Termination Based on Poor Performance: A Legal Step for Employers

If You’re an Employer Dealing with Poor Performance

If you’re an employer who has tried coaching, performance reviews, and formal warnings, but your employee continues to underperform, you may wonder if it’s time to take more decisive action. It’s frustrating when productivity is affected and morale suffers, but jumping straight to termination can expose you to legal risk.

There is a legally sound path forward, and one critical step is suspension pending a Domestic Inquiry (DI). This step helps you protect your organisation and comply with Malaysian employment law.

When Poor Performance Becomes a Serious Issue

Every employee has an off day. But when low performance becomes a pattern: missed deadlines, poor-quality work, repeated errors despite retraining, It can disrupt operations, impact other team members, and cost your business money.

If your internal performance management process has been exhausted and no improvement has been seen despite warnings, the situation may call for formal disciplinary action. However, this action must follow fair and lawful procedures. That’s where a suspension pending inquiry comes in.

What Malaysian Law Says About Managing Underperformance

In Malaysia, employee termination, even for underperformance, must follow fair procedures based on valid legal grounds. Here’s how the law views it:

Under the Employment Act 1955, employers must have a cause or excuse to terminate an employee. This includes consistent, documented poor performance.
The Industrial Relations Act 1967 allows employees to claim unfair dismissal if they believe the process was unjust or not correctly followed.
The Code of Conduct for Industrial Harmony 1975 (while not binding) is commonly referred to by the Industrial Court as a guideline for best practices, including conducting inquiries fairly.
Recent industrial court’s decisions show that the court requires the employer to implement a Performance Improvement Plan ranging from 3 to 6 months, allowing an opportunity for the employer to rectify the underperformance issue.

Suspending an employee with pay during the inquiry process is not a punishment. It’s a protective step for your organisation and the employee. It prevents interference with the inquiry and ensures procedural fairness.

Case Law

Case	Citation	Court	Short Summary
Khaliah bte Abbas v Pesaka Capital Corp Sdn Bhd	[1997] 3 CLJ 827	Court of Appeal	Held probationers have same rights as confirmed employees; cannot be terminated for poor performance without just cause.
Tuan Haji Sarip Hamid & Anor v Patco Malaysia Berhad	[1995] 3 CLJ 627	Supreme Court	Confirmed forced resignations constituting dismissal; employer process matters even in performance-based exits.
Bennett Subash Peter v Bon Ton Sdn Bhd	[2019] Court of Appeal, 7 CLJ 18	Court of Appeal	Clarified that even with notice clauses, termination must be bona fide and based on genuine reasons, including performance grounds.
Siti Hajar Binti Jamaludin v Celcom Axiata (M) Berhad	Industrial Court decision (2024)	Industrial Court	Upheld performance-based termination after structured 5-month Performance Improvement Plan (PIP), objective metrics, and right to rebuttal.
Dismissal for Poor Performance – DWC guide case law	Pekeliling case studies	Industrial Court	Summarised legal principles: warning, documented PIP (3–6 months), objective evidence required.
Omar Othman v Kulim Advanced Technologies Sdn Bhd	[2019] 7 CLJ 18 (cited May 2025 guide)	Court of Appeal	Reaffirmed that contractual notice is not enough; just cause must underpin termination, including underperformance.

What You Should Do Next: Practical Steps

If you believe suspension pending inquiry is necessary for an underperforming employee, follow this step-by-step approach to remain legally protected and fair:

1. Document the Performance Concerns

Keep records of performance reviews, failed KPIs, verbal and written warnings, and any coaching or training provided. The Industrial Court expects to see these efforts before any disciplinary action.

2. Conduct a Preliminary Review

Quietly assess whether the employee’s performance issues are genuine and severe enough to warrant inquiry. Check if expectations were communicated and a reasonable time was given for improvement.

3. Implement a Performance Improvement Plan

A PIP (Performance Improvement Plan) is a formal HR tool used by employers to help underperforming employees meet clearly defined performance expectations. In Malaysia, the PIP process is often used to show that an employer has given the employee a fair chance to improve before termination, especially important under Section 20 of the Industrial Relations Act 1967, which protects against dismissal without just cause or excuse.

In Azura Norden v SME Development Bank Malaysia (Award No. 94 of 2021), the court found that a proper PIP with objective standards, clear timelines, and support justified a dismissal when the employee failed to improve.

4. Issue a Show Cause Letter

This formal letter gives the employee a chance to explain their side. State the specific issues, provide relevant dates or examples, and give a reasonable deadline (24–72 hours) for their written reply.

How the Show Cause Letter Protects You

A Show Cause Letter is more than just a warning — it’s a procedural safeguard.

It serves three essential purposes:

It gives the employee a fair opportunity to explain. They might raise issues you weren’t aware of, such as personal difficulties or unclear expectations.
It protects you legally. If the employee challenges their dismissal later, the letter becomes part of your defence, showing that due process was followed.
It creates a clear paper trail. Documentation is critical if you’re later required to justify your actions in front of the Industrial Relations Department or the Industrial Court.

Steps to Prepare and Issue the Show Cause Letter

Issuing a Show Cause Letter isn’t tricky, but it must be done correctly. Here’s a practical process you can follow:

1. Gather Evidence and Documentation

Before writing the letter, compile relevant records:

Performance appraisals after PIP
Emails or reports showing missed deadlines or poor results
Any previous warnings or improvement plans

You’ll need these if the matter escalates to a Domestic Inquiry or legal claim.

2. Draft the Letter with Clarity and Neutral Tone

Your letter should include:

The specific performance issues observed
Dates or instances where targets were not met
A statement that the employee’s performance falls below expectations despite previous support
A request for the employee to explain why disciplinary action should not be taken

Avoid emotional or accusatory language. Keep the tone factual and professional.

3. Provide a Reasonable Timeline to Respond

Typically, employees are given 24 to 72 hours to respond in writing. Choose a timeframe that suits the complexity of the issue. Ensure the employee has access to the documents or performance records referred to.

4. Keep a Record of Delivery and Response

Issue the letter by hand (with acknowledgement), email, or both
Record the date and time it was sent
Keep a copy of the employee’s written response, or a note if they fail to reply

This documentation can be vital later if the case proceeds to conciliation or court.

5. Review the Employee’s Reply

You may proceed to more formal action if the explanation is vague, evasive, or inconsistent.

6. Suspend the Employee with Pay and Begin Domestic Inquiry

When facing severe underperformance that may lead to dismissal, suspension serves multiple important purposes:

Neutralises the work environment
- It prevents disruption while the inquiry is ongoing, avoiding tension with other employees.
Supports an unbiased investigation
- It ensures the employee doesn’t interfere with witnesses or documents.
Demonstrates procedural fairness
- It shows that you’re giving the employee a chance to be heard before making any termination decision.
Helps defend against unfair dismissal claims
- If the matter escalates to the Industrial Court, following proper suspension procedures can help you defend your position.

Remember, suspension must be with full pay during the inquiry period. This ensures you are seen as fair and compliant under employment standards.

Issue a formal Letter of Suspension, stating:

That the employee is being suspended with pay
The reason for suspension (pending a Domestic Inquiry)
The anticipated timeline for the inquiry

Then, begin the Domestic Inquiry process. This involves appointing a neutral panel, issuing a formal charge letter, and giving the employee a fair chance to respond and present evidence.

Final Thoughts

Suspension pending inquiry is not about punishment. It’s about fairness, process, and protecting your business while respecting employee rights. Skipping this step can result in costly unfair dismissal claims, especially when performance concerns may lead to termination.

If you’re unsure about the timing or procedure, it’s worth speaking to an employment lawyer who understands Malaysian labour law. A legally sound approach now can save you from much bigger problems down the line.

Need guidance before starting an inquiry or issuing a suspension letter? Get in touch for legal support tailored to your case.

FAQ

1. Can I suspend or terminate an employee for poor performance without implementing PIP or conducting an inquiry?

No. Termination or suspension pending inquiry should only be used when serious, ongoing, and documented poor performance is involved. It must follow due process, including completing the PIP, issuing a Show Cause Letter and receiving an unsatisfactory response, before leading to a Domestic Inquiry.

2. What is a Show Cause Letter, and why is it important?

A Show Cause Letter is a formal request for an employee to explain why disciplinary action should not be taken against them. It’s important to ensure procedural fairness, which helps protect the employer from future legal claims.

3. When should an employer issue a Show Cause Letter for poor performance?

It should be issued after repeated underperformance despite prior support, such as coaching, performance reviews, or warnings, and when improvement remains unsatisfactory.

4. What should be included in a Show Cause Letter?

It must clearly state the performance concerns, provide examples of poor performance, reference previous support or warnings, and request a written explanation from the employee within a set timeframe.

5. Is issuing a Show Cause Letter legally required in Malaysia?

While not always legally required, it is considered best practice under industrial harmony guidelines. It demonstrates fairness and strengthens the employer’s case if the matter is challenged in the Industrial Court.

6. How much time should an employee be given to reply?

Typically, 24 to 72 hours is reasonable, depending on the nature and complexity of the issue. The timeframe must be fair and allow the employee to respond meaningfully.

7. Can an employee be terminated immediately for poor performance?

No. Termination for poor performance must follow a proper process, including documented warnings, improvement opportunities, and the chance to respond to concerns via a Show Cause Letter or Domestic Inquiry.

8. What happens if the employee does not reply to the Show Cause Letter?

If no reply is received within the given timeframe, the employer may proceed with disciplinary action based on the available evidence, including a Domestic Inquiry or termination.

9. Under Malaysian law, is poor performance considered “just cause” for termination?

Yes, but only if the employer can show that reasonable steps were taken to support the employee and that the underperformance persisted. The employer must also follow due process.

10. Can the employee bring a legal claim after receiving a Show Cause Letter?

The letter itself doesn’t trigger legal claims, but if the employee is eventually dismissed without proper process, they may file an unfair dismissal claim under the Industrial Relations Act 1967.

11. What documents should be kept when issuing a Show Cause Letter?

Employers should keep a copy of the letter, delivery confirmation (e.g. signed acknowledgement or email log), all related performance records, and the employee’s written response for legal defence if needed.

12. Is suspension considered a form of punishment?

No. Under Malaysian employment practices, suspension pending inquiry is a neutral step. It is not disciplinary punishment but a protective measure to ensure fairness and prevent interference in the investigation.

13. Do I need to pay the employee during the suspension?

Yes. The employee must be suspended with full pay during the inquiry period. This maintains fairness and avoids claims of constructive dismissal or procedural unfairness.

14. What is the purpose of suspending the employee before the Domestic Inquiry?

Suspension helps to:

Preserve workplace harmony
Prevent tampering with evidence
Avoid influence over witnesses
Allow the inquiry panel to conduct a fair and unbiased review

15. When can poor performance justify suspension and inquiry?

Only after:

Repeated underperformance has been documented
Coaching and performance reviews have been conducted
Undergoing the full PIP and failed to meet the requirements
Verbal and written warnings have been issued
Further disciplinary steps, including an inquiry, may be justified if there is no improvement.

16. What should be included in the suspension letter?

The suspension letter must state:

That the employee is suspended with pay
The reason for the suspension (pending inquiry)
The timeframe or expected duration
That it is not a punishment but a procedural requirement

17. Is a Domestic Inquiry legally required in all poor performance cases?

Not always, but it is highly recommended, especially if termination is being considered. Industrial Courts often view a lack of inquiry as a breach of natural justice, which can render dismissals procedurally unfair.

18. How long can I suspend an employee pending an inquiry?

There’s no fixed legal limit, but the suspension should only be for a reasonable and necessary period. Employers should ensure the Domestic Inquiry is conducted without unnecessary delay.

19. Can the employee challenge the suspension or inquiry process?

Yes. If the process appears biased, unreasonable, or inconsistent with natural justice, the employee may file a complaint or pursue a claim for unfair dismissal under the Industrial Relations Act 1967.

20. What happens if I skip the PIP, suspension and inquiry process altogether?

You risk facing an unfair dismissal claim, which could result in compensation orders, reinstatement, or reputational damage. Following proper procedure significantly strengthens your legal position.