Most employment contracts will have a “notice period”, whereby either employer or employee may terminate the employment contract by providing the specified notice (or by making payment in lieu of that notice). The notice period will vary depending on the position and seniority of the employee. For the employer, the notice period is there to mitigate any losses that could be incurred by the resignation of an employee – for example, the employer may want to ensure that the resigning employee completes their outstanding matters and/or assists with handover and transition.
However, there are also situations where an employee will resign with “immediate effect” and stop showing up to work, despite the notice period in the contract. What happens if an employee resigns without serving the contractual notice period? In such situations, the employer may be able to recover a sum of money equal to the salary that the employee would have earned during the notice period. This is often referred to as a “payment in lieu of notice”, or an “indemnity” for the notice period.
Employee X’s employment contract states that he may terminate his employment by providing 1 months’ notice, or making payment in lieu of notice. Employee X tenders his resignation on 1 October 2018. Under his contract, he is therefore contractually required to serve notice until 1 November 2018. However, in his letter of resignation, Employee X says that his resignation is effective immediately and he does not turn up to work after tendering his resignation.
Employee X’s monthly salary is RM 10,000.
Since Employee X has failed to serve his 1 month notice, he is required to make payment to his employer in lieu of that notice (i.e: RM 10,000 representing 1 month of his salary).
An employer has two options to recover payment in lieu of notice from their errant employees, i.e: through the Labour Court, or the Civil Court. This depends on the amount of the employee’s monthly salary:
- Does not exceed RM 5,000.00 (Labour Court); and
- Exceeds RM 5,000.00 (Civil Action in Civil Court).
If the employee’s monthly salary does not exceed RM 5,000.00, the employer is able to recover the payment in lieu of notice through the labour court pursuant to Section 69(2)(iii) of the Employment Act 1955 (i.e: inquiries by the Director General of Labour).
There are no filing fees involved in recovering an amount through the Labour Court. The procedures involved are also relatively less formal compared to legal proceedings in the civil court. However, as there are no specific timelines under the Employment Act 1955, delays may occur. Any decision by the Labour Court may be appealed to the High Court.
In the event the salary of the employee is above RM 5,000.00, the employer may take legal action against the employee for breach of contract, due to the employee’s failure to make payment in lieu of notice. If the employer is successful in their claim, they will have a court judgment which can be enforceable against the employee.
Regardless of the forum to recover the payment in lieu of notice, employers should also consider issuing a letter of demand before any commencing legal action against their employees. A letter of demand will establish the intention of the employer to recover the payment in lieu of notice, and some employees will opt to settle the payment in lieu of notice rather than risk a legal action being filed against them.
Most of the time, the notice period issue is only looked at from the lens of an employee, ie: whether an employee has been given sufficient notice of termination. However, it should not be overlooked that employers similarly have rights to ensure that a resigning employee complies with their contractual obligations. An abrupt resignation or abandonment of employment can cause an employer loss and damage as there would be an unplanned vacancy.
About the author: Zi-Han Lim is an associate in the dispute resolution practice group at Donovan & Ho. He is experienced in dispute resolution, focusing on employment and industrial relations, administrative law and commercial litigation.
Donovan & Ho is a law firm in Kuala Lumpur, Malaysia. Our practice areas include employment law, dispute resolution (litigation and arbitration), corporate and tax advisory, family law and real estate/conveyancing. Have a query? Contact us.