Author name: Zi Han

Under Malaysian employment law, mutual termination simply means both employer and employee agree to end a working relationship. There is no dismissal or resignation, just a consensual parting of ways.  To support this process, employers often adopt two structured schemes:  If done properly, mutual termination offers clarity, fairness, and legal protection, especially for employers.  When to offer VSS or MSS  A VSS or MSS is most commonly used ahead of a restructuring or downsizing as a low-disruption alternative to selecting employees for retrenchment, for example due to the significant hike in salary requirements to apply for Employment Passes. In fact, these schemes are often used before a retrenchment, as stipulated in the Code of Conduct for Industrial Harmony (paragraph 22) and the Department of Labour’s Guidelines on Retrenchment Management (item 4.2).  They help achieve workforce reduction while reducing risks of unfair dismissal claims under Section 20 of the Industrial Relations Act 1967.  That said, the rationale behind the offer must be legally sound to hold up in court.  Ensuring legality of the agreement   A VSS or MSS agreement is legally valid provided that contract law requirements are met, and in practice contains three key elements:   If any of these elements are missing, the courts can rule against the employer, as seen in Teh Yet Poh v Tropicana Shared Services Sdn Bhd.  Teh Yet Poh v Tropicana Shared Services Sdn Bhd [2025] What the employer called a “mutual separation” was, in reality, a one-sided decision as the employee was told to resign or face retrenchment. Although the employee signed the MSS and received an initial payout of RM73,706.99, the court found that the agreement had been entered into under pressure and therefore amounted to an unlawful dismissal. The court subsequently awarded the employee an additional compensation of RM223,173.01. The most disheartening part of reading this judgment was the long list of case law from 1991 to 2024 that reflects how employers have continuously made the same mistake.  But it doesn’t have to be that way, and our next section walks you through how to handle a mutual separation scheme properly.  Steps in rolling out a VSS or MSS Here’s how employers can ensure both sides agree to the terms, benefits, and finality of the separation:  Step 1: Establish a genuine reason, be it redundancy, cost control, or restructuring.  Step 2: Choose a VSS if applying to a group and MSS for individuals.  Step 3: Define who is eligible and how the offer will be communicated.  Step 4: Draft clear, balanced, and enforceable documents to avoid problems later.  Step 5: Keep written records of all steps taken, especially around consent, communication, and payout calculations, which includes ensuring all statutory contributions like EPF and SOCSO are up to date before the separation takes effect. Missed payments can lead to serious legal consequences. For details on statutory entitlements, see step seven of our guide to retrenchment.  And if you’d like help drafting a legally sound VSS or MSS Agreement that protects your business while treating employees fairly, we are here to assist.  FAQs on mutual termination in Malaysia Q: Can an MSS or VSS be offered verbally? A: Preferably not. Although verbal contracts are legally recognised, for employment matters it is risky and opens the door to misunderstandings and disputes. A written agreement ensures both clarity and legal enforceability. Q: Who usually drafts the VSS or MSS document? A: It is typically prepared by the employer or their legal advisor. Q: Can the employee propose their own terms under MSS? A: Yes. Q: Can the employee challenge the agreement after signing? A: Yes. Q: Does the VSS/MSS need to offer more than the legal minimum? A: It’s preferable as if compensation is equal to or lower than the legal minimum, the court may view it as a disguised retrenchment and subject the employer to full statutory obligations. Q: How long should the employee be given to respond to a VSS or MSS offer? A: A few days to a week is generally reasonable. The key is not to pressure the employee into making a rushed decision. However, the response timeframe may also consider the company’s overall business conditions and urgency of the restructuring plan.

Termination or dismissal with cause is a right granted to Malaysian employers that allows them to terminate an employee immediately.  However, the dismissal may be challenged under Section 20 of the Industrial Relations Act 1967. If found to be handled unfairly, the employer can be forced to reinstate the employee or pay compensation.  This why when advising clients on employment matters, we always emphasise this:   Fair process protects the employer.  Below, we cover how termination with cause should be carried out in full compliance with Malaysian labour law.  Let’s begin.   Why process matters even if misconduct is obvious  Termination with cause is a disciplinary action, and under Malaysian law, when challenged, the courts look beyond the misconduct itself and examine whether the termination was carried out fairly.  It’s not just about what the employee does, but how the employer responds.  Section 14(1) of the Employment Act 1955 requires employers to conduct a ‘due inquiry’ before dismissing an employee for misconduct. This section also allows for suspension during the inquiry (up to 2 weeks on half-pay).  In practice, the fair process usually expected by the courts include:   Skipping just one step can cause a dismissal to be ruled procedurally unfair.  That’s when employers start worrying about reinstatement or compensation orders.  Common grounds for dismissal with cause  The most common forms of misconduct that can justify immediate dismissal include:  And in case you’re wondering, yes, absenteeism is also a cause for dismissal, and we’ve dedicated an entire section on it below!  Real-life example: Unfair process  In 2017, Bank Negara Malaysia (BNM) dismissed a senior manager named Kohila over ethics violations.   However, the court found numerous violations as Kohila was:  Her final appeal to the bank’s governor was also treated as a mere formality and in 2024, the High Court found the dismissal procedurally unfair and ordered BNM to pay RM366,000 in compensation.  It wasn’t about what Kohila did, but how BNM responded.  Absenteeism as misconduct: What employers should know   Absenteeism is expressly defined under Section 15(2) of the Employment Act 1955 which states: If an employee is absent for more than two consecutive working days without permission or valid reason, it may be treated as a contract breach.   Repeated or prolonged absenteeism may even amount to a willful breach, which opens the door to termination without notice under Section 13(2) of the same Act.   But as always, employers must act reasonably and promptly.  In addition to issuing a show cause letter, giving warnings, and keeping a record, do not leave a gap between instances of absenteeism and disciplinary action.  Do I need a letter for misconduct termination?  If you were our client, our answer would be a resounding “Yes!”  Whether a termination is due to misconduct, absenteeism, or breach of duty, a formal termination letter shows the employer followed through in a structured, documented way.  In court, only the reasons stated in the letter will be considered.   That letter becomes your official record and legal footing.  As we explained in our guide to termination without cause, skipping this can leave you without a strong defence.  Checklist for termination with cause   Before issuing a dismissal letter, ensure the following are in place:   At ELP, we regularly assist clients in drafting employment contracts, internal policies, and disciplinary frameworks that align with Malaysian law. If you are looking to revise or strengthen your HR documentation, get in touch with us today. 

Legal risks, supporting case law, and how employers can protect the business when terminating without cause under the Industrial Relations Act 1967.

Learn the legal basis of 6 termination clauses in employment contracts under the Employment Act 1955 and how to draft them.