What you need to know about the law on retrenchment of employees

the law on retrenchments
Will the last one to leave please turn off the lights?

There has been a wave of retrenchments in Malaysia, which started last year and looks to continue through 2016. Malaysia’s Human Resources Minister says that his ministry expects retrenchments to continue into 2017.

According to the Malaysian Employers’ Federation (MEF), more than 20,000 employees were retrenched in 2015 (as at September 2015). Comparatively, the figure for the entire 2014 was 10,000 employees. The MEF predicts that it will only get worse in 2016.

Although the steepest increase in retrenchment numbers are in the oil and gas industry, the banking industry has also seen several retrenchment exercises or voluntary separation schemes being implemented. The legal industry has also been affected, with many medium and big law firms either downsizing or freezing hiring.

Let’s take a quick look at the law related to retrenchments. As an employer, when can I retrench employees? Am I free to choose which employees to let go? How much do I have to pay them as severance? As an employee, what are my rights? Can I challenge a retrenchment?

> What is retrenchment?

First of all, what’s a ‘retrenchment’? A retrenchment happens when there is a redundancy — when an employer has more employees than it needs.

The following are some of the common reasons which cause redundancies to occur:

  • The company experiencing financial difficulties.
  • A reorganisation of the workforce to increase efficiency or cut costs.
  • The shutting-down or termination of products or services which are unprofitable.
  • A surplus of employees following a merger due to employees from each entity performing similar tasks.
  • A decision to outsource certain tasks or entire departments to external service providers.

> The management’s right to decide on reorganisation

Malaysian courts have taken the clear and settled position that it is the prerogative of the management to decide on the reorganisation of its business.

The courts will not intervene with the management’s decisions in this respect, as the courts are not in a position to decide how many employees a company should have.

However, the court will intervene if it is shown that the employer’s decision was not genuine, such as where it was a termination disguised as a redundancy, or where the affected employees were victimised or selected to be retrenched for unfair reasons.

> How employees are selected for retrenchment: the LIFO principle

An employer cannot randomly choose which employees to be retrenched. It is almost mandatory that the LIFO principle (‘last in, first out’) is followed, though exceptions are possible depending on the circumstances.

The LIFO principle means that the most junior employee (as a result of some queries from readers, I should clarify that ‘junior’ here refers to the length of service with the employer, and not the age or rank of the employee — hence ‘last in, first out’) must be retrenched first. It is not the most junior employee in the entire company which has to be retrenched first, but the most junior employee in the relevant category. For example, if the retrenchment is due to the outsourcing of accounting services, employees in the legal department would not be included in the pool.

> Giving notice of retrenchment

The employer must give the affected employees a notice of retrenchment. The notice period is based on the employment contract or collective agreement, and employees who fall within the scope of the Employment Act (EA) — there are various factors which determine whether an employee is covered by the EA, but generally these are employees whose monthly earnings are not more than RM2,000 — are entitled to the minimum notice period in the EA.

It’s advisable to consult or inform employees of a potential retrenchment as soon as possible.

Employers are also required to submit a written notification (PK Form) to the nearest Department of Labour at least 30 days before conducting a retrenchment exercise.

> Termination benefits payable upon retrenchment

The right of an employee to a termination benefit upon retrenchment depends whether or not he is covered by the EA.

An employee who falls within the scope of the EA is entitled to termination benefits if he has been employed for at least 12 months. The termination benefits payable are as follows (or the amount in the employment contract if it is higher):

  • 10 days’ wages for every year of employment if he has been employed for less than two years;
  • 15 days’ wages for every year of employment if he has been employed for two years or more but less than five years; or
  • 20 days’ wages for every year of employment if he has been employed for five years or more.

An employee who is not covered by the EA is only entitled to termination benefits if it is provided in his employment contract. If the contract is silent, then it is up to the employer whether or not to pay termination benefits, and how much to pay.

Employers who are carrying out a retrenchment due to serious financial difficulties may also be excused from paying retrenchment benefits.

> Recourse for employees who have been unfairly retrenched

Some employers may carry out a termination disguised as a retrenchment as a way of dismissing unwanted employees. Employees who feel that they have been unfairly retrenched can bring a claim against the employer.

In deciding whether or not the retrenchment was justified, the court will consider the following two key questions:

  1. Firstly, was there an actual redundancy which justified a retrenchment? This will depend on all the relevant facts based on the reason given by the employer for the retrenchment. For example, if a human resources manager is retrenched, and the employer hires another human resources manager to perform the same work functions a month after the retrenchment, it is likely to be concluded that there was not a genuine redundancy.
  2. Secondly, if a retrenchment was justified, was the employee-selection process fair? This goes back to the LIFO principle discussed earlier, and will also involve consideration of whether the employee pool/category was properly defined.

If the court decides that the retrenchment was unfair, the employer will be ordered to reinstate the employee or pay compensation in lieu of reinstatement.

> The Code of Conduct for Industrial Harmony — a guide for employers considering retrenchment

Although it is not legally-binding, the Industrial Court encourages employers to comply with the Code of Conduct for Industrial Harmony which was issued in 1975.

The Code recommends that, where redundancy is likely, an employer should take positive steps to avert or minimise reductions of workforce by adopting appropriate measures such as —

  • limitation on recruitment;
  • restriction of overtime work;
  • restriction of work on weekly day of rest;
  • reduction in number of shifts or days worked a week;
  • reduction in the number of hours of work;
  • re-training and/or transfer to other department/work.

Where a retrenchment becomes necessary, the Code encourages employers to take the following measures:

  • Giving as early a warning as practicable to the affected employees.
  • Introducing schemes for voluntary retrenchment and retirement and for payment of redundancy and retirement benefits.
  • Retiring workers who are beyond the retirement age.
  • Assisting workers to find alternative employment.
  • Spreading the termination of employment over a longer period.
  • Ensuring that the employees are informed or consulted before a formal announcement is made.

The Code also recommends that the employer should select the employees to be retrenched based on an objective criteria, and that retrenched employees should be given priority to be re-employed by the employer if the employer decides to employ workers again in the future.

Non-compliance with the Code will not mean that a retrenchment will be deemed to be unfair, but employers should try to comply with the Code where possible because the recommendations in the Code are good practice, and it could also strengthen the position of an employer if an employee brings an unfair dismissal claim as a result of the retrenchment.

9 thoughts on “What you need to know about the law on retrenchment of employees

  1. Abdullah 24 August, 2016 / 11:19 pm

    I filed a case at the Industrial relation dept. in Shah Alam, we had the first meeting with an officer for unfair dismissal, the officer told in the beginning that in case both parties will not reach an arrangement, the case will go to industrial court and we could bring all the evidence and papers for a hearing in the court, like in this link of the flowchart of hearing process ( http://www.mp.gov.my/PDF/flow-hp.pdf ), but when I called him this monday to ask when the next appointment is for the hearing, he said he will send my papers by this week to putrajaya and I don’t have to come the court will just judge. I find this very strange and I have very strong doubts about it. Is it correct that I don’t have to go again because I have many evidence the officer didn’t even see.

    Please answer my question asap if possible.


  2. Seri Banun bt Ramli 2 February, 2017 / 11:47 am

    Our company is in the process to start the minor retrenchment due to the organization business restructure. On the LIFO principle, the company should retrench the most junior in the relevant category. Can we give an exception to the junior employee who has excellent performance and to retrench the next junior with lower rating performance? We do not want to make a wrong action in this matter. Your kind advice is very much appreciated.

  3. Vinson Lau 28 May, 2020 / 10:14 am

    Hi, will need some help in clarify the retrenchment happen on executive. Salary more then RM 2,000 who haven’t pass the probation. Just a fews simple question:

    1. Do I entitle my basic salary for the last serving month?
    2. If my manager request me to serve until the last day on the letter. But I still have annual leave and delayed off day remaining. Will I get paid for those remaining annual leave and delayed off day?
    3. Will the pay is normal pay or reduced?

    Really appreciate your help if able to answer it. Since I’m experiencing it and might not able to reverse the effect if everything decided.


  4. Rajesh 31 May, 2020 / 11:32 pm

    I have been working with a company in India since 13 years and then was transferred to Malaysia. But due to covid19 situation company loss business and they Terminated me. I worked for 10month in Malaysia. The problem is that they are only offering me 1month salary which i find not fair. I have worked for the company for 14 years almost and they are offering me only one month salary.
    Can anyone tell me if this is correct or not ? and what are the benefits i am entitled for.


  5. SL 30 June, 2020 / 10:46 pm


    I have been working with a company less than 1 year (6-7 months) and they terminated me and will compensate me 1 month salary. The reasons given were the outbreak of Covid 19 and it was a redundancy position. However, the company does not practice the Code of Conduct for Industrial Harmony like cutting down the salary or re-training and/or transfer to other department/work.


  6. Anonymous 20 July, 2020 / 7:35 pm

    1. May I know in which clause/ section of EA that mentioned on the calculations of retrenchment benefits below:

    10 days’ wages for every year of employment if he has been employed for less than two years;
    15 days’ wages for every year of employment if he has been employed for two years or more but less than five years; or
    20 days’ wages for every year of employment if he has been employed for five years or more.

    1.a) Based on the above calculations, assuming this employee gross income is RM4,500 x 12 =RM54,000 / 365 * 10 days of wages.
    In which clause/ section of EA, the calculations of wages are following the calendar days i.e. 365 days from the joining date?

    2. Can you also provide in which clause/ section of EA mentioned on using 26 days for leave encashment?

    3. Why the calculations of wages is using 365 days vs leave encashment using 26 days?

    I would like to get all these information to answer our employees whom they asked the above due to retrenchment (redundancy because of acquisition) from Employer (IT Co.) .

    Appreciate your reply and assistance very much.

    Warm Regards,

  7. Ivy Hong 2 December, 2020 / 11:44 am

    Dear Sir,

    This Retrenchment or Termination benefit is apply for all range of salary, or for those staff who getting RM2,000 and below only?

    Thank you.

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