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General Principles of Retrenchment

Updated: Aug 18, 2020

Employment stability is generally correlated to the economic situation of a country or region. The negative impacts of the COVID-19 pandemic has not spared Malaysia and with the introduction of movement control orders, this has tightened the cash flow for many organisations which may prompt organisations to restructure their business operations to create a leaner workforce with the objective of reducing their operating cost in hope of surviving the bleak economic situation that looms over us now.

Naturally, reorganisations may result in a retrenchment exercise taking place to remove employees that are surplus to the needs of an organisation. News reports have cited various conglomerates and corporate titans are considering downsizing measures in order to keep themselves afloat, inevitably resulting in the possibility of a retrenchment exercise to be put on the drawing board. News reports have also stated that law firms are experiencing “non-stop enquiries” from employers about retrenchment exercises and how to tap government support to avoid an austere cost-cutting approach during this financially hard time. Thus, there is a sense of urgency to restate the general position of the law in respect of retrenchment in light of current affairs for the sake of both employers and employees.


Redundancy must first be proved to justify retrenchment. There is no statutory definition of the term “redundancy” in Malaysia. Nonetheless, reference may be drawn to S.12(3)(c) of the Employment Act 1955 [Act 265] (“EA”) as guidance to paint a clearer picture.

The wordings of S.12(3)(c) of the EA are as follows:

“The requirements of that business for the employee to carry out work of a particular kind have ceased or diminished or are expected to cease or diminish.”

The Court of Appeal case of Woo Vain Chan v Malayawata Steel Bhd (currently known as Ann Joo Steel Bhd) referred to the authoritative book entitled Industrial Relations in Malaysia as to how redundancy has been defined:

“Redundancy refers to a surplus of labour and is normally the result of a reorganisation of the business of an employer; and its usual consequence is retrenchment, i.e. the termination by the employer of those employees found to be surplus to his requirements after the reorganisation. Thus, there must be redundancy or surplus of labour before there can be retrenchment or termination of the surplus.”

It is settled law that an employer is entitled to reorganise their organisation in any manner considered best, provided the reorganisation is done bona fide.

Case in point: Court of Appeal case of Harris Solid State (M) Sdn Bhd v Bruno Gentil Pereira:

“… An employer may reorganise his commercial undertaking for any legitimate reason such as promoting better economic viability. But he must not do so for a collateral purpose … Whether the particular exercise of managerial power was exercised bona fide or for collateral reasons is a question of fact that necessarily falls to be decided upon the peculiar circumstances of each case.”

It is suggested that employers should give a longer notice period compared to what was provided in the employment contract to allow employees to adjust to their redundancy and a wider time window to look for other work. This initiative would be highly appreciated by employees during this arduous time where people are scrambling to find avenues to put food on the table for their family.

Foreign workers

Put simply, the EA defines foreign workers as an employee who is not a citizen. Malaysia is highly dependent on foreign workers, especially in the 3D (dangerous, dirty and difficult) and service industries as there exists a stigma that such jobs are shunned and demeaning. Bearing in mind the above, the Section 60N of the EA stipulates that the services of the foreign workers should be terminated first if there are both foreign and local employees employed in a similar position in any retrenchment exercise. This may result in a situation where local employees may be unable to fill the gaps left by foreign workers in the abovementioned industries for example.


Generally, a worker who falls under the definition of an employee under the EA (e.g. a person who irrespective of his occupation had entered into a contract of service with an employer for a monthly income that is not exceeding RM2,000.00) will be entitled to the benefits under the Employment (Termination and Lay-Off Benefits) Regulations 1980 (“Regulations”) as the Regulations is a creation of the EA.

There are four qualifying conditions for a person to be entitled to the provisions of the Regulations:

  1. The person must fall within the definition of an employee under the First Schedule of the EA

  2. The person has been employed under a continuous contract of service for a period of not less than 12 months ending with the relevant date by virtue of Regulation 3, relevant date is defined in Regulation 2 differently in respect of a termination and for a lay-off.

  3. The contract of service of the person is terminated (in accordance with Regulation 4) or laid off (in accordance with Regulation 5); and

  4. The person is not disqualified by the provisions of Regulation 4 and 8.

The benefits provided for in the Regulations serve as a cushion against the hardships faced by an employee who has to come to terms with the loss of his employment and the consequential loss of his immediate means to earn an income.

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.

Also, hope is not lost for employees who do not fall under the EA as the Code of Conduct for Industrial Harmony serves as a persuasive authority to being taken into account when conducting a retrenchment exercise. Clause 22 of the Code of Conduct for Industrial Harmony provides that if retrenchment becomes necessary, despite having taken appropriate measures, the employer should take the following measures i.e. introducing schemes for voluntary retrenchment and retirement and for payment of redundancy and retirement benefits.

Code of Conduct for Industrial Harmony (“Code”)

The Code is a non-binding set of guidelines agreed upon by the Ministry of Human Resources and the Malaysian Council of Employers' Organisations (the predecessor to the Malaysian Employers Federation and the Malaysian Trades Union Congress). When an employer selects an employee to be retrenched, the Code’s criteria includes:

  1. Ability, experience, skill and occupational qualifications

  2. Consideration for length of service and status

  3. Age

  4. Family situation

Although it is non-binding, the Code intended to communicate best practice retrenchment exercises and has been endorsed and supported by case laws. However, the Court of Appeal case of Equant Integration Services Sdn Bhd v Wong Wai Hung which held that failure to comply with the Code per se cannot be fatal in a proper retrenchment exercise. The Court of Appeal held:

“The Code, however, is a mere guideline, and cannot be enforced as if it is binding statute ... the failure to comply with the Code per se cannot be fatal in a proper retrenchment exercise. This is because the Code does not have the force of law ... The Code is to be given due consideration by the Industrial Court towards exercising its discretionary power under s. 30(5A) of the Industrial Relations Act 1967, that is, to make a decision in accordance with equity and good conscience … instead it should be taken as mere guidance in a properly retrenched exercise as in the instant case. Failure to adhere to the requirement under the Code per se cannot vitiate a genuine retrenchment.”

Last in First Out (“LIFO”)

In a retrenchment exercise, it is an accepted industrial practice to retrench employees according to the LIFO principle. Radio & General Trading Sdn Bhd v Pui Cheng Teck, Gan Sek Teng, Foo Say Tuan & Goh Tok Eng held that:

“All things being equal, the employee with the least number of years’ service should be the first employee to be identified to be retrenched.”

However, like the Code above, failure to comply with the LIFO principle does not result in an impugned retrenchment exercise. A employer’s departure from the LIFO principle must be justified. In the 2019 High Court case of Technip Geoproduction (M) Sdn Bhd v Ng Chang Seng held:

Next, as to the LIFO Principle, a company may depart from it if the needs arise. The matter is best to be decided by the company … LIFO is not one of the major selection criteria. LIFO will be applied only in exceptional and marginal situation where there is a tie between two equally ranked employeesthe rule that last come first go is not immutable and for valid and sufficient reasons an employer may depart from it.”

See also the High Court case of Nordson (Malaysia) Sdn Bhd v Lee Chin Tao which held:

“The manner of termination of employment was also addressed, with the Industrial Court describing it as "deplorable". Nevertheless, the point that was emphasised related to violation of fair labour practice as the Company did not follow the LIFO principle, and was not able to justify the departure from the LIFO principle.”

The idea underlying the LIFO principle is to reward senior employees for their loyalty in the organisation displayed in the length of their tenure. Furthermore, it is likely that a junior employee will have more ease in securing another position compared to a more senior employee. Lastly, the economic rationale of letting go the junior employees first is the costs will be less expensive to the employer in respect of any retrenchment benefits payable.

The LIFO principle averts discrimination of employees that may be prevalent in a workplace such as favouritism and nepotism, it is possible that the inception of the LIFO principle originates from Article 8 of the Federal Constitution which plainly states:

“All persons are equal before the law and entitled to the equal protection of the law.”

Alternatives to Retrenchment

Apart from retrenchment, employers may also opt to use separation schemes i.e. Voluntary Separation Scheme (“VSS”) or Mutual Separation Scheme (“MSS”). Put simply, a VSS appears as an invitation from the employer for the employee to apply for where the employee would apply to terminate his employment with the company. On the other hand, an MSS denotes that both parties mutually agree on the termination of the employee’s services.

The High Court case of Razali bin Husain v Sapura Research Sdn Bhd held that:

“One of the best practices, which is set out in Clause 22(a) of the Code, is for the employers to introduce schemes for voluntary retrenchment and retirement of employees, and for the payment of redundancy and retirement benefits to the employees concerned … while agreeing that there is no legal requirement for the company to offer a voluntary separation scheme to its employees, who are considered redundant by the company … that going by the spirit and intention of the Code and agreed practices, it would be in accordance with equity and good conscience for the company to consider offering a voluntary separation scheme to the claimants”

Unfair Dismissal under the Guise of Retrenchment

As mentioned above, employers are entitled to manage their employees to maximise efficiency in generating revenue. However, it is a valid concern of employees to puzzle whether a retrenchment may be used as a convenient excuse to disguise an actual unfair dismissal.

In these circumstances, the Industrial Court being a court of equity and good conscience may conclude that an employee is dismissed without just cause or excuse from the abuse of powers by an employer. Pursuant to the Industrial Relation Act 1967 [Act 177], the Industrial Court may order reinstatement or compensation in-lieu of reinstatement and back wages of a maximum of 24 months for a confirmed employee and 12 months of the employee's last drawn salary for a probationer.

When assessing the amount of backwages to be awarded, the Industrial Court will take into account several considerations such as whether the claimant (employee) has found another job after his dismissal from his previous employer, if yes what is the salary of this new job and any misconduct contributed by the claimant.

The Federal Court in R Rama Chandran v Industrial Court of Malaysia held that in respect of unfair dismissal under the guise of retrenchment:

“To recapitulate, the case for the Employee at all levels, in effect, was that the act of the Employer in terminating his services by the letter dated 20 April 1988, although ostensibly in pursuance of a retrenchment exercise was really a device to cloak a mala fide exercise of power or, in other words, an act of victimization, thus avoiding a fair enquiry into certain baseless allegations of misconduct which the Employer had no intention of pursuing ...
In other words, the case for the Employee was that this was not a redundancy situation at all; the letter of termination was really a cover up for the Employer's inability to establish those allegations by fair enquiry and the ulterior purpose of the exercise was to get rid of the Employee … ”

Key Takeaways

Before conducting a retrenchment exercise, it would be in the best interest of employers to first ascertain all the requirements and the current position of the law on retrenchment in respect of their own factual context. If an employee believes that he or she is unfairly dismissed, he or she should seek proper legal advice regarding his or her specific circumstances as this article is only intended to be a general guide to shed light on the subject matter.


This article does not and is not intended to constitute as legal advice. This article represents the views of the writer alone. Information in this article may not constitute the most up-to-date information. Specific professional advice should be sought regarding your specific circumstances.

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