Guide to Unfair Dismissal Malaysia and Employment Contract Malaysia

Employment relationships in Malaysia are fundamentally contractual in nature but heavily regulated by statute and industrial jurisprudence. Two central pillars in Malaysian employment law are the employment contract and the doctrine of unfair dismissal. While the employment contract defines the rights and obligations of both employer and employee, unfair dismissal law determines whether termination of that contract was lawful.

This article provides a comprehensive explanation of employment contract principles in Malaysia and the legal framework governing claims of unfair dismissal in Malaysia.

Part I: Employment Contract in Malaysia

1. What Is an Employment Contract?

An employment contract is a legally binding agreement between an employer and an employee that sets out the terms and conditions of employment. It may be written, oral, or implied, though written contracts are strongly recommended for evidentiary clarity.

Employment relationships in Malaysia are governed primarily by:

• The Employment Act 1955
• The Industrial Relations Act 1967
• Common law contractual principles

The Employment Act sets minimum statutory protections for employees, while the Industrial Relations Act governs disputes such as unfair dismissal.

2. Essential Elements of a Valid Employment Contract

Like any contract, an employment agreement must satisfy:

• Offer
• Acceptance
• Consideration (wages in exchange for services)
• Intention to create legal relations

Without these elements, the contract may be unenforceable.

3. Types of Employment Contracts in Malaysia

Employment contracts typically fall into several categories:

(a) Permanent Employment

Open-ended employment until terminated by either party in accordance with contract or law.

(b) Fixed-Term Contract

Employment for a specified duration. Genuine fixed-term contracts automatically expire without constituting dismissal, but courts scrutinise whether the contract is truly fixed-term or a disguised permanent arrangement.

(c) Probationary Contract

Employment subject to confirmation after evaluation. Importantly, probationers are still entitled to protection against unfair dismissal.

4. Key Terms in Employment Contracts

A well-drafted employment contract typically includes:

• Job scope and designation
• Salary and payment structure
• Working hours
• Leave entitlements
• Benefits
• Confidentiality clauses
• Termination clauses
• Notice periods

Statutory minimum benefits under the Employment Act cannot be contracted out. Any clause providing less than statutory minimum standards is void.

5. Express and Implied Terms

Employment contracts contain both:

Express Terms

Clearly written or orally agreed terms.

Implied Terms

Inserted by law or custom, including:

• Mutual trust and confidence
• Duty of fidelity
• Employer’s duty to provide a safe workplace
• Employee’s duty to obey lawful and reasonable instructions

A breach of fundamental implied terms may give rise to constructive dismissal.

6. Termination Clauses

Most contracts specify notice periods. Under the Employment Act, minimum notice depends on length of service unless the contract provides longer notice.

Termination may occur through:

• Resignation
• Termination with notice
• Termination without notice (for misconduct)
• Expiry of fixed-term contract
• Mutual agreement

However, even if termination complies with contractual notice requirements, it must still satisfy the “just cause or excuse” requirement under unfair dismissal law.

Part II: Unfair Dismissal in Malaysia

1. What Is Unfair Dismissal?

Unfair dismissal occurs when an employee is terminated without just cause or excuse. Section 20 of the Industrial Relations Act 1967 provides employees the right to challenge dismissal.

Malaysia adopts a protective approach. Employers cannot dismiss employees arbitrarily, even if the contract allows termination with notice.

2. “Just Cause or Excuse” Requirement

The central legal test is whether the employer had just cause or excuse for termination. Common legitimate grounds include:

(a) Misconduct

Examples:

• Theft
• Fraud
• Insubordination
• Sexual harassment
• Serious breach of company policies

Misconduct must be proven after proper inquiry.

(b) Poor Performance

Termination must follow:

• Clear performance standards
• Warnings
• Opportunity to improve
• Performance improvement plans

Sudden dismissal without documented evaluation may be deemed unfair.

(c) Retrenchment or Redundancy

Must be genuine and based on business necessity, not disguised termination.

3. Domestic Inquiry and Procedural Fairness

Before dismissing for misconduct, employers should conduct a domestic inquiry. This ensures:

• Employee is informed of charges
• Employee is given opportunity to defend
• Evidence is examined
• Decision is impartial

Failure to observe procedural fairness may render dismissal unjustified, even if misconduct occurred.

The Industrial Court emphasises both substantive and procedural fairness.

4. Burden of Proof

Once dismissal is proven, the employer bears the burden of justifying it.

The Industrial Court examines:

• Whether misconduct occurred
• Whether punishment was proportionate
• Whether procedures were fair

The court does not merely accept employer’s assertion; it independently evaluates evidence.

5. Constructive Dismissal as a Form of Unfair Dismissal

Unfair dismissal also includes constructive dismissal, where the employee resigns due to employer’s fundamental breach, such as:

• Salary reduction
• Demotion
• Harassment
• Non-payment of wages

The resignation is legally treated as dismissal if proven.

6. Procedure to File Unfair Dismissal Claim

Step 1: File Representation

Within 60 days of dismissal, the employee must file representation at the Industrial Relations Department.

Step 2: Conciliation

The matter undergoes conciliation between employer and employee.

Step 3: Referral to Industrial Court

If unresolved, the Minister may refer the case to the Industrial Court.

Step 4: Industrial Court Hearing

Both parties present evidence and witnesses.

7. Remedies for Unfair Dismissal

If the Industrial Court finds dismissal unjustified, remedies include:

(a) Reinstatement

Restoration to former position (rare in practice).

(b) Back Wages

Generally capped at:

• 24 months for confirmed employees
• 12 months for probationers

(c) Compensation in Lieu of Reinstatement

Calculated based on years of service.

Compensation aims to restore the employee to the financial position they would have been in.

Relationship Between Employment Contract and Unfair Dismissal

1. Contractual Compliance Is Not Enough

An employer may terminate “with notice” according to contract, but if no just cause exists, dismissal may still be unfair.

Industrial law overrides pure contract law in employment termination.

2. Breach of Contract vs. Unfair Dismissal

These are distinct claims:

An employee may have both claims in different forums.

3. Fixed-Term Contract Disputes

If a fixed-term contract is genuine, non-renewal is not dismissal. However, if it is repeatedly renewed, courts may deem it permanent employment.

In such cases, non-renewal may constitute unfair dismissal.

Common Scenarios of Unfair Dismissal in Malaysia

1. Termination Without Inquiry

Employer dismisses employee based on allegation without investigation.

2. Retrenchment Without Business Justification

Company claims redundancy but hires replacement.

3. Dismissal Due to Whistleblowing

Retaliatory termination may be deemed unfair.

4. Discriminatory Dismissal

Termination based on race, gender, or union activity may violate industrial principles.

Employer Best Practices

To minimise risk of unfair dismissal claims:

• Draft clear employment contracts
• Maintain proper documentation
• Conduct domestic inquiries
• Issue warning letters progressively
• Apply policies consistently
• Seek legal advice before termination

Proper HR governance significantly reduces exposure to litigation.

Employee Considerations Before Filing Claim

Employees should assess:

• Whether dismissal letter states reason
• Whether inquiry was conducted
• Whether misconduct allegations are valid
• Whether 60-day timeline is met

Delay beyond 60 days may bar claim.

Timeframe of Proceedings

Industrial Court proceedings may take 1–3 years depending on complexity.

Conciliation stage offers opportunity for settlement.

Financial and Reputational Implications

For employers:

• Back wages liability
• Legal costs
• Reputational impact

For employees:

• Emotional strain
• Income uncertainty during litigation
• Risk of losing case

Strategic evaluation is essential before proceeding.

Conclusion

Employment contracts in Malaysia form the structural foundation of the employment relationship, defining rights and obligations of both parties. However, termination of employment is not governed solely by contractual terms. The doctrine of unfair dismissal under the Industrial Relations Act 1967 ensures that employees are protected from arbitrary or unjust termination.

Employers must demonstrate just cause or excuse, and procedural fairness is critical. Employees, in turn, must act promptly if challenging dismissal.

Ultimately, employment law in Malaysia balances managerial prerogative with worker protection. A well-drafted employment contract, combined with fair and documented termination procedures, remains the most effective safeguard against disputes.

Understanding the interplay between employment contract principles and unfair dismissal law enables both employers and employees to manage workplace relationships within the framework of legal compliance and industrial harmony.