Termination and Retrenchment in Malaysia: A 2026 Compliance Guide for Employers

If you’re navigating termination and retrenchment in Malaysia for the first time in a while, there’s one change worth knowing before anything else: since 1 January 2023, the Employment Act 1955 no longer has a salary cap. Every employee, regardless of how much they earn, is now covered by the Act and its retrenchment benefit regulations. Employers who still assume higher-paid staff fall outside these protections are working from outdated information — and that assumption is exactly what gets challenged in the Industrial Court.

This guide walks through what Malaysian employers need to know in 2026: lawful grounds for termination, how retrenchment benefits are actually calculated, the filing requirements employers still miss, and the mistakes that turn a lawful termination into an unfair dismissal claim.

In This Article

• The three lawful grounds for termination
• The domestic inquiry requirement for misconduct
• How retrenchment benefits are calculated
• The Borang PK filing requirement
• Last-in-first-out and when it can be departed from
• Common mistakes that lead to unfair dismissal claims
• Frequently asked questions

Quick Answer Termination and retrenchment in Malaysia must fall under one of three lawful grounds: misconduct (after a domestic inquiry), poor performance (after documented warnings), or retrenchment (genuine redundancy). Retrenchment benefits start at 10 days’ wages per year of service and scale up to 20 days for employees with 5+ years — and since 2023, this applies to every employee regardless of salary.

The Three Lawful Grounds for Termination

The Industrial Court recognizes termination as lawful only when it falls under one of three categories. Anything outside these tends to invite an unfair dismissal claim under Section 20 of the Industrial Relations Act 1967.

1. Misconduct

Dishonesty, insubordination, gross negligence, or serious policy violations can justify dismissal, with or without notice depending on severity. However, the employer must follow due process — this almost always means conducting a domestic inquiry before dismissal, not after.

2. Poor Performance

Performance-based termination requires a documented trail: clear expectations, written warnings, and a genuine opportunity to improve. A single bad review with no prior warning is weak ground and is one of the most common reasons employers lose at the Industrial Court.

3. Retrenchment (Redundancy)

Genuine redundancy—due to restructuring, automation, or a real oversupply of labor—is a lawful ground, but the employer must show the redundancy is real, not a pretext for removing a specific employee. This is where retrenchment benefits and the LIFO principle come in, covered below.

The Domestic Inquiry Requirement for Misconduct

Before dismissing an employee for misconduct, Malaysian law generally expects employers to hold a domestic inquiry — an internal hearing where the employee can respond to the allegations before a decision is made. Skipping this step, even when the misconduct seems obvious, is one of the most common reasons a dismissal gets overturned.

A defensible domestic inquiry process should include a written notice of the allegations, a chance for the employee to respond and bring representation, and a documented record of the hearing and decision. None of this needs to be elaborate, but it does need to exist.

How Retrenchment Benefits Are Calculated

Under Regulation 6 of the Employment (Termination and Lay-Off Benefits) Regulations 1980, employees with at least 12 months of continuous service are entitled to a minimum retrenchment benefit based on tenure:

• 10 days’ wages per year of service—for less than 2 years of service
• 15 days’ wages per year of service — for 2 years up to 5 years
• 20 days’ wages per year of service — for 5 years or more

Incomplete years are pro-rated to the nearest completed month. These are minimums — an employment contract or collective agreement can specify more, but never less. Because the 2023 amendment removed the salary cap, this scale now applies to every covered employee, not just lower-income staff as it did previously.

The Borang PK Filing Requirement

Before carrying out a retrenchment, employers must file Borang PK (Notification of Retrenchment) with the Department of Labour at least 30 days before the retrenchment takes effect. This step is frequently overlooked by SME employers who assume internal notice to the employee is sufficient.

Non-compliance with this filing requirement can result in fines of up to RM50,000 per offence. Once the retrenchment is carried out, final pay — including notice pay, accrued annual leave, and the retrenchment benefit — must reach the employee within 7 days of the termination date.

Last-In-First-Out (LIFO)—and When You Can Depart From It

The Code of Conduct for Industrial Harmony sets out last-in-first-out as the default principle for selecting which employees to retrench: within a comparable role, the most recently hired employee is let go first, ahead of longer-serving colleagues.

LIFO isn’t absolute. Employers can depart from it where there’s an objective, documented reason—differences in skill, qualification, or role requirements that a strict tenure-based approach wouldn’t capture. What the Industrial Court scrutinizes closely is whether the departure from LIFO was genuinely objective or a way to target a specific employee without cause. One rule that is fixed, however: foreign workers in comparable roles must generally be retrenched before local employees.

Common Mistakes That Lead to Unfair Dismissal Claims

• Assuming higher-paid employees fall outside Employment Act protections—this hasn’t been true since the 2023 amendment
• Dismissing for misconduct without holding a proper domestic inquiry
• Treating retrenchment as a way to remove an underperforming employee without documentation, rather than a genuine redundancy
• Skipping the Borang PK filing, or filing it less than 30 days before the retrenchment date
• Departing from LIFO without a documented, objective justification
• Missing the 7-day window to pay out final wages and retrenchment benefits

Frequently Asked Questions

Does the retrenchment benefit apply to all employees now?

Yes. Since the Employment Act’s 2023 amendment removed the salary cap, every employee with at least 12 months of continuous service qualifies for the statutory minimum retrenchment benefit, regardless of how much they earn.

Can an employer skip the domestic inquiry if the misconduct was caught on camera?

Generally no. Even where evidence seems clear, skipping the inquiry removes the employee’s chance to respond, which is often exactly what the Industrial Court examines if the dismissal is challenged.

What happens if an employer misses the Borang PK filing deadline?

The retrenchment can still proceed, but the employer risks a fine of up to RM50,000 per offense for the filing failure—separate from any wrongful dismissal exposure if the retrenchment itself is later challenged.

Is retrenchment the same as being laid off?

In Malaysian law, retrenchment and layoff benefits are treated the same way under the regulations—the distinction is more about the circumstances (permanent redundancy vs. temporary suspension of work) than the benefit calculation itself.

Handling a Retrenchment or Termination? Book a free HR compliance consultation with inTalent. We’ll review your termination process, retrenchment benefit calculations, and Borang PK filing to make sure everything holds up if it’s ever challenged.

Sources

• Employment (Termination and Lay-Off Benefits) Regulations 1980—official PDF, JTKSM—the actual regulation text setting out the 10/15/20-day retrenchment benefit scale
• JTKSM Official Retrenchment FAQ—Department of Labour’s own guidance confirming the benefit rates and Borang PK requirement
• Jobstreet Malaysia — Guide to Severance Pay — confirms the 2023 salary-cap removal and benefit rates
• Chambers and Partners — Retrenchment Exercise in Malaysia — legal firm overview of the four core retrenchment principles
• Edwin Lee & Partners—6-Step Guide to Lawful Retrenchment—confirms the RM50,000 fine for Borang PK non-compliance and the 30-day filing window
• ASEAN Briefing — Terminating Employees in Malaysia — general overview of misconduct/notice framework