Published On: 31/10/2025By

Unfair Dismissal in Malaysia: Legal Risks, Procedures & Employer Checklist

Terminating an employee is never an easy decision — but doing it the wrong way can create much bigger problems for your business. Unfair dismissal claims commonly arise when employers skip proper procedures or act without just cause. Understanding what constitutes fair versus unfair dismissal and knowing your responsibilities before taking action can protect your company from costly disputes.

What is Unfair Dismissal in Malaysia?

Unfair dismissal occurs when an employee is terminated without valid reason, or when the employer fails to follow due process under Malaysian employment law.

Examples of unfair dismissal include:

  • Terminating someone without documented reasons.

  • Dismissing an employee without conducting a domestic inquiry.

  • Using “performance issues” as a cover for retrenchment without proper procedure.

  • Firing someone due to age, gender, pregnancy, union involvement or other prohibited grounds.

In essence, dismissal is unfair if it is arbitrary, discriminatory or unsupported by evidence and proper process.

Laws Governing Unfair Dismissal in Malaysia

Two key legislative frameworks govern employee termination and unfair dismissal claims:

Employment Act 1955
Sets minimum employment standards including notice periods and termination conditions, especially for employees earning up to RM4,000 per month (and certain categories above).

Industrial Relations Act 1967
Gives employees the right to challenge unfair dismissal. Under this Act, an employee may file a claim with the Industrial Relations Department (IRD) within 60 days of dismissal. The dispute may be referred to the Industrial Court, where the employer must prove that the termination was carried out with just cause and due process.

What Constitutes Fair vs Unfair Dismissal?

Fair Grounds for Dismissal

  • Misconduct (e.g., theft, fraud, harassment, serious breach of company policy).

  • Consistently poor performance despite warnings and improvement opportunities.

  • Genuine redundancy or business restructuring, following fair selection and proper consultation.

  • Breach of contract by the employee.

Unfair Grounds for Dismissal

  • No valid or documented reason.

  • Employer fails to conduct inquiry or follow disciplinary process.

  • Retrenchment disguised as performance-related dismissal.

  • Dismissal based on gender, pregnancy, religion, union activities, whistle-blowing.

Employers must demonstrate both a valid reason and a fair procedure in every dismissal decision.

Common Reasons for Unfair Dismissal Claims

Unfair dismissal claims typically stem from:

  • Termination without valid reason or documentation.

  • Redundancies implemented without proper procedure or notice.

  • Constructive dismissal (where the employee is forced to resign).

  • Discrimination or bias-based dismissals.

Employer Responsibilities Before Dismissing an Employee

Employers must take the following steps before dismissing an employee:

  • Maintain proper documentation: appraisals, warning letters, disciplinary actions.

  • Conduct a domestic inquiry or fair hearing when required.

  • Follow company policies, the Employment Act and the Industrial Relations Act.

  • Provide notice or payment in lieu (as per statute or contract).

  • Issue a clear termination letter citing reasons, process followed and last day of employment.

  • Ensure performance reviews and terminations are transparent and documented.

Consequences of Unfair Dismissal for Employers

If the Industrial Court finds a dismissal to be unfair, possible remedies include:

  • Reinstatement of the employee (less common due to strained relations).

  • Back wages for up to 24 months (confirmed employees) or 12 months (probationers).

  • Compensation in lieu of reinstatement, often calculated as one month’s salary per year of service.

In addition to financial liability, unfair dismissal claims can damage your employer brand, lower morale and strain relationships with regulators and employees.

Steps to Take if an Employee Files an Unfair Dismissal Claim

When faced with a claim, employers should act promptly and professionally:

  1. Respond to the Industrial Relations Department with a written submission and supporting documents.

  2. Prepare evidence: employment contract, warning letters, inquiry notes, performance records.

  3. Represent the case at the Industrial Court if conciliation fails. Employers may appoint HR or legal advisors.

  4. Be aware of possible outcomes: reinstatement, compensation, or claim dismissal.

How Employers Can Avoid Unfair Dismissal Claims

Here are preventive measures every employer should adopt:

  • Document everything: keep accurate records of performance, conduct and disciplinary actions.

  • Provide warning letters and allow opportunities to improve.

  • Conduct fair, documented domestic inquiries when required.

  • Comply with statutory notice, termination and procedural requirements.

  • Issue termination letters that clearly state reasons, references to warnings/inquiry findings.

  • Maintain clear HR policies and communicate them to employees.

  • Conduct transparent performance reviews and provide coaching or improvement plans.

  • Consult HR or legal experts before finalising dismissals in complex cases.

  • Consider alternatives (e.g., voluntary separation) in redundancy situations.

Real Case Example of Unfair Dismissal in Malaysia

Unfair dismissal isn’t just a theoretical concept — it’s a serious legal and financial risk that has been repeatedly tested in Malaysia’s Industrial Court. Employers who fail to follow due process or justify their actions properly may face significant compensation orders and long-term reputational damage.

Case Study: Maxis Executive Awarded Over RM1 Million for Unfair Dismissal

One of the most notable examples is the case of Tung Yoke Leng vs. Maxis Broadband Sdn Bhd, reported by Free Malaysia Today. The Industrial Court awarded more than RM1 million in compensation to former Maxis executive Tung Yoke Leng, ruling that she was unfairly dismissed after 25 years of service.

Tung had been placed on a Performance Improvement Plan (PIP) despite a previously strong performance record. She claimed that the process was unfair and poorly managed — with ongoing issues being carried forward between reviews, inexperienced team support, and no clear warning that termination could result from the PIP.

After reviewing the evidence, the Industrial Court agreed with Tung’s claims and found that Maxis failed to provide a valid justification for the dismissal. The court ordered Maxis to pay:

  • RM416,640 in back wages (after a 30% deduction for post-dismissal earnings), and

  • RM620,000 as compensation in lieu of reinstatement,
    bringing the total compensation to RM1,036,640.

Key Takeaways for Employers

This case serves as a powerful reminder to all employers in Malaysia: even well-established corporations can face severe financial and reputational consequences if dismissals are handled improperly. To avoid similar outcomes, employers should:

  • Implement fair and transparent performance improvement plans (PIPs): Give employees clear objectives, support, and timelines for improvement.

  • Document every step carefully: Keep written records of evaluations, coaching sessions, and performance feedback.

  • Communicate clearly: Ensure employees understand the purpose of the PIP and the potential consequences of failing to meet expectations.

  • Seek HR or legal guidance: Before proceeding with termination, ensure all processes comply with the Employment Act 1955 and Industrial Relations Act 1967.

By maintaining proper documentation and fair treatment throughout the employment process, businesses can protect themselves from costly unfair dismissal claims — and preserve trust with their workforce.

Simplify Compliance with Pandahrms

Handling terminations, investigations and documentation manually can be error-prone. With Pandahrms, you can:

  • Store and access employee records and disciplinary history securely.

  • Track termination and inquiry processes, reminders and document deadlines.

  • Generate digital reports and audit logs effortlessly.

By using Pandahrms, you strengthen your HR governance, reduce risk, and focus on strategic workforce management — not administrative headaches.

Final Thoughts

Fair and lawful dismissal is about more than valid reasons — it’s equally about procedure, documentation and transparency. Employers who act without just cause and process expose themselves to significant financial and reputational risk.

By following best practices and automating HR workflows with Pandahrms, you can protect your business, support your employees fairly, and maintain compliance.