Legal but with strict requirements
Though the law in Malaysia recognises the right for employers to retrench employees, they must be carried out in good faith or risk sparking wrongful termination claims and industrial disputes.
Our guide outlines six essential steps (and one bonus) for employers to ensure a retrenchment exercise is done in full compliance with Malaysian labour law, namely the:
Let’s begin.
Establish grounds for retrenchment
Grounds for retrenchment generally fall into two main areas: redundancy or structural changes within a business entity, including:
- company reorganisation
- production reduction
- company merger or acquisition, or
- changes in technology
Having clear valid grounds helps prevent claims of unjustified or bad faith retrenchment, such as those based on discrimination or union-related victimisation.
This was the case in Adam Abdullah v. Malaysian Oxygen Bhd. [2012] 2 MELR 357, where the Industrial Court ruled that bad faith retrenchments could be legally challenged.
Consider alternative measures
Before proceeding with retrenchment, employers must demonstrate that cost-cutting alternatives as outlined in Clause 20 of the CCIH were considered:
- limiting recruitment
- restricting overtime work and work on weekly rest days
- reducing the number of shifts or working hours
- re-training or transferring employees to other departments
In other words, it must be demonstrable that retrenchment is an unavoidable last resort after other options have been exhausted.
Apply fair retrenchment selection
If retrenchment is unavoidable, employers must adopt fair selection criteria when selecting employees to retrench as per Clause 22(b) of the CCIH:
- merit-based selection – Evaluations based on skills, performance, and qualifications
- length of service – Practice a “last in, first out” principle
- employee status – Prioritise local talents over foreigners
Failure to adopt fair selection criteria can result in unfair dismissal claims, as seen in William Jacks & Co. (M) Sdn. Bhd. v. S. Balasingam [1997] 3 CLJ 235.
Of course, there can be exceptions in certain cases, but they must be objectively justified with proper documentation, and the criteria otherwise apply by default.
Provide written retrenchment notice
Under Section 12(2) of the Employment Act 1955, employers must issue written notice to a retrenched employee not less than the following notice periods:
- four weeks for employees with <2 years of service.
- six weeks for employees with 2–5 years of service.
- eight weeks for employees with ≥5 years of service.
If employees are not required to serve their notice period, employers must provide payment in lieu of notice (Section 13 of the Employment Act 1955).
Notify authorities
Employers must submit Borang PK to the nearest Labour Office, and if the retrenched employee is a foreigner, also notify the Director General (Section 60KA of the Employment Act 1955).
Both must be done at least 30 days before retrenchment, and non-compliance may result in fines of up to RM50,000 per offence.
Pay retrenchment benefits
Under the Employment (Termination and Lay-Off Benefits) Regulations 1980, employees with at least 12 months of continuous service are entitled to:
- 10 days’ wages per year for service <2 years.
- 15 days’ wages per year for service between 2-5 years.
- 20 days’ wages per year for service >5 years.
Failure to pay termination benefits can lead to legal disputes.
Recap
Malaysia’s Code of Conduct for Industrial Harmony outlines six non-negotiable steps for employers to demonstrate that retrenchment is unavoidable and was carried out in good faith:
- establish valid grounds
- consider alternative measures
- apply fair selection criteria
- provide written notice
- notify authorities, and
- pay retrenchment benefits
By following these practices, retrenchments can be done as amicably as possible, important considering the bonus step we’ve included.
Bonus: Re-employ whenever possible
Clause 23 of the CCIH encourages employers to prioritise re-employing retrenched staff when positions become available.
As talent is a key driver of growth, we hope this reinforces the need for retrenchments not only in compliance with the law but with due consideration for employee wellbeing.
After all, it’s in times of hardship that an act of kindness leaves its biggest mark!
The value of a retrenchment clause
Ultimately, businesses must be allowed to shield themselves from financial distress and reorganise for operational efficiency, but never at the cost of violating employee rights.
As workforce reduction is a highly litigious area, a retrenchment clause sets clear guidelines for both employers and employees if retrenchment becomes unavoidable.
Tailored to the needs of an organisation, a retrenchment clause is a key addition to an employment contract, ensuring fair treatment for all.
Venice Goh is a Pupil-in-Chambers at Edwin Lee & Partners. She was called to the Bar of England and Wales by the Honourable Society of Middle Temple in 2022. Venice holds a Bachelor of Laws (LLB) with First Class Honours from the University of Liverpool, where she was recognised for outstanding academic excellence. She later pursued the Bar Training Professional Course at City, University of London, specialising in Corporate Law and Practice, followed by the Legal Practice Course at BPP University, where she graduated with Distinction under a merit-based scholarship.
