Termination, Notice Period and Going On Leave

When a contract of service is coming to an end, the question of leave application,  outstanding annual leave or putting the employee on leave may arise.

1. Notice Period or Indemnity in Lieu of Notice

With resignation, the employee is required to serve a notice period as contained in their employment contract.  If an employee fails to serve the notice period, the employer is entitled to demand the indemnity (compensation) in lieu of the notice. This indemnity is typically equivalent to the wages the employee would have earned during the notice period.

2. Annual Leave During Notice Period

The employees may want to apply to take unpaid leave or annual leave during their notice period.  However, approval is at the strict discretion of management. If an employee goes on leave without obtaining permission, it will be considered absent without valid excuse and misconduct.  In such cases, the notice period is considered incomplete as well and the employee is liable to pay indemnity for the unserved portion of the notice period as well as not receiving the wages for the days that he is absent.  

If annual leave is approved, the employee remains in employment as employee until the end of the notice period, and final wages will be paid at the conclusion of the notice period.  

Take note that the employer may not force the employee to take his annual leave, but the employer may require him to exhaust his annual leave before the service terminates.  If the employer does not allow the employee to exhaust the unused annual leave then the employer would have to compensate the employee for the unused leave with money which is to be calculated using the 26-day ORP formula.

3. Offsetting Notice Period Against Annual Leave Balance

The employee, on the other hand may request to offset their notice period against their unused annual leave balance.   If the application is approved, it would mean that the employee’s service would end on the day the offsetting begins, rather than at the end of the notice period. However, this arrangement is subject to management approval.  If it is not approved, the employee must faithfully serve out the notice period without fail, or else be liable to pay indemnity in lieu of notice.

If approved, the employer would pay the employee’s final wages on their last working day, which is the day the offsetting begins. The employee’s service terminates immediately.  Employees should note that this option is not automatic and requires mutual agreement.

4. Employer-Initiated Early Termination (Waiver of Notice Period)

In some cases, an employer may wish for an employee to leave before the end of the notice period provided by the employee. In such situations, the employer can offer a waiver of the notice period. However, the employee must consent to this arrangement. If the employee agrees, they will leave immediately and receive their final wages on their last working day.

5. Garden Leave and Exhausting Unconsumed Leave

If an employer offers a waiver of the notice period and the employee withholds consent, the employer may place the employee on Garden Leave. This means the employee will remain on paid leave until the end of the notice period but will not be required to report to work.

Additionally, if the employee has unused annual leave, the employer may direct the employee to apply for and exhaust all outstanding leave balances with the condition that failure to do so may result in the forfeiture of the unused leave.  

Conclusion

Understanding the rules surrounding termination, notice periods, and taking leave is essential for both employees and employers. Employees must ensure they comply with their contractual obligations, such as serving the notice period or paying indemnity if necessary. Similarly, they should seek approval before taking annual leave during the notice period or requesting to offset their notice period against unused leave.

Employers, on the other hand, must follow proper procedures when offering waivers or placing employees on Garden Leave. Clear communication and mutual agreement are key to ensuring a smooth and fair transition for all parties involved.

Chan Wang Tak

Pakar Industry Negara, HR Consultant and 

Author of 400 Q&A on the Practice of Labour Laws in Malaysia