Employment Law: Retrenchment in Malaysia (Case Update)
Employment Law: Retrenchment in Malaysia (Case Update)

Employment Law: Retrenchment in Malaysia (Case Update)

This issue seems to be the concern of many employers and employees recently.

At the outset, it must be understood that retrenchment (or nowadays, the preferred Voluntary Separation Scheme (VSS)) is essentially a form of termination or dismissal from employment on the ground of redundancy. There are, of course, termination or dismissal from employment on other grounds.

Retrenchment is often viewed as the result of economic downturns, but from another perspective, it is just a step taken as part of a company’s day to day operational strategy.

It must be noted that if the employer’s decision for retrenchment was exercised or carried out  unfairly or unjustly, the said decision may be subsequently challenged by the affected employee(s) in the industrial court.

Recent Relevant Cases

The recent Industrial Court’s decision by his Honourable Lordship, Yang Arif Bernard John  Kanny in the case of Nurul Najmi Radzuan & Ors v. T-Systems Malaysia Sdn Bhd, Industrial Court, Kuala Lumpur (Award No. 1042 of 2018) [2019] reaffirms the basic legal principles applicable should retrenchment become inevitable as a result of business realities.

The basic legal principles for retrenchment can be summed up as follows :-

  1. Three issues for determination when it comes to deciding whether a retrenchment was fairly exercised and not tainted with unfair labour practices:-

(i)      Was there a reorganization by the company and if so was it justified?

(ii)     Did a redundancy situation  arise  in the various departments of the company leading to the retrenchment of the claimants?

(iii)    If the answer to (i) and (ii) are affirmative, whether the selection and retrenchment of the claimants were done fairly in compliance with the accepted standards or procedure?  

This reaffirms the notion that redundancy or surplus of labour is a precondition for the exercise of retrenchment.

  1. The Court will look at the Code of Conduct for Industrial Harmony (“CCIH”) in determining whether the retrenchment was done fairly.

Despite not having any legal force, the CCIH may be taken into consideration by the Industrial Court which has the power to take into consideration any agreement or code relating to employment practices between organizations representative of employers and workmen respectively where such agreement or code has been approved by the Minister of Human Resource.

This is in fact provided in Section 30(5A) of the Industrial Relations Act 1967.

As was also seen in the case of

‘Pengkalen Holdings Bhd v. James Lim Hee Meng, Industrial Court, Kuching (Award No. 351 of 2000) [2000] 2 ILR 252’,

despite redundancy caused  by  the  company  ceasing  business in a particular area, the claimant was held to be unjustly dismissed because of breaches of the CCIH by the company. The court in arriving to the said decision held that:-

[4] Article 22(c)(ii) of the Agreed Practices annexed to the Code stipulates that should retrenchment be necessary, despite an employer having taken appropriate means to avert or minimise the necessity for the same, the employer should inter alia make provisions for the payment of redundancy and retirement benefits.

[5] There were indeed breaches of the Code of Conduct with regard to the failure of the company to give the claimant adequate notice and to provide compensation for his loss of employment.

  1. Burden of proof lies on the employer

It is an established principle propounded in the Federal Court case of

Goon Kwee Phoy v. J & P Coats (M) Bhd [1981] 1 LNS 30; [1981] 2 MU 129

as well as

Bayer (M) Sdn Bhd v. Ng Hong Pau [1999] 4 CLJ 155

that the burden of proof lies on the employer to prove that the decision to reorganize and the subsequent redundancy of the claimants is bona fide.

In other words, it is an established principle of law that an employer seeking to rely on redundancy as a reason for a dismissal must prove it.

Otherwise, the court need not go further as the inevitable conclusion must be that the retrenchment or dismissal was without just cause and excuse.

  1. Back wages

In awarding back wages, the general principle is that it shall not exceed 24 months and in the case of a probationer, it shall not exceed 12 months.

However, paragraph 3 of the Second Schedule of the Industrial Relations Act 1967 states that:

Where there is post-dismissal earnings, a percentage of such earnings, to be decided by the court, shall be deducted from the backwages given.

It was highlighted by the court in the Nurul Najmi’s case (supra) that it would not be just and equitable, even illogical, that a claimant who diligently seeks alternative employment is awarded a sum less than  one  who  does not, as it would result in the court punishing employees who have found employment post-dismissal by scaling down monetary compensation whilst employees  who resist looking  for  employment  are  unjustly  enriched with a higher scale of monetary compensation without deductions .

It was stated that this would surely be against the spirit and intent of the said paragraph 3 of the Second Schedule.

Therefore, the court held that the failure of the dismissed employee to play their part by actively looking for work after having been dismissed from their current employment is also relevant for consideration by the ‘court of equity, good conscience and the substantial merits of the case’ in scaling down the monetary compensation to be awarded.


Lastly, it must be taken in perspective that knowing the principles of law on retrenchment is not only beneficial to employees to essentially safeguard  their  right  to gainful employment and security of tenure; but will also ensure the employer to exercise the reorganization or restructuring of the company to ensure its survival and sustainability in a lawful manner.

About the Author:

This article was published in Issue No. 3 of RELEVAN (February 2020) written by Chia Swee Yik, Partner of this Firm, who endeavors to provide practical advice on employment law.

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