Malaysia: Retrenchment In Malaysia

Last Updated: 28 February 2016
Article by Leonard Yeoh and Chen Mei Quin

It is settled law that a company has the right to organise and reorganise its business in the manner it considers best for better business management and efficacy. In this respect, the company may reorganise or restructure by inter alia retrenching surplus labour. However, in doing so, the company must act bona fide and not capriciously or with motives of victimisation or unfair labour practices, as held in William Jacks & Co (M) Sdn Bhd v S.Balasingam.

To justify retrenchment, there must first be redundancy. In proving redundancy, there must be a surplus of labour or the requirements of the job functions of the employee have ceased or diminished to the extent that the job no longer exists.

Guidelines to the Procedure of Retrenchment

(A)  Providing the Employee Notice

The Employment Act 1955 ("EA") and the Employment (Termination and Lay Off Benefits) Regulations 1980 ("Regulations") govern the retrenchment exercise of employees who earn not more than RM2,000 monthly and manual workers irrespective of the amount of their monthly salaries. For employees who fall within the EA, the length of notice period depends on the employees' length of employment:-

For employees who do not fall within the EA, the length of notice period would be in accordance with their employment contract

(B) Compliance with Code of Conduct for Industrial Harmony 1975 (the "Code")

If it is found that there is redundancy, the Industrial Court ("Court") has encouraged for retrenchment exercise to be carried out, as far as possible, in accordance with the accepted standards of procedure and guidelines such as the Code. Clause 22(a) of the Code states that if retrenchment becomes necessary despite having taken appropriate measures, the employer should take among others, the following measures:-

(i)Give early warning to the employees concerned;

(ii)Introduce schemes for voluntary retrenchment and retirement benefits;

(iii) Retire employee who are beyond their normal retiring age;

(iv) Assist in co-operation with the Ministry of Human Resources, the employees to find work outside the undertaking;

(v)Spread termination of employment over a longer period;

(vi) Ensure that no such announcement is made before the employees and their representatives or trade union have been informed.

The Code also states that the selection for retrenchment should be based on the following:-

(i)need for the efficient operation of the company;

(ii)ability, experience, skill and occupational qualifications;

(iii) length of service (Last in, First Out "LIFO" principle) and status (non citizens, casual, temporary, permanent);


(v)family situation; and

(vi) other criteria as may be formulated in the context of national policies.

(C) Reporting the Retrenchment

Employers are required to report the retrenchment, voluntary separation, temporary layoff or an employee's pay-cut, if applicable, to the nearest Labour Office before any said act termination action via the prescribed Termination Form.

Failure to submit the report within the stipulated timeline is an offence under the EA and the employer could be fined for not more than RM10,000 for each offence.

(D) Retrenchment Benefits

For employees who fall within the EA, the Regulations provide that an employee would be entitled to termination or lay-off benefits if the employee was employed under a continuous contract of employment for at least 12 months before the termination. Pursuant to the Regulations, the quantum of termination benefits to be paid is prescribed.

For employees who do not fall within the EA, the obligation to pay retrenchment benefits and the quantum of retrenchment benefits, if any, would be in accordance with their employment contract, if applicable.

Employers are also required to submit the prescribed form to the Inland Revenue Board of Malaysia at least 30 days before the date of retrenchment.

A Guise to Dismissing the Employee?

Having such a prerogative power, there have been circumstances where employers have dismissed their employees under the guise of retrenchment. In these circumstances, the Court may find that the employees are being dismissed without just cause or excuse.

For example, it was held that the retrenchment was not bona fide where the employee was made redundant but the job with the same duties and functions remain or where employees who were terminated were in fact all active union members .

If the Court finds that there is unfair labour practice under the guise of retrenchment due to abuse of prerogative power or there is no genuine retrenchment the Court, being a court of equity and good conscience may conclude that the termination or dismissal was without just cause or excuse. In this case, the Court may order reinstatement or compensation in-lieu of reinstatement and back wages of a maximum of 12 months of the employee's last drawn salary for a probationer or a maximum of 24 months for a confirmed employee.

It is important to comply with the requirements for retrenchment because the Court will not hesitate to protect the employees if it is found that the retrenchment was made mala fide or that the requirements for retrenchment were not complied with.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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