Key Takeaways
- Wages in lieu of notice are generally paid when an employer or employee does not complete the required notice period.
- The amount usually depends on the contractual notice period and the portion that remains unserved.
- The employer may owe the payment when employment is ended immediately, while an employee may owe an equivalent indemnity when resigning without serving the required notice.
- Employers should confirm the employment contract, effective termination date, salary components and any lawful deductions before finalising the calculation.
- Payment in lieu of notice is listed by KWSP as a payment that is not liable for EPF contributions, but other final-pay items may have different treatment.
- Wages in lieu of notice are separate from outstanding salary, unused leave payments and qualifying termination or lay-off benefits.
- The seven-day deadline under the Employment (Termination and Lay-Off Benefits) Regulations 1980 applies to qualifying termination or lay-off benefits, not automatically to every payment in lieu of notice.
When employment ends without the required notice period being fully served, one party may need to compensate the other for the unserved period.
This payment is commonly described as wages in lieu of notice or payment in lieu of notice.
For Malaysian employers, the issue is not limited to multiplying a monthly salary by the notice period.
The employment contract, the party ending the employment, the portion of notice left unserved, the effective termination date and the other components of final pay must all be reviewed.
Notice pay must also be distinguished from outstanding salary, unused annual leave and any qualifying termination or lay-off benefits.
This article explains seven practical facts about wages in lieu of notice, including when the payment may arise, how employers can approach the calculation and why different final-pay obligations should not be combined under a single payment deadline.
1. Wages in Lieu of Notice Replace an Unserved Notice Period
Wages in lieu of notice arise when an employment contract ends without the required notice period being fully served.
Section 13(1) of the Employment Act 1955 allows either party to terminate a contract without notice, or without waiting for an existing notice period to expire, by paying the other party an indemnity.
The amount is equal to the wages that would have accrued during the full notice period or the remaining unserved portion.
In everyday HR and payroll discussions, this arrangement may also be called:
- payment in lieu of notice;
- salary in lieu of notice;
- notice pay; or
- PILON.
Although the wording varies, the central issue is the same: a party is settling the financial value of a notice period that will not be worked.
Serving Notice Compared With Payment in Lieu
Suppose an employee must give one month’s notice.
When the employee resigns and continues working until the agreed final day, the employee receives ordinary wages for work performed during that month.
There is generally no need to replace the notice period with a separate payment.
When the employee leaves immediately without completing the month, the value of the unserved notice may become payable to the employer.
The reverse may happen when an employer wants the employment relationship to end immediately rather than requiring the employee to remain at work throughout the notice period.
Employers should therefore avoid treating every final salary payment as wages in lieu of notice.
Ordinary earned salary, notice indemnity and other exit payments should be identified separately.
2. Either the Employer or Employee May Be Responsible for Notice Payment
Wages in lieu of notice are not necessarily a payment made only by an employer to an employee.
Section 13(1) applies to either party to the contract.
When the Employer May Owe the Employee
An employer may need to pay an employee when the company ends the employment immediately instead of allowing the employee to work through the required notice period.
For example, assume an employment contract requires one month’s notice.
The company issues a termination letter stating that employment will end on the same day and does not require the employee to work for another month.
Subject to the circumstances and applicable contract, the employer may need to settle:
- salary already earned up to the effective termination date;
- indemnity for the unserved notice period;
- payment for unused annual leave where applicable;
- approved claims or other contractual amounts; and
- qualifying termination benefits where separately applicable.
A notice payment addresses the notice-period obligation.
It should not be used to combine or obscure other payments that have a different legal or contractual basis.
When the Employee May Owe the Employer
An employee may become responsible for notice indemnity when resigning immediately or leaving before completing the required notice period.
Section 24 of the Employment Act permits a deduction for an indemnity that is due to the employer under Section 13(1).
It also contains provisions concerning amounts remaining due to an employer when final wages are processed.
However, employers should not make an arbitrary deduction based only on an oral instruction or an assumption that the employee has abandoned the position.
Before processing the deduction, the company should document:
- the applicable notice clause;
- the resignation or termination date;
- the notice period already served;
- the portion that remains unserved;
- the calculation used; and
- any waiver, release or alternative arrangement agreed by the parties.
Where the amount owed by the employee exceeds the final wages available, the employer may need to consider an appropriate claim process rather than recording an unexplained negative salary balance.
3. Confirm the Required Notice Period Before Calculating the Amount
The notice period determines the duration for which the indemnity must be calculated.
Employers should begin with the signed employment contract rather than applying one standard notice period to every employee.
Section 12 states that the notice period should be the same for the employer and employee and should be determined by the written terms of the contract.
Where there is no written notice provision, the Act provides minimum periods based on length of service:
Length of service | Minimum notice where no written period is provided |
Less than two years | Four weeks |
Two years or more but less than five years | Six weeks |
Five years or more | Eight weeks |
Check the Employee’s Current Contractual Status
The employer should verify which contract or clause was in effect when notice was given.
Relevant documents may include:
- the original appointment letter;
- a probation clause;
- a confirmation letter;
- a renewed or revised employment agreement;
- a promotion or salary-adjustment letter;
- a collective agreement; and
- a written variation to the notice period.
An employee’s original offer letter may, for example, provide two weeks’ notice during probation and two months after confirmation.
Using the wrong employment status could produce the wrong calculation.
Calculate Only the Unserved Portion
When part of the notice has already been completed, Section 13(1) refers to the wages that would have accrued during the unexpired term of notice.
For example, an employee with a 30-day notice obligation who completes 10 days before leaving may have 20 days remaining.
The calculation should address the remaining period rather than charging the employee again for the part already served.
The employer should record the exact dates instead of describing the notice simply as “one month” where there is a disagreement over the employee’s final day.
4. Payment Timing Depends on How Employment Ends
There is no single seven-day deadline that should be applied to every final-pay item.
The relevant deadline depends on whether notice was served, who ended the employment and what type of payment is being processed.
Payment Timing Under the Employment Act 1955
Employment situation | Payment timing |
Employment ends normally after notice is served | Earned but unpaid wages, less lawful deductions, should be paid no later than the day the contract terminates. |
Employer ends employment immediately under Section 13(1) | Earned wages and the indemnity payable to the employee should be paid no later than the termination date. |
Employee ends employment without notice | Earned wages, less deductions permitted under Section 24, should be paid no later than the third day after termination. |
Sections 20 and 21 establish these different payment timings.
In particular, when the employer terminates immediately under Section 13(1), both the employee’s earned wages and notice indemnity are payable no later than the day employment is terminated.
When an employee leaves without notice, the three-day rule concerns the earned wages that the employer still owes the employee after lawful deductions.
It should not be misread as a universal deadline governing every amount that the employee may owe the employer.
Why the Seven-Day Rule Causes Confusion
The Employment (Termination and Lay-Off Benefits) Regulations 1980 contain a separate rule requiring qualifying termination or lay-off benefits to be paid no later than seven days after the relevant date.
The Regulations also require the employer to provide a written statement showing the payment amount and how it was calculated.
That seven-day period applies to benefits payable under those Regulations.
It is not the general payment deadline for wages in lieu of notice.
Employers should therefore prepare separate lines for:
- outstanding earned wages;
- wages in lieu of notice;
- unused annual leave;
- termination or lay-off benefits; and
- any lawful deductions.
Using one general label such as “final compensation” can make it difficult for the employee, payroll team or reviewing authority to determine what was paid and whether the correct deadline was followed.
5. The Calculation Should Reflect the Applicable Wages and Unserved Period
Section 13(1) bases the indemnity on the amount of wages that would have accrued during the applicable notice period or its unexpired portion.
A practical starting formula is:
Applicable wages for the notice period × unserved portion of that period
The final method should still be reviewed against the employment contract, the statutory meaning of wages and the employee’s remuneration structure.
Example: Full One-Month Notice Is Not Served
Assume that:
- the employee earns fixed wages of RM4,000 per month;
- the contract requires one month’s notice; and
- the entire month remains unserved.
The starting notice-indemnity amount would generally be:
RM4,000 × one full unserved month = RM4,000
This example assumes a straightforward fixed monthly wage and no disagreement over which remuneration components form part of wages.
Example: Only Part of the Notice Remains
Assume the employee has already served part of the required notice and has 12 days left.
The employer should calculate the value of the remaining 12 days using the applicable payroll and legal method. It should not charge the employee for the entire notice period.
The calculation record should state:
- the notice start date;
- the contractual final date;
- the actual last working day;
- the number of days served;
- the number of days unserved;
- the wage components used; and
- the resulting indemnity.
Do Not Automatically Use Basic Salary Alone
The Employment Act defines wages as basic wages and other cash payments payable for work done under the contract, while excluding certain items such as employer fund contributions, travelling allowances, special-expense payments, discharge or retirement gratuities and annual bonuses.
This means employers should not automatically assume that the notice calculation always uses either:
- basic salary alone; or
- every item appearing on the payslip.
Regular contractual cash allowances may require consideration, while reimbursement-type payments, annual bonuses and other excluded items may be treated differently.
Variable commissions, incentives, accommodation benefits and unusual allowances should be reviewed individually.
Where the contract and payroll records do not provide a clear answer, obtaining HR, payroll or legal guidance is safer than selecting a formula based on convenience.
6. EPF Treatment Differs From Ordinary Salary
Final payroll may contain several payment categories, and they do not necessarily receive identical statutory treatment.
KWSP lists payment in lieu of notice of termination of employment among payments that are not liable for EPF contributions.
KWSP also states that its list of non-wages is not exhaustive.
Separate Notice Pay in the Payroll Record
A final payslip should clearly distinguish notice pay from ordinary salary and other amounts.
For example:
Final-pay item | Suggested payroll presentation |
Salary earned before termination | Outstanding salary |
Compensation for an unserved notice period | Payment in lieu of notice |
Unused annual leave | Annual leave encashment |
Qualifying retrenchment amount | Termination or lay-off benefit |
Amount owed by employee for unserved notice | Notice indemnity deduction |
Clear classification helps the company explain why EPF may apply to one component but not another.
The KWSP classification should not be used by itself to determine income-tax, SOCSO or EIS treatment.
Those obligations should be checked separately using the relevant Malaysian authority, payroll classification and circumstances of the payment.
7. Notice Pay Is Not the Same as Termination or Lay-Off Benefits
Wages in lieu of notice and termination benefits serve different purposes.
Notice pay settles the value of a notice period that is not served.
Termination or lay-off benefits provide a separate form of compensation in qualifying situations under the Employment (Termination and Lay-Off Benefits) Regulations 1980.
The Regulations expressly state that qualifying termination or lay-off benefits are additional to payments an employee may be entitled to under Section 13 of the Employment Act.
JTKSM similarly identifies pay in lieu of notice, termination benefits, annual leave balance and salary balance as distinct items that may arise during retrenchment.
Comparison of Common Exit Payments
Payment | Main purpose | Typical basis |
Wages in lieu of notice | Replaces an unserved notice period | Notice clause, unserved period and applicable wages |
Outstanding salary | Pays for work already performed | Salary records and final working date |
Unused annual leave payment | Settles eligible leave not taken | Leave balance, contract and applicable law |
Termination or lay-off benefits | Compensates a qualifying employee following termination or lay-off | Eligibility, length of service and the 1980 Regulations |
Contractual severance or separation payment | Settles an amount promised or agreed separately | Contract, collective agreement or separation agreement |
An employee may potentially receive more than one of these payments.
For example, a retrenched employee could have outstanding salary, unused leave, payment in lieu of notice and qualifying termination benefits in the same final settlement.
The employer should calculate and explain each item separately instead of assuming that notice pay replaces every other possible entitlement.
Practical Employer Checklist Before Processing Notice Pay
Before paying or deducting wages in lieu of notice, the employer should complete the following checks.
- Identify who ended the employment.
Record whether the exit was initiated by the employer, the employee or mutual agreement. - Review the applicable employment contract.
Confirm the notice period, probation status, confirmation status and any revised terms. - Confirm the effective termination date.
Distinguish the date the letter was issued from the date the contract legally ends. - Calculate the notice already served.
Determine whether the entire notice period or only part of it remains unserved. - Identify the relevant wage components.
Do not assume that the correct basis is automatically basic salary or total gross pay. - Separate every final-pay item.
Record outstanding wages, unused leave, notice indemnity, benefits and deductions independently. - Check the correct payment deadline.
Apply the deadline that corresponds to the way employment ended and the type of payment involved. - Verify statutory treatment.
Review EPF, tax and other payroll obligations separately instead of applying one classification to the entire settlement. - Prepare a written calculation.
Show the notice dates, wage basis, formula, deductions and net payment clearly. - Retain supporting records.
Keep the contract, resignation or termination letter, attendance record, leave record, payslip, calculation sheet and relevant correspondence.
Where a monetary dispute cannot be resolved internally, JTKSM states that Labour Court proceedings under Section 69 handle monetary claims by employers and employees.
Its published claim categories include wages in lieu of notice for employer claims and contractual or statutory payments for employee claims.
Conclusion
Wages in lieu of notice are not simply another label for final salary.
They compensate for a contractual notice period—or the remaining part of that period—that will not be served.
Depending on how the employment ends, the employer may owe the employee, or the employee may owe the employer.
Before processing the payment, employers should confirm:
- who ended the employment;
- the notice period stated in the applicable contract;
- how much of that period remains unserved;
- which remuneration components form part of the calculation;
- the effective termination date;
- any deductions permitted by law; and
- the payment deadline that applies to each final-pay component.
Under Section 13(1) of the Employment Act 1955, the notice indemnity is based on the wages that would have accrued during the full notice period or its remaining unexpired portion.
When the employer terminates employment immediately under that section, the indemnity and earned wages are payable no later than the termination date.
Employers should also keep notice pay separate from outstanding salary, unused annual leave and qualifying termination or lay-off benefits.
The seven-day deadline under the Employment (Termination and Lay-Off Benefits) Regulations 1980 applies specifically to benefits payable under those Regulations—not automatically to wages in lieu of notice.
Clear contracts, written termination or resignation records and itemised calculations can reduce confusion when final pay is reviewed.
Businesses can also explore related Malaysian workplace and operational information in the LocalVitals Business category.
Related article
Need Help Reviewing a Notice-Pay Situation?
A general article cannot determine the correct treatment of every resignation, immediate termination or retrenchment. The applicable outcome may depend on the employment contract, length of service, salary structure, reason for termination and portion of notice already served.
Employers seeking case-specific assistance can review this professional HR guidance about wages in lieu of notice. Provide the relevant contract, payroll details and termination or resignation documents so the circumstances can be assessed accurately.
Frequently Asked Questions
Can an employer refuse to pay wages in lieu of notice?
An employer should first determine whether an indemnity is due under the employment contract and Section 13(1) of the Employment Act 1955.
When an employer terminates a contract immediately under Section 13(1), the indemnity payable to the employee must be paid no later than the termination date.
However, notice indemnity may not arise in every termination.
Different considerations may apply to misconduct, a wilful contractual breach, an agreed waiver of notice or another legally recognised basis for ending employment.
Employers should not withhold payment merely because the calculation is inconvenient or disputed; the contractual terms and facts should be reviewed first.
Can an employer deduct notice indemnity from an employee’s final wages?
Section 24 of the Employment Act 1955 permits an employer to deduct an indemnity that an employee owes under Section 13(1).
It also addresses deductions from an employee’s final wage payment for amounts that remain due to the employer when employment ends.
The employer should still document the notice clause, actual final day, unserved period, calculation and reason for the deduction.
An unexplained deduction may make it difficult for either party to verify whether the correct amount was used.
Is payment in lieu of notice subject to EPF contributions?
KWSP lists payment in lieu of notice of termination of employment as a payment that is not liable for EPF contributions.
KWSP also states that its list of non-wages is not exhaustive.
This classification should not automatically be applied to the employee’s entire final payment.
Outstanding salary, leave encashment, bonuses and other components should be classified and assessed separately.
Is notice pay the same as severance or retrenchment benefits?
No. Notice pay compensates for a notice period that is not served.
Termination or lay-off benefits are separate payments that may apply when the employee meets the requirements of the Employment (Termination and Lay-Off Benefits) Regulations 1980.
JTKSM identifies pay in lieu of notice, termination benefits, annual leave balances and outstanding salary as separate potential entitlements in a retrenchment.
An eligible employee may therefore receive several separately calculated payments as part of the same employment exit.
Can an employee file a claim over unpaid notice wages?
Depending on the facts and eligibility requirements, an employee may lodge a labour complaint or pursue a monetary claim through JTKSM.
JTKSM handles complaints involving labour disputes and late payment of wages, while its Labour Court information identifies contractual or statutory payments as employee claim categories.
Employers may also bring a claim for wages in lieu of notice owed by an employee.
JTKSM expressly lists wages in lieu of notice as an employer claim category.
The claimant should retain the employment contract, resignation or termination letter, payslips, attendance records, calculation statement and relevant correspondence.
Legal or professional advice may be appropriate where the notice clause, termination grounds or amount is disputed.