Termination & Dismissal in Malaysia: A Practical Guide for Foreign Employers with Local Subsidiaries

August 11, 2025

Raja Nadhil Aqran

‍Introduction: Why Foreign Employers Need a Local Lens

Malaysia is a popular destination for foreign investment – from manufacturing hubs to regional headquarters – but its employment laws are protective, procedural, and unforgiving if misapplied. Even well-intentioned terminations can result in Industrial Court claims, reinstatement orders, and reputational harm if the process breaches statutory requirements.

For foreign employers in Malaysia, the challenge is rarely a lack of goodwill. The real risk is applying global HR policies and contracts without tailoring them to Malaysian labour law. What seems like a standard process at headquarters can be unlawful here.

Decisions made remotely may inadvertently breach the Employment Act 1955 or Industrial Relations Act 1967. As highlighted in our earlier article on termination and dismissal in Malaysia, process is just as important as reason.

The safest approach? Involve local counsel early – not only during disputes, but at the stage of drafting employment contracts, localising global policies, and planning organisational changes. Preventive legal advice at these points can save months of litigation later.

Termination vs Dismissal in Malaysia: Why the Distinction Matters

Foreign HR teams often treat “termination” as a single concept, but Malaysian law draws a crucial line:

Termination: any lawful end of employment – expiry of a fixed-term contract, resignation, redundancy, mutual separation.
Dismissal in Malaysia: employer-initiated end of employment for cause, such as misconduct or poor performance.

This distinction matters because dismissals require strict procedural fairness. An employer may have a perfectly valid reason to dismiss, but if they skip a required step – such as holding a due inquiry – the Industrial Court can order reinstatement or substantial compensation.

^Illustration^{A global misconduct policy may allow instant termination for serious offences. In Malaysia, however, even gross misconduct allegations generally require an internal inquiry where the employee can respond. If HQ directs local management to “terminate immediately” without that step, the dismissal is likely to be deemed unfair.}

Key Legal Framework in Employment Law Malaysia

Foreign employers must ensure HR decisions align with:

Employment Act 1955: governs minimum terms for all employees in Malaysia (note that some rules only apply for employees earning not more than MYR4,000/month). Covers notice periods, payment of wages, overtime, and termination benefits.
Industrial Relations Act 1967 (IRA): applies to all employees and protects against unfair dismissal. Establishes the Industrial Court, where disputes are adjudicated.
Immigration Regulations: relevant when terminating foreign and expatriate employees. Includes obligations for work permit cancellation and repatriation.
Personal Data Protection Act 2010 (PDPA): regulates handling of employee personal data, particularly in disciplinary investigations. It is particularly important for foreign employers who transfer employee data across between their headquarters and their Malaysian subsidiary.

^{Why it matters for foreign HQs:}^{A global severance policy that exceeds statutory minimums is fine – but if it ignores mandatory procedures, it still breaches Malaysian law. This is why contract and policy localisation are essential.}

Lawful Grounds for Ending Employment in Malaysia

Expiry of Fixed-Term Contracts

Common for project-based roles, but repeated renewals without a break or genuine reason can imply permanency. Courts may treat the employee as permanent, granting them the same dismissal protections.

^Illustration^{A Malaysian subsidiary of a foreign engineering firm hired a site supervisor on a 12-month contract for a bridge project. The project ran over schedule, so HQ extended the contract three times without changing the job scope. The Industrial Court later held the supervisor to be a permanent employee, making the “non-renewal” an unfair dismissal.}

^Tip^{: engage local counsel when drafting fixed-term contracts to ensure renewal clauses and job descriptions support the temporary nature of the role.}

Retrenchment / Redundancy

Driven by financial or operational needs, often initiated by HQ. Malaysian law requires objective selection criteria, often applying “Last In, First Out” unless justifiably departed from. Employers must notify the Labour Department (using the PK form) in advance.

^Illustration^‍

^{A regional HQ ordered a 15% workforce reduction across all Southeast Asian subsidiaries. The Malaysian branch applied the cuts without documenting selection criteria or notifying the Labour Department. The affected employees brought claims, and the court found the retrenchment unlawful.}

^Tip^{: before implementing retrenchments in Malaysia, consult a lawyer to ensure objective selection criteria are applied, documentation is in order, and statutory notifications are made before formal steps are taken.}

See our quick guide Retrenchment & Workforce Changes in Malaysia: When You Must Notify the Department of Labour for further details.

Dismissal for Misconduct

From theft to insubordination, misconduct must be proven through a due inquiry. This involves giving the employee written charges, a chance to be heard, and a fair investigation process. Even where the misconduct is obvious (e.g., caught on CCTV), skipping the inquiry risks an unfair dismissal finding.

^Illustration^{A retail subsidiary of an international brand dismissed a store manager the day after CCTV footage showed her taking merchandise without payment. HQ instructed immediate termination, believing the evidence was irrefutable. The Industrial Court ruled the dismissal unfair because no inquiry was held, and the manager was awarded compensation despite the proven misconduct.}

^{Had a quick inquiry been held, the additional costs would have been much lower and the expensive dispute and reputational damage could have been fully avoided.}

Poor Performance

Requires clear KPIs, performance reviews, and a documented performance improvement plan. Sudden termination for “underperformance” – common in at-will jurisdictions – rarely survives scrutiny here.

^Illustration^{A Malaysian branch of a Europe-based software company dismissed a sales executive after two consecutive quarters of low sales figures, without prior warnings or a performance plan. In the Industrial Court, the company argued that sales targets were part of the global contract. The court found the dismissal unfair, noting that the employer had not documented performance concerns or given the employee a chance to improve under Malaysian standards.}

^Tip^{: before initiating a dismissal for poor performance, work with local counsel to ensure KPIs are realistic, improvement plans are clearly documented, and timelines meet Malaysian labour law requirements.}

Mutual Separation Agreements (MSA)

Voluntary agreements where both parties end the relationship on agreed terms. Useful for senior or sensitive exits. MSAs should include proper release clauses, payment schedules and comply with tax laws, with particular attention to ensuring the employee’s consent is genuinely voluntary and not the result of undue pressure.

^Illustration^{A Malaysian subsidiary of a European manufacturing group offered an MSA to a senior manager as part of a restructuring. The document was drafted by HQ and signed on the same day without the manager having a chance to seek advice. The manager later challenged the agreement, claiming duress. The Industrial Court set the MSA aside and treated the matter as an unfair dismissal, ordering compensation.}

^Tip^{: always provide employees with adequate time to review MSA terms, document that the agreement is voluntary, and have local counsel vet the document to ensure it complies with Malaysian labour law and tax requirements.}

Procedural Fairness: The Cornerstone of Dismissal in Malaysia

In Malaysian employment law, how you dismiss is as important as why.

Foreign employers often face delays because approvals must go through HQ. This can breach statutory timelines for notice or inquiries. A practical solution is to delegate procedural authority to the Malaysian management team while keeping HQ informed.

^Illustration^{A misconduct case arises in the Malaysian office. HQ insists on reviewing every document before action. By the time HQ responds, two weeks have passed – well beyond a reasonable inquiry period. The dismissal is challenged and compensation awarded, even though misconduct was proven.}

^Tip^{: delegate sufficient procedural authority to your Malaysian management team so inquiries and notices can be issued without delay, while keeping HQ updated. This ensures compliance with statutory timelines under Malaysian labour law.}

Contract Localisation in Malaysia: The First Line of Defence

Employment contracts are your primary shield in disputes. Yet many foreign employers import HQ contracts with minimal changes, leaving them inconsistent with Malaysian labour law.

Essential localisation points:

Statutory notice periods (Employment Act-compliant)
Probation clauses matching local norms (typically three to six months)
Disciplinary clauses referencing due inquiry
Provisions for termination linked to work permit expiry for expatriates
Clear redundancy and fixed-term clauses

_Note_{: a single Industrial Court case in Malaysia can cost far more than a full contract localisation exercise.}

Special Considerations for Foreign and Expat Employees in Malaysia

Terminating foreign employees involves additional obligations:

Cancelling work permits and employment passes.
Coordinating repatriation, where applicable.
Obtaining tax clearance from the Inland Revenue Board before releasing final salary.

_Risk_{: non-compliance can result in immigration fines, delayed employee departure, or disputes over final payments.}

Best Practices for Foreign Employers in Malaysia

To reduce legal risk and ensure compliance:

Localise global policies to match Malaysian labour law.
Train local managers on documentation, inquiries, and statutory timelines.
Document all steps – from warnings to termination letters.
Seek legal input early – before contract issuance, policy rollout, or restructuring.
Use compliance checklists before finalising a termination decision.

Conclusion: Prevention Over Cure

In Malaysia, process and compliance are non-negotiable. Global HR teams managing Malaysian staff must adapt to the local framework or risk expensive disputes.

For a comprehensive overview of the core legal principles, see our write-up Termination and Dismissal in Malaysia: What Employers Need to Know. This guide focuses on how those principles apply when decisions are driven by headquarters but implemented locally.

For companies managing Malaysian teams from abroad, it is never too early or too late to audit your employment contracts, review dismissal procedures and train managers in local compliance. Your level of protection correlates directly with the time by which you seek legal advice.

Need advice on managing terminations and dismissals in Malaysia?

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Our employment law team helps foreign headquarters and Malaysian subsidiaries align global HR policies with Malaysian labour law – from contract drafting to dismissal procedures – reducing the risk of costly disputes.

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This article is for general information only and does not constitute legal advice.