Settle or Defend? How a Company Should Make the Commercial Decision in a Section 20 Dismissal Dispute

An employer should settle a Section 20 dismissal dispute when the certainty and terms available through settlement are commercially better than the risk-adjusted cost of defending it. It should defend when the dismissal has a credible legal basis, the contemporaneous evidence can prove that basis, and the settlement demand is materially worse than the realistic litigation downside.

That is the short answer. The difficult part is calculating "commercially better" without turning a legal dispute into either an emotional refusal to pay or a reflexive payment to make it disappear. The decision should be written down against the same factors in every case: merits, evidence, remedy exposure, defence cost, management time, workforce impact, publicity, insurance and the terms needed for a complete settlement.

Legal That Works provides employer-side Industrial Court and Section 20 representation for companies that need this assessment tied to the actual facts, documents and procedural stage of their dispute.

Do not ask only, "How much is the employee demanding?"

A demand is one input, not the value of the case. The company's decision should compare at least three numbers:

• The defend scenario: the likely range of legal exposure if the claim succeeds, plus the cost and disruption of taking the matter through the Industrial Court.

• The settlement scenario: the payment and non-financial obligations required to obtain a binding, workable end to the dispute.

• The risk-adjusted scenario: the defend exposure adjusted for the assessed strength of the employer's case and the quality of the evidence—not a guessed "percentage chance of winning" unsupported by analysis.

Run the numbers as ranges. A single figure creates false confidence because Industrial Court remedies are discretionary and fact-sensitive. The upper statutory or practice-note figure is not automatically the likely award; a low settlement offer is not automatically a bargain if it leaves the claim, confidentiality or enforcement issues unresolved.

1. Start with the employer's actual dismissal case

The first question is not whether the company followed its preferred HR process. It is whether it can prove that the dismissal was with just cause or excuse on the reason it actually relied on.

Prepare a two-page merits assessment that answers:

• What was the true reason for dismissal?

• Who made the decision, and what material was before that person?

• Was the reason communicated consistently in the show-cause process, domestic inquiry or performance process, termination letter, JPPM response and later pleadings?

• What facts are disputed?

• What legal or procedural weakness could make an otherwise legitimate reason difficult to defend?

• What is the employee's strongest point—not the easiest point to answer?

If the company has changed its explanation over time, treat that as a major risk flag. A termination letter is evidence of what was said; it is not proof that the underlying reason existed. The employer still needs the facts, documents and witnesses behind it.

Underlying documents matter. Review the applicable contract and policy against our guide to employment agreement requirements in Malaysia. If the dispute concerns the expiry or non-renewal of a fixed term, the analysis must also address whether the arrangement was genuinely temporary; see fixed-term employment contracts in Malaysia.

2. Rate proof quality separately from legal merits

A company can have a good reason and a weak case. That happens when the decision was commercially understandable but the people who made it have left, the investigation was informal, the performance record was retrospective, or electronic communications were not preserved.

For every material proposition, record:

A settlement decision made before this exercise often overvalues confidence and undervalues evidential gaps. Conversely, a company with disciplined records may discover that an aggressive demand is not supported by the realistic downside.

3. Model the remedy exposure without treating the cap as the outcome

Section 30(6A) of the Industrial Relations Act 1967 requires the Court to consider the Second Schedule when making an award on a Section 20 reference. The Second Schedule provides that backwages, where awarded, must not exceed:

• 24 months based on last-drawn salary for a confirmed employee; or

• 12 months based on last-drawn salary for a probationer.

It also provides for a percentage of post-dismissal earnings to be deducted from backwages, excludes compensation for loss of future earnings and requires contributory misconduct to be considered.

Industrial Court Practice Note No. 3 of 2019 gives the Court's dismissal-award guidelines. Where a dismissal is found to be without just cause or excuse, the guideline contemplates reinstatement with backwages or compensation in lieu of reinstatement, with compensation in lieu calculated at one month's salary for each completed year of service. It also addresses mitigation, post-dismissal earnings, contributory conduct and certain contractual benefits.

A board model can therefore use:

For illustration only: a confirmed employee earning RM15,000 with eight completed years of service has a headline 24-month backwage ceiling of RM360,000. The Practice Note's compensation-in-lieu guideline would add RM120,000 if that remedy and calculation applied. RM480,000 is not a prediction of the award. It is a gross planning scenario before fact-specific discretion, possible reductions, contractual items and the employer's prospects are considered.

Our guide to back wages, reinstatement and compensation exposure owns the detailed remedy calculation. This article uses exposure only to answer the settle-or-defend decision.

4. Add the cost of defending—even if the company expects to win

Winning is not free. Record the internal work required from:

• HR to reconstruct and manage the file;

• management to approve pleadings, attend conferences and make settlement decisions;

• IT or records teams to locate electronic material;

• witnesses to prepare statements and attend hearing;

• finance to model exposure and manage reserves; and

• operations to handle employee-relations consequences.

Do not inflate those costs to justify settlement. Measure them. Estimate hours, identify irreplaceable personnel and distinguish work needed immediately from work that arises only if the case reaches hearing.

Defence cost can support settlement where the dispute is low-value and document-heavy. It can support defending where an early concession is likely to trigger comparable claims, undermine a legitimate policy or create a larger workforce cost.

5. Test the non-financial consequences

The commercially correct answer can differ between two legally similar cases. Consider:

• Workforce signal: Will settlement be perceived as correcting a questionable process, or as paying any employee who challenges a decision?

• Policy integrity: Does the case test a rule the business needs to enforce consistently?

• Precedent and repetition: Are there similar dismissals, a restructuring cohort or pending grievances?

• Confidential information: Will defending require operational, financial or personal material to be filed or discussed?

• Reinstatement practicality: Is the role still available, and can the employment relationship realistically continue if reinstatement is ordered?

• Publicity: The Industrial Court publishes full awards. A defended case can create a public reasoned record; private settlement terms require careful drafting and may not be absolutely confidential in every context.

• Regulatory or governance duties: Does the matter involve whistleblowing, protected activity, a regulator, an insurer, directors' duties or mandatory reporting?

These factors do not override the law. They identify business consequences the legal merits assessment alone does not price.

6. Check insurance, indemnity and approval authority

Before negotiations move, check whether any employment practices, directors and officers, management liability or other policy might respond. Notify the insurer within the policy terms and do not assume a settlement is covered or may be concluded without consent.

Also confirm:

• who may approve the settlement and at what value;

• whether board approval or a reserved-matter consent is required;

• whether another group company, officer or insurer must be a party;

• who can sign for the employer; and

• whether payment timing fits finance and payroll controls.

A commercially sensible settlement can fail because the negotiator never had authority to conclude it, or because the proposed terms breach an insurance condition or internal approval rule.

7. Decide what the company must receive in return for settlement

Settlement value is not only the payment amount. The document and closure mechanism should address the actual dispute and any connected exposure.

Depending on the facts and procedural stage, terms may need to cover:

• a clear full-and-final settlement and release of identified claims;

• the settlement amount, payment mechanics and responsibility for any applicable deductions or reporting;

• withdrawal, closure or recording of the settlement through the appropriate JPPM or Industrial Court process;

• no admission of liability;

• confidentiality with necessary exceptions for legal, tax, audit, regulatory and insurance disclosure;

• non-disparagement framed lawfully and reciprocally where appropriate;

• return of company property, data and access credentials;

• the agreed employment reference or confirmation of service;

• costs and each party's responsibility for them;

• consequences of non-payment or other breach; and

• authority, entire-agreement and governing-law provisions.

JPPM's current Section 20 guidance says that, where conciliation produces a settlement, DIRM prepares a Memorandum of Agreement endorsed by both parties and closes the case after compliance with its terms. If settlement occurs around Industrial Court proceedings, section 31 permits the Court to have regard to the agreement or to record terms reached before proceedings commence.

Section 54 restricts the use of evidence about statutory conciliation and, without consent, offers made without prejudice. Use the correct label and channel, but do not assume the phrase "without prejudice" fixes poor drafting or authorises disclosure of privileged material.

A board-ready settle-or-defend matrix

Do not total the columns mechanically. A single issue—fraudulent evidence, inability to obtain a complete release, statutory reporting, an unavailable decision witness—can outweigh several lesser factors.

When should the company revisit the decision?

Settle-or-defend is not a one-time vote. Set review gates:

1. After the initial claim assessment: before the company anchors itself publicly to a position.

2. Before or during conciliation: once the employee's objective and the realistic settlement range are clearer.

3. After pleadings and document review: when the disputed facts and evidential gaps are defined.

4. After witness assessment: before material hearing preparation cost is incurred.

5. Before hearing or final submissions: when the cost already spent should be treated as sunk, not used to justify spending more.

Each review should record what changed. A stronger witness, recovered document or reduced demand may alter the answer. So may a new contradiction, unavailable witness or related workforce claim.

Frequently Asked Questions

Does a strong dismissal reason mean the employer should always defend?

No. A strong legal reason can still be difficult to prove, expensive to litigate or commercially disruptive. It may also justify a lower settlement rather than a full defence. The correct comparison is the value and terms of settlement against the employer's evidence-backed, risk-adjusted downside.

Should the employer offer the maximum possible backwages to settle?

Not automatically. The statutory ceiling is a limit on backwages where awarded, not the price of every case. The assessment must consider merits, evidence, post-dismissal earnings, contributory conduct, reinstatement or compensation-in-lieu issues, contractual items and the value of final settlement terms.

Can the company settle during JPPM conciliation?

Yes. JPPM states that where the parties settle through DIRM conciliation, a Memorandum of Agreement is prepared and endorsed, and the case is closed after compliance.

Can the company settle after the case reaches the Industrial Court?

Yes. Section 31 of the Industrial Relations Act 1967 deals with agreements reached before or during Court proceedings. The required filing, recording or disposal steps should be confirmed for the actual case so the settlement produces procedural as well as contractual closure.

Are settlement discussions confidential?

Section 54 restricts evidence about statutory conciliation and without-prejudice offers, but confidentiality is not a reason to be careless. Limit circulation, separate privileged advice from commercial offers and draft express confidentiality exceptions. A settlement cannot lawfully suppress mandatory disclosure or reporting obligations.

What if the employee will accept money but not give a full release?

The company should identify what remains open and price that residual risk. Paying without a clear release, closure mechanism and breach consequences may buy only a pause. Whether a proposed release is valid and sufficiently comprehensive requires advice on the actual claims and parties.

Who should approve the final decision?

The person or body with authority under the company's constitution, delegations, board-reserved matters, insurance terms and internal financial controls. The approval paper should summarise merits, evidence, exposure ranges, business consequences, proposed terms and the recommendation.

Make the decision on the file, not in the heat of the dispute

A disciplined employer does not settle because the allegation is uncomfortable and does not defend because management feels offended. It tests the legal reason, the proof, the remedy range and the business consequences; then it obtains finality on terms the company can perform and enforce.

This article is for general information only and does not constitute legal advice. Every transaction and every set of facts is different. Obtain specific advice from a qualified adviser before acting on any part of it.

How Legal That Works can assist

If your company needs to decide whether to settle or defend a live dismissal dispute, Legal That Works can assess the merits, evidence, exposure and settlement terms through its employer-side Industrial Court and Section 20 representation service. The assessment is most useful before the next conciliation, filing or hearing deadline fixes the company's options.