other operational needs, understanding termination and lay-off benefits is essential. These benefits provide financial security to employees while ensuring employers comply with legal obligations.
In Malaysia, the Employment (Termination and Lay-Off Benefits) Regulations 1980 outline the entitlements of employees who face termination of employment. These regulations establish clear eligibility criteria, benefit calculations, and legal requirements that employers must follow.
This guide explores who qualifies for termination and lay-off benefits, how payments are calculated, and what legal obligations employers must meet. Whether you’re an employer ensuring compliance or an employee protecting your rights, this article provides the insights you need.
1. Who Is Entitled to Termination and Lay-Off Benefits?
Not all employees are entitled to termination of employment benefits. According to the Employment (Termination and Lay-Off Benefits) Regulations 1980, an employee must meet the following conditions:
Minimum Requirement: 12 Months of Continuous Service
- Employees must have at least 12 months of continuous service with the same employer to qualify.
- Continuous service refers to uninterrupted employment, though certain gaps (e.g., unpaid leave) may not necessarily break service continuity.
- Employment that involves periodic renewals of fixed-term contracts could also be considered continuous, depending on circumstances.
Who Is NOT Eligible?
Not all employees qualify for termination of employment benefits. The following categories are excluded:
- Employees dismissed due to misconduct
- If an employee is terminated for misconduct (e.g., fraud, theft, serious insubordination) after a proper domestic inquiry, they are not entitled to benefits.
- Employees who voluntarily resign
- Those who resign on their own accord are not eligible, except under specific legal provisions.
- Employees who refuse a valid offer of re-employment
- If an employer offers the same or better terms of employment, and the employee declines, termination benefits are forfeited.
4. Employees on fixed-term contracts
- Employees on fixed-term contracts are generally not entitled to termination benefits if their contracts expire naturally and are not renewed.
- However, if an employer ends a fixed-term contract before the agreed completion date, the employee may be entitled to compensation.
- Some employers offer gratuity payments as a goodwill gesture, though this is not a legal requirement.
2. What Constitutes a Valid Termination of Employment?
Termination of employment occurs when an employer ends the contract of an employee due to:
Valid Reasons for Termination
- Redundancy or Retrenchment: Due to economic downturns, automation, or company restructuring.
- Business Closure: Permanent shutdowns or cessation of a specific business operation.
- Health Reasons: If an employee is medically unfit and unable to continue working.
- Retirement: Employees who reach the retirement age set by their company or industry regulations are considered to have undergone lawful termination of employment.
- Expiry of contract: If an employee’s contract has a set duration and expires naturally, this is not considered wrongful termination.
Unfair Termination and Legal Risks
- Termination without just cause may be challenged under industrial relations law.
- Employers must provide a valid reason and due process before terminating employment.
- Discrimination in termination: Employers must ensure that termination is not based on discriminatory factors such as gender, pregnancy, race, religion, or union membership.
- Retaliatory termination: Employees cannot be dismissed as revenge for whistleblowing, lodging complaints, or reporting unethical behaviour.
3. Understanding Lay-Offs and When They Qualify for Benefits
A lay-off occurs when an employee is temporarily suspended from work due to a lack of available work.
Definition of Lay-Off
- If an employee receives no work for at least 12 normal working days within 4 consecutive weeks, they are considered laid off.
- However, employers are still required to pay lay-off benefits unless exempted.
What Is NOT Considered a Lay-Off?
The following do not count as lay-off periods:
- Rest days and public holidays
- Medical leave
- Annual leave or maternity leave
- Employer-approved unpaid leave
- Partial Lay-Off and Reduced Hours
- If an employer significantly reduces an employee’s work hours (e.g., cutting a full-time job to part-time with reduced pay), the employee may be entitled to termination benefits.
- Courts may consider such cases as constructive dismissal, allowing the employee to claim compensation.
If an employee is laid off but not paid any benefits, their service is still considered continuous unless explicitly terminated.
4. How Termination and Lay-Off Benefits Are Calculated
When termination of employment occurs, employees are entitled to benefits based on their years of service.
Payment Formula for Termination Benefits
Employees receive:
- 10 days’ wages per year for service less than 2 years.
- 15 days’ wages per year for service between 2 and 5 years.
- 20 days’ wages per year for service 5 years or more.
Example Calculation:
If an employee earning RM3,000 per month has served 4 years and 6 months, their benefit is calculated as:
- 2 years x 15 days’ wages (RM3,000 ÷ 26 × 15 × 2) = RM3,462
- 2 years x 10 days’ wages (RM3,000 ÷ 26 × 10 × 2) = RM2,308
- 6 months pro-rated = RM577
- Total payout = RM6,347
Key Considerations
- Wages include basic salary, fixed allowances, and contractual bonuses.
- Benefits must be paid within 7 days of termination.
5. Exceptions and Special Circumstances
Certain employment situations impact the termination of employment benefits.
Change of Business Ownership
- If a company changes ownership, and the new owner offers continued employment on the same or better terms, termination benefits are not required.
Employer’s Death
- If an employer dies, it does not automatically entitle employees to benefits unless the business ceases operations.
Employee’s Death
- If an employee passes away, termination benefits must be paid to their estate or dependants.
6. Employer Obligations and Legal Compliance
Key Employer Responsibilities
- Provide written notice of termination.
- Ensure timely payment of termination benefits.
- Conduct fair dismissals to avoid unfair termination claims.
Legal Consequences for Non-Compliance
- Failure to pay termination benefits within 7 days is an offence under the law.
- Employees can seek redress through the Labour Department or the Industrial Court.
7. What to Do If You Face Unfair Termination of Employment?
If an employee believes they were unfairly dismissed or denied termination benefits, they can:
- Negotiate with the employer for a fair settlement.
- File a complaint with the Labour Department for resolution.
- Pursue a case under the Industrial Relations Act if unfair dismissal is suspected.
- Seek legal representation:
- Employees may consult a lawyer or a union representative if they face wrongful termination.
- Employers should also seek legal advice to ensure they have strong grounds for termination.
Employers should maintain clear HR policies and follow fair employment practices to minimise disputes.
Conclusion
Termination of employment is a sensitive yet vital process that requires a clear understanding of rights and obligations. The Employment (Termination and Lay-Off Benefits) Regulations 1980 provide structured guidelines to ensure employees receive fair compensation while employers comply with legal standards.
For employers, compliance is key to avoiding legal repercussions and maintaining a positive workplace reputation. For employees, knowing your rights ensures you receive fair treatment and the benefits you deserve.
If you’re facing termination of employment, ensure you understand your entitlements and take the right steps to protect your interests.
Need expert guidance on termination procedures, compliance, or industrial relations? MECA’s consultants provide tailored, customised solutions such as training and consultancy to help businesses navigate employment laws with confidence. Contact us today to safeguard your workplace and make informed decisions.