What Severance Pay Rules Must Employers Follow in Malaysia?

Which Employees Qualify for Severance Pay?

Employees in Malaysia qualify for severance pay if they meet the following conditions:

• They have been employed continuously for at least 12 months.
• Their employment is terminated due to redundancy, retrenchment, or company closure, not for misconduct or voluntary resignation.
• They fall under the coverage of the Employment Act 1955, which generally includes:
  • Employees earning RM4,000 or less per month; or
  • Manual laborers, regardless of salary level.
• Foreign and local employees are both eligible if their employment terms fall under the Act’s jurisdiction.

What Are the Legal Timelines for Paying Severance?

Employers must pay termination benefits within seven (7) days from the employee’s last day of service. This deadline is clearly stated under the Employment (Termination and Lay-Off Benefits) Regulations 1980.

In practice, this means that once employment ends, whether due to redundancy or company closure, the severance payment must be processed promptly, not deferred to the next payroll cycle. Employers are also expected to maintain proper documentation showing how the severance amount was calculated and when it was paid. Timely payment ensures compliance and avoids unnecessary disputes or government intervention.

What Penalties Apply if Severance Is Not Paid Correctly?

Failing to pay severance correctly or on time can expose employers to legal and financial penalties under Malaysian labor law. Key consequences include:

• Fines issued by the Department of Labour Malaysia for violating the Employment Act or related regulations.
• Court orders requiring back payment of the full severance amount, sometimes with interest.
• Reputational damage, as disputes over termination benefits can lead to public labor complaints or affect future hiring.
• Employee claims lodged with the Labour Office, which can trigger investigations and potential enforcement actions.

Employers should keep accurate employment records and follow the official calculation formula to ensure compliance.

Does Outsourcing Employment via an EOR Change Severance Liability?

When employment is outsourced through an Employer of Record (EOR) in Malaysia, the EOR becomes the legal employer and assumes responsibility for paying severance according to Malaysian labor law. The client company is not directly liable for severance payments, as the EOR manages all statutory employment obligations. However, client companies remain responsible for ensuring that the EOR partner follows compliance standards and applies the correct severance calculations under the Employment Act 1955.

Be 100% Compliant in Offering Severance with Playroll

Managing severance compliance in Malaysia requires accuracy and awareness of local labor laws. Playroll ensures your business remains compliant by calculating termination benefits according to the Employment Act 1955 and handling all statutory payments on time. Employers stay protected from disputes, fines, and regulatory risk.

With Playroll, your global workforce is managed under full compliance, from hiring to termination. Our platform handles severance calculations, documentation, and payments seamlessly, ensuring legal accuracy and peace of mind for every employment decision.