What Malaysian employers need to know about employment law

employment law

The Malaysian law governing industrial relations — or employment law — has a reputation for being overly-friendly to employees.

I am often approached for advice by employers when things have gone pear-shaped, meaning that they want advice on how to dismiss an employee, or to defend an unfair dismissal claim.

Many employers are of the view that the law makes it unreasonably difficult to dismiss an employee, except for the most obvious cases of misconduct or poor performance, and is therefore ‘pro-employee’.

This reputation has spread outside the country as well. Foreign businesses looking to expand into Malaysia often tell me that they have been informed that Malaysian law is disadvantageous to employers.

This reputation is, in fact, undeserved.

Provided that an employer does things the right way from the start, Malaysian employment law is not at all unfair — in fact, the underlying motive behind local employment law is equity, or fairness.

The problem is, many employers do not put in the groundwork required to establish a legally-satisfactory employment relationship in the first place — or, having done so, do not take care to maintain that relationship. This could be due to a lack of knowledge, or a reluctance to spend money on getting things done right.

As a result, employers end up fire-fighting due to the lack of will to implement fire-prevention measures.

Hiring to firing

Over the next three posts, I will outline the basic areas of employment law that all employers should be familiar with to ensure that their businesses are managed properly, covering the following phases of the employment relationship:

  • Hiring: This will include pre-employment issues such as job criteria, background research, and conducting interviews. It will also address key clauses in employment contracts, and whether the employment terms should be in a simple letter, lengthy agreement, or refer to a standard terms and conditions manual applicable company-wide.
  • Managing: This part will cover issues such as the payment and provision of wages, bonuses, leave, and other benefits. Employers must know which benefits are mandatory, which are discretionary, and how they should be documented and managed. Practical issues such as performance reviews will also be addressed.
  • Firing: As mentioned, this is the area of law which most employers take an interest in. In this part, I will provide an overview of the law in respect of dismissing employees — including the acceptable reasons for dismissal, and the practical steps which must be taken to ensure that an employee is dismissed fairly. I will also touch on issues I am often asked about, such as redundancies, retrenchments, voluntary separation schemes, and constructive dismissals.

Malaysian employment law landscape

The statutory provisions of Malaysian employment law are mainly contained in the Employment Act 1955 and Industrial Relations Act 1967, as well as numerous other subsidiary legislation and regulations, including the Employment (Termination and Lay-Off Benefits) Regulations 1980.

The enforcement structure includes the Director General of the Industrial Relations Department, who reports to the Minister of Human Resources, who in turn decides on referrals to the Industrial Court.

The statutory regime has caused some confusion in the past. It has been left to the courts to interpret the law and bring it up-to-date with the modern business environment.

It’s all about balance

In order to understand the practical effect of the Malaysian industrial relations law regime, one must have a basic idea of the foundational principles behind the law.

In general, employment law seeks to find a balance between —

  • the right of employees to their livelihoods (the ‘security of tenure’ principle); and
  • the right of the employers to dismiss their employees under reasonable circumstances (the ‘managerial prerogative’ principle).

The ‘security of tenure’ principle underlines the rights of employees to continue to keep their jobs. Malaysian courts have placed this ‘right to employment’ on the same footing as ‘property rights’ — an approach which is consistent with other common law jurisdictions.

The ‘managerial prerogative’ consideration focuses on the right of an employer to make commercial decisions on how to run their businesses. This includes optimising effectiveness by reorganisation, ceasing unprofitable activities, or implementing cost-cutting measures.

The result of this balancing act is that employers are allowed to decide how to manage their businesses, including dismissing or reorganising employees, without interference from the court — but the employer must act reasonably and in good faith.

The Malaysian approach is distinguishable from American labour law, which is based on the principle of ‘at-will employment’ — which generally allows either party to end the employment relationship with no liability. An employer can dismiss an employee at any time without having to give a reason, and likewise an employee can quit at any time if he so chooses. The harshness of the ‘at-will employment’ principle has been assuaged by some exceptions such as breach of procedure, fixed-term contracts, discrimination, public policy, and other general requirements of ‘good faith’.

The Malaysian approach is that, when dismissing employees, an employer must show that the actions were substantively justified, and procedurally fair.

In plain terms, this means that, as long as an employer can show that he has treated the employee fairly, the courts and the law, do not place an unreasonable burden on the employer.

What this means in practice should be made clear over the next three posts.

This series of posts was originally published in The Edge Financial Weekly.

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