Introduction

Termination and retrenchment are among the most delicate issues in Malaysian employment law. Many employers mistakenly assume that the Employment Act 1955 (“EA”) only protects certain categories of workers and that giving notice under Section 12 is sufficient to lawfully end employment. This is a myth.

The Industrial Court has repeatedly stressed that compliance with statutory notice alone is insufficient. What truly matters is whether the dismissal was carried out with “just cause or excuse” and in a fair manner. Even employees outside the EA’s scope can challenge dismissals under Section 20 of the Industrial Relations Act 1967 (“IRA”).

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The Legal Landscape

The EA sets only a minimum floor of protection – mainly for employees earning RM2,000 and below, or those engaged in manual work. 

However, Section 20 of the IRA casts a much wider net. It allows any “workman,” regardless of salary level, to challenge a dismissal. The Industrial Court, in exercising its broad discretion, looks beyond statutory or contractual compliance and decides cases based on equity, good conscience, and the substantial merits. 

This means that even if an employer issues proper notice under Section 12 EA or complies with contractual terms, an employee may still succeed in an unfair dismissal claim if the employer cannot prove that the termination was for just cause and with procedural fairness. 

Serving notice or paying in lieu is not, by itself, a legal shield. In Tinus Wilting v ITASA Asia Sdn Bhd [2021] 4 ILR , the Industrial Court ruled the dismissal unlawful despite notice being given, because the employer failed to establish just cause or excuse. The case underscores that termination must be substantively fair and procedurally compliant. The underlying justification carries as much weight as the observance of notice requirements.

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High Earners and Equity

Although employees earning above RM4,000 fall outside the EA, they are still protected under the IRA. 

In Raul Fabrizio Casserini v George Fischer (M) Sdn Bhd [2017] 3 ILR 613, the Industrial Court awarded compensation to a claimant with a monthly salary of RM23,690. The case highlights that the principles of equity, good conscience, and fairness apply to all employees – regardless of income level.

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Retrenchment and Genuine Redundancy

Retrenchment is legally permitted, but the Industrial Court will scrutinise whether it was genuine and fair. Employers must prove that redundancy is not a pretext, and that fair compensation and alternatives such as redeployment or a Voluntary Separation Scheme (VSS) were properly considered. 

In Stephen Bong v FCB (M) Sdn Bhd [1999] 1 LNS 131, the Court clarified that redundancy refers to a genuine reduction in the employer’s overall need for workers, not just eliminating a role for convenience. 

By contrast, in Abdul Rashid Yusoh v Grand Elite Sdn Bhd [2023] 4 ILR, the Court upheld the retrenchment because the employer acted transparently, offered a VSS more generous than statutory requirements, and demonstrated good faith throughout in its process. 

These cases confirm that both the reason for redundancy and the manner in which it is carried out will be closely scrutinized.

The Risk of MSAs

Mutual Separation Agreements (MSAs) are frequently regarded by employers as “bulletproof vests,”: the employee resigns voluntarily in exchange for compensation. On paper, this looks like a clean break, since resignation is not considered a dismissal under law. 

But in reality, MSAs are not immune from challenge. The Court will scrutinise whether the employee’s consent was truly voluntary and informed, whether they had sufficient time and opportunity to seek independent advice, and whether the compensation offered was genuinely fair.

In Fatimah Noordin v Carsem (M) Sdn Bhd & Anor [2025] 6 CLJ , the Court of Appeal reclassified an MSA as an unlawful dismissal because the employee had signed it under duress, without a cooling-off period or access to proper advice. The Court held that the mere presence of a signature does not validate the agreement if it was obtained through pressure or unequal bargaining power. 

The lesson: MSAs are not absolute defences and must be structured with transparency, voluntariness, and adequate safeguards. Without these, they risk becoming a liability instead of a shield.

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Commercial Takeaways

For employers, effective risk management in termination and retrenchment goes far beyond mere statutory compliance. The Industrial Court has shown time and again that fairness of process carries as much weight as the legality of the paperwork. 

To mitigate exposure, employers should:

• pair contractual notice with ex gratia payments as a gesture of good faith.
• document the business rationale for termination to prove genuine need. 
• communicate openly and transparently with affected employees, as poor optics can undermine even lawful exercises. 
• offer alternatives such as VSS or Mutual Separation Schemes (properly structured) before resorting to compulsory termination. 

These practices not only reduce the risk of unfair dismissal claims but also demonstrate that the employer has acted responsibly and in line with principles of equity and good conscience.

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Conclusion

Termination, retrenchment, and MSAs in Malaysia are shaped as much by principles of fairness and equity as by statutory rules. Employers who rely solely on compliance with notice requirements expose themselves to significant legal and reputational risks. 

The law sets the floor of protection, but in industrial relations, it is fairness that defines the ceiling.