Employment Law: Retrenchment in Malaysia
Employment Law: Retrenchment in Malaysia

Employment Law: Retrenchment in Malaysia


What does retrenchment mean in law?

Retrenchment simply means

the discharge of surplus labour or staff by the employer for any reasons whatsoever otherwise than as a punishment inflicted by way of disciplinary action”.

This is as per S. K Das J in Hariprasad v Divelkar AIR [1957] SC 121.

Some employers may call it ‘downsizing‘, ‘rightsizing’, ‘reorganizing‘ or ‘lay-off’ for the sake of strategizing or restructuring their business, but they all connote retrenchment. 

For the employees, it triggers many different emotions in those being retrenched, such as feeling sad, angry, helpless, and so forth.

We often stumbled across question whether there is any legal recourse in this instance or is this just part of the ups and downs in employment where there nothing much can be done.

It must be noted that out of many unjust dismissals cases ended up in the Industrial Court of Malaysia, there is, in fact, a considerable number of dismissals founded purportedly on the ground of redundancy or retrenchment.

It goes without saying that retrenchment is subjected to scrutiny by the Industrial Court of Malaysia.

For whatever the reasons a retrenchment exercise was carried out, these are 4 basic legal principles that every employers or employee should know.

#1. Redundancy as Precondition for Retrenchment

In other word, redundancy or surplus of labour is a precondition for the exercise of retrenchment.  

It is no doubt recognized by law that it is the prerogative of the employer to reorganize its business for whatever reasons. Some common reasons for redundancy that recognized by the law include, 

    • where the business requires fewer employees of whatever kind in order to reduce cost, or
    • it may be due to the recession of economy or
    • merger of two businesses when the business needs fewer employees.
    • a decline in profits and reduction in business or
    • even cessation or closure of business.

However, such prerogative is not without qualification at all. Should the decision for retrenchment was made capriciously or without a genuine reason, or worst still it was done in bad faith against a particular employee, such decision will not be immune from examination by the Industrial Court. 

#2. Guidelines for Retrenchment 

The Code of Conduct for Industrial Harmony (“CCIH”) serves as valid guides to the employer on a retrenchment exercise and must be accorded with due compliance. 

The CCIH is an acceptable industrial relation practice and also recognized by law as a factor to be considered in determining whether the retrenchment was carried out genuinely and justifiably.

For example, in circumstances where redundancy is likely an employer should take positive steps to avert or minimize reductions of the workforce by the adopting measures such as:-

(a)        Limitation on recruitment

(b)        Restriction of overtime work

(c)        Restriction of work on the weekly day of rest

(d)        Reduction in number of shifts or days worked a week

(e)        Reduction in the number of hours of work

(f)        Re-training and/or transfer to other department/work.

If retrenchment becomes necessary, despite having taken appropriate measures, the employer should take the following measures:-

(a)        Give early warning;

(b)        Introducing schemes for voluntary retrenchment (or VSS) and for payment of redundancy and retirement benefits

Note: Regulation 6 of the Employment (Termination and Lay-Off Benefits) Regulations 1980 may serves as a guide – refer to paragraph 15 here

(c)        Retiring workers who are beyond their normal retiring age

(d)        Assisting in job searching

(e)        Spreading termination of employment over a longer period

(f)        Ensuring that no such announcement is made before the workers and their representatives or trade union has been informed.

(g)        Establish clear and objective selection criteria in retrenchment. E.g.

(i) ability, experience, skill and occupational qualifications of an individual worker,

(ii) length of service and status (non-citizens, casual, temporary, permanent),

(iii) age and

(iv) family situation

#3. Retrenchment Benefit 

According to Regulation 6 of the Employment (Termination and Lay-Off Benefits) Regulations 1980, employees whose monthly salary is RM2000 and below and who falls within the purview of the Employment Act 1955 (“EA 1955”) must be entitled to retrenchment benefits as stated below, depending on their tenure of employment:-

Number of Days' Wage for Each Year of EmploymentTenure of Employment ('X')
10 DaysX < 2 Years
15 Days2 Years ≤ X < 5 Years
20 Days5 Years ≤ X

and pro-rated in respect of the incomplete year, calculated to the nearest month.

For the employees who do not cover by the EA 1955, their employment relationship with the employer boiled down to the employment contract or contract of service, subject to such other industrial law and guidelines such as CCIH as mentioned in the above paragraph.

#4. Industrial Court as a Forum to Challenge Retrenchment 

As mentioned earlier in the introduction paragraph 3, the Industrial Court of Malaysia is no doubt a popular forum to challenge retrenchment where an employee considered it as amounting to an unjust dismissal.

As a statutory tribunal established under the Industrial Relations Act 1967, the Industrial Court is duty-bound to investigate the facts and circumstances of each case that brought before it to determine whether the exercise of the power of dismissal of an employer was in fact made good faith due to genuine reasons and with just cause and excuse and untainted by any unfair labour practice.


For case update, refer to: Employment Law: Retrenchment In Malaysia (Case Update)

Lastly, it must be taken in perspective that knowing the principles of law on retrenchment is not only beneficial to the employees to safeguard their right to gainful employment but also to the employers in implementing a restructuring exercise in a lawful manner to reduce its headcount in an attempt to ensure its survival and sustainability.

About the Author:

This article was written by Chia Swee Yik, Partner of this Firm (+6016 2148 218, chia@chialee.com.my), who endeavors to provide practical advice on employment law.

Feel free to contact him if you have any queries.

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