Notice period buyout in Malaysia: how it works and how it is calculated

What a notice period buyout is

A notice period buyout ends employment without the notice being served, or before it runs out, in exchange for a payment. It is also called pay in lieu of notice, or salary in lieu of notice. The rule sits in section 13(1) of the Employment Act 1955.

Under section 13(1), either party to a contract of service can end it without notice, or without waiting for notice already given to expire, by paying the other party an indemnity. The indemnity is a sum equal to the wages the employee would have earned during the notice period, or during the part of it that has not yet run.

So an employee who resigns and wants to leave early pays the employer for the notice they do not serve, and an employer that wants someone gone before their notice ends pays the employee for it.

How the buyout amount is calculated

Start with the length of notice. Section 12(2) says it is whatever the written contract sets, and the same for both sides. If the contract says nothing, the minimum is 4 weeks for under 2 years of service, 6 weeks for 2 to under 5 years, and 8 weeks for 5 years or more. The day notice is given counts as the first day of the period (section 12(4)). The calculator below works out the length and the last day. It is also on its own page, as the notice period calculator.

Then take the unserved part. The indemnity covers the wages for the notice that will not be worked: all of it if nothing is served, or what is left if some is.

Then use “wages” as the Act defines it. Section 2 defines wages as basic wages and all other cash payments for work done under the contract. It excludes, among other things, travelling allowances, sums paid to cover special expenses of the job, annual bonuses, gratuity on discharge or retirement, the value of housing or food, and the employer’s own contributions to schemes such as a provident fund. A fixed allowance paid in cash for doing the job is usually part of wages; a travelling allowance is not.

A worked example. An employee on a written three-month notice period earns a basic salary of RM 2,700 and a fixed monthly allowance of RM 300 for the role, plus a travelling allowance. They resign, serve one month, and want to leave. Two months of notice are unserved, so the buyout is two months of wages under the Act’s definition: RM 6,000, leaving the travelling allowance out.

The Act does not set a method for part-months. If the unserved notice is not a whole number of weeks or months, agree in writing how the daily amount is worked out before anyone pays.

Can an employer refuse a notice period buyout?

Section 13(1) gives the right to either party, and it does not make it depend on the other party agreeing. Read on its own, it lets an employee end the contract by paying the indemnity, whether or not the employer would prefer them to stay until the end of their notice.

Whether a particular contract, company policy or situation changes that is a legal question this page cannot answer for you. Where it matters, ask the Labour Department (JTKSM) or a lawyer, and keep the resignation, the notice and any payment in writing.

Early release is different. Section 12(2) also lets either party waive the right to notice. An employer that simply agrees to release someone early is waiving notice, and no buyout is owed for the part it waives. Put the agreed last day in writing.

EPF and tax on a buyout

EPF. Payment in lieu of notice appears on the list of payments that are not subject to EPF contribution, as payroll providers summarising KWSP’s list set out. Confirm with KWSP for your own case.

Tax. LHDN’s Public Ruling No. 5/2019 on perquisites from employment treats a buyout paid by a new employer, to release an employee from their notice, as a perquisite: taxable employment income for the employee. How other payments in lieu of notice are taxed depends on who pays and why, so confirm with LHDN or a tax adviser.

Hiring someone with a long notice period

A candidate’s notice period decides their real start date, and it is one of the few things a first round has to settle for every applicant. A few habits make it much less painful:

• Ask for the notice period and the realistic start date as two separate questions, early. The reasoning is in the questions a first round actually has to answer.
• Ask whether early release is likely, and whether a buyout would be needed to start sooner.
• If you would reimburse a buyout to bring someone in earlier, decide that before the offer, and remember the tax point above.
• Check whether the notice is in weeks or months, and whether it counts from the day notice is given.

Blue asks every candidate for their notice period and when they could start, in the first-round interview, so a recruiter sees the answer before booking anyone.

Questions people ask

The fine print

This page explains the text of the Employment Act 1955 as published by the Labour Department. It is not legal or tax advice. For a notice period with no buyout at all, see notice periods during probation, which follow the same rules.