A Legal Guide To Employee Retrenchment Selection Criteria

Retrenchments must be CCIH-led 

While the Code of Conduct for Industrial Harmony (CCIH) itself is not legally binding, Section 30(5A) of the Industrial Relations Act 1967 allows the Industrial Court to consider its provisions when assessing retrenchment disputes.

Therefore, when choosing staff to retrench and retain, employers in Malaysia must follow five objective selection criteria as outlined in the CCIH, which we explain below.

Let’s begin.

A need for operational efficiency 

Retrenchments should be driven by business sustainability, meaning selection must prioritise employees who are essential to the company’s survival and long-term efficiency.  Document the selection process to demonstrate that business needs—not favouritism, were the deciding factor in retrenchment decisions. 

Harris Solid State (M) Sdn. Bhd. & Anor v. Bruno Gentil Pereira & Ors [1996], 

In Harris Solid State (M) Sdn. Bhd. & Anor v. Bruno Gentil Pereira & Ors [1996], the Court of Appeal ruled that whether an employer’s retrenchment or business closure was made in good faith (bona fide) or for ulterior motives depends on the specific circumstances of each case. If objective facts suggest that the retrenchment was not genuinely necessary for business operations but was instead intended to deprive an employee of their livelihood, the Court may declare the termination unlawful as an unfair labour practice. 

✅ Key takeaway 

Employers must ensure retrenchment is truly necessary and properly justified. If the decision is found to be a pretext for wrongful dismissal, it can be challenged in court and ruled unlawful. 

Skills, experience & qualifications 

Employees with higher skill levels, certifications, or specialised training that aligns with the company’s business needs should be prioritised for retention. Employers should therefore assess past performance records to ensure retrenchment does not unfairly target high-performing employees. 

Ng Chang Seng v. Technip Geoproduction (M) Sdn Bhd & Anor [2021], 

In Ng Chang Seng v. Technip Geoproduction (M) Sdn Bhd & Anor [2021], the Court ruled that an employer must provide clear evidence that the retrenched employee’s role was genuinely redundant or that their skills were no longer required. The employer in this case failed to prove that the remaining employees possessed skills that the retrenched employee lacked, making the retrenchment unjustified. 

✅ Key takeaway 

Employers must justify why specific employees were retrenched by demonstrating that those retained had essential skills that the affected employees did not possess. Failure to do so can lead to wrongful dismissal claims. 

Length of service

The ‘Last In, First Out’ or LIFO principle is a well-established industrial relations practice that dictates the most recently hired employees should be retrenched first. Naturally, LIFO is not an absolute rule, and employers can depart from it with justification, such as: 

• The longer-serving employee lacks the required skills 
• The newer employee’s role is essential to business operations 
• The senior employee has performance or disciplinary issues 

Brian Meadows v Petrofac Energy Developments Sdn Bhd [2019], 

In Brian Meadows v Petrofac Energy Developments Sdn Bhd [2019], the Industrial Court reaffirmed that while LIFO is the general rule, employers may depart from it if there is valid justification.  

• The court upheld the retrenchment because the employer used an objective selection matrix that considered multiple factors (e.g., length of service, age, skills, experience, job performance, and personal circumstances). 
• Since the selection was fair, structured, and necessary for business operations, the retrenchment was ruled as just and lawful. 

Tan Chong Motor Assemblies Sdn Bhd v. Ramesh V. Subramaniam & Anor [2024], 

In Tan Chong Motor Assemblies Sdn Bhd v. Ramesh V. Subramaniam & Anor [2024], the court held that the departure from LIFO was unjustified because: 

• The employer retained junior employees while terminating a senior one without a valid explanation. 
• The employer hired a new manager just before retrenching the employee, contradicting its claim of financial struggles. 
• The employer failed to provide sufficient documentary evidence proving that the retrenchment was genuinely due to redundancy. 

✅ Key takeaway 

Employers must document and justify any deviation from LIFO. If the employers fail to provide clear reasons, retrenchment may be deemed unfair and unlawful. 

Local vs foreign employees

Section 60N of the Employment Act 1955 requires foreign employees to be retrenched before local employees in similar roles.  

The only exception is if the foreign employee is a permanent resident (Section 60O of the Employment Act 1955). 

Ng Chang Seng v. Technip Geoproduction (M) Sdn Bhd & Anor [2021], 

In Ng Chang Seng v. Technip Geoproduction (M) Sdn Bhd & Anor [2021], the Industrial Court ruled that an employer’s failure to prioritise local employees over foreign workers violated best retrenchment practices. 

• The employer retained foreign and contract employees while retrenching local permanent staff without valid justification. 
• The employer did not provide evidence showing that the foreign employees had unique or specialised skills that local employees lacked.  

✅ Key takeaway 

Employers must justify retaining foreign employees over locals by proving that the foreign workers possess critical skills that locals do not have. Failure to do so can render the retrenchment unfair and open to legal disputes. 

Additional considerations 

In addition to skills, experience, and length of service, Clause 22(b) of the CCIH outlines three additional factors that may be considered during retrenchment selection: 

• age  
• family situation  
• such other criteria as may be formulated in the context of national policies. 

✅ Key takeaway 

While these factors are not strict legal requirements, they are recommended best practices to ensure retrenchment is socially responsible and does not disproportionately impact vulnerable employees. 

Even after applying fair selection criteria as provided above, courts do not automatically accept retrenchment as valid, and employers must go a step further and justify why retrenchment was necessary in the first place.. 

Employer’s duty to justify retrenchment 

It is the employer’s burden to prove that the decision to retrench an employee was made in good faith and was genuinely required due to business needs. 

Duty to prove bona fide retrenchment 

In William Jack & Co (M) Sdn Bhd v. S. Balasingam [1997], the Industrial Court held that retrenchment exercises must be examined to determine whether they are genuine or a pretext for wrongful termination. 

If retrenchment is bona fide, the court will not interfere. However, if there is evidence of bad faith, discrimination, or arbitrariness, the court has the power to declare the termination unlawful. 

Goon Kwee Phoy v. J & P Coats (M) Bhd [1981] and Bayer (M) Sdn Bhd v. Ng Hong Pau [1999], 

In Goon Kwee Phoy v. J & P Coats (M) Bhd [1981] and Bayer (M) Sdn Bhd v. Ng Hong Pau [1999], the Court ruled that: 

• The burden of proof rests on the employer to establish that the retrenchment and employee selection were bona fide. 
• If an employer fails to prove why a particular employee was selected for retrenchment, the dismissal will be deemed unfair. 

Industrial Court’s fairness principles 

To determine whether retrenchment was executed fairly, the Industrial Court in Nurul Najmi Radzuan & Ors v. T-Systems Malaysia Sdn Bhd [2019] laid down three essential fairness principles: 

1. Whether there was a justified reorganisation 
2. Whether redundancy genuinely arose 
3. Whether the retrenchment was executed fairly and in compliance with accepted standards 

Employers cannot rely on retrenchment as a mere business prerogative, they must prove that both the need for retrenchment and the selection of employees were justified and fair. Failure to do so can expose them to valid wrongful dismissal claims. 

Takeaways for employers 

In the event a retrenchment is inevitable and employers must decide which employees to retrench and retain, best practices are to: 

• apply objective selection criteria (LIFO, skills, job performance) 
• justify any deviation from LIFO with written documentation 
• ensure local employees are prioritised over foreign workers or contract employees 
• follow proper notice period requirements to avoid wrongful dismissal claims, and
• comply with procedural requirements, such as submitting Borang PK to JTK at least 30 days before retrenchment, as per the Employment Act 1955 and the Notification of Retrenchment of Employees 2004. More details can be found here
• have a well-defined retrenchment clause in all employment contracts and employee handbooks to set clear guidelines

Of course, it’s one thing to know these principles, but applying them to a workforce with diverse backgrounds and skills is never easy, so be sure to read our overall guide to retrenchment in Malaysia for a big picture understanding.