What are the types of compensation, bonuses, and severance to include when terminating an employee in Malaysia?

August 5, 2021
Nicholas K

Disclaimer: This article should not be considered to be legal advice, and altHR is not liable for any actions taken based on this article.

Terminating an employee is never a pleasant experience. Nonetheless, it’s crucial for employers and HR professionals to understand that there are certain laws that govern the process, such as the Labour Relations Act (LRA) 1967 and the Employment Act 1955, as well as contract and case law in Malaysia. 

These rules are designed to balance both sides of any employer-employee relationship, and are built on the basic principle of fairness. As such, the dismissal of an employee can only be done for “just cause or excuse” — failing which, the employee in question can lodge a complaint to the Director-General of Industrial Relations. 

But what about situations where an employee is terminated lawfully? What are the types of compensation or severance to include for employees in Malaysia? 

Which employees are entitled to termination benefits payment? 

According to the Employment (Termination and Lay-Off Benefits) Regulations 1980, an employee is entitled to termination benefits payment when their contract of service is terminated for any reason, except: 

  • When the employee’s contract is terminated upon reaching age of retirement (if there is a clause within the contract)
  • When the employee’s contract is terminated on grounds of misconduct
  • When the employee voluntarily terminated their own contract 
  • If the employee’s contract of service is renewed with equal or improved terms (with renewal taking effect immediately)
  • Other permutations of the above, which can be read in detail here.

How to calculate termination benefits payment

The Employment (Termination and Lay-Off Benefits) Regulations 1980 sets out the formula to calculate termination or layoff benefits payment, which shall not be less than:

(a) ten days’ wages for every year of employment under a continuous contract of service with the employer if he has been employed by that employer for a period of less than two years; or 

(b) fifteen days’ wages for every year of employment under a continuous contract of serviced with the employer if he has been employed by that employer for two years or more but less than five years; or

(c) twenty days’ wages for every year of employment under a continuous contract of service with the employer if he has been employed by that employer for five year or more,

and pro-rata as respect an incomplete year, calculated to the nearest month.

What other compensation is due to a terminated employee?

Every employment contract — if drafted according to the Employment Act 1955 — requires a notice period of at least one month. This notice period applies equally to both employers and employees, although both parties can choose to make a payment in lieu of notice to effectively buy themselves out of their contract. 

Take this example: Employer A chooses to terminate the contract of Employee A, who earns a basic monthly salary of RM10,000. The binding employment contract stipulates a notice period of two months. If the employer wants (or needs) the employee to leave immediately, they will have to make a payment in lieu of notice of RM20,000 to the employee. The same would apply in the inverse situation, where an employee wishes to leave ahead of their notice period. 

There is a caveat to this. If either party to the contract wilfully breaches a condition within the contract, the contract may be terminated without notice. This would apply to cases of gross misconduct, and other wilful breaches of contract such embezzlement and even corporate espionage. 

Other forms of compensation that may be due to employees upon termination include the encashment of unutilised annual leave, as well as discretionary pro-rated annual bonuses. This also depends on the terms of employment, which govern many of the payments that might or might not need to be made upon termination.  

And finally, there are gratuity payments — which are made ex gratia (latin for “by favour”), as well as retirement benefits for employees who have reached the stipulated age at certain organisations. 

Maintain transparency — with the help of altHR

At the end of the day, it’s important to maintain transparency when handling the termination of employee contracts. Failing to comply with employment law and regulations can lead to costly, drawn-out disputes in the Industrial Court, which isn’t usually in the best interests of either employer or employee. 

Digi’s super app, altHR, can help with this. Thanks to useful features like the Documents module, you can upload important documents for employees to view, such as employee handbooks, employment contracts, or even a Performance Improvement Plan. The latter is a useful tool to employ (before considering termination) which can help employees to resolve potential issues and perform to the best of their abilities. 

You’ll also be able to revise documents on the go, and for sensitive documents, enable password protection to maintain the utmost confidentiality. And of course, all of that works seamlessly with the other modules in the new normal, such as leaves, expense and payroll management.

HR professionals are often faced with daunting, often tedious tasks on a daily basis — tasks that have become even more difficult to handle in light of the ongoing COVID-19 situation. 

But help is available, if you know where to look. Let us streamline your HR processes by managing and automating day-to-day tasks, so you won’t have to worry about things like paperwork, privacy concerns, time-tracking, or onboarding challenges.

Sign up for altHR, the all-in-one digital solution that covers everything from payroll and onboarding, to staff management and providing employees with information kits. You’ve done it the old way long enough.

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