Due to the current situation on the outbreak of Covid-19 and the shrinking income and profit of business players globally, employers may have to restructure their business in order to create a leaner workforce to reduce operating costs to cope with the impact of the current landscape of the global and local economy.

Consequently, reorganisation by employers would inevitably result in retrenchment of employees who are considered surplus to the requirement of the business organisation. With news of retrenchment exercises in the tourism and airline industries which are severely affected due to the outbreak of Covid-19, we find it useful and timely to discuss the position of the law in relation to retrenchment.


What is retrenchment? Retrenchment simply means “the discharge of surplus labour or staff by the employer for any reason whatsoever otherwise than as a punishment inflicted by way of disciplinary action”. In the case of WILLIAM JACKS & CO. (M) SDN. BHD. v. S BALASINGAM [1997] 3 CLJ 235, the Court of Appeal defined retrenchment as:-

'Retrenchment' has been defined as the discharge of surplus labour or staff by an employer for any reason whatsoever otherwise than as a punishment inflicted by way of disciplinary action. Whether the retrenchment exercise in a particular case is bona fide or otherwise is a question of fact and of degree depending on the peculiar circumstances of the case. It is well-settled that the employer is entitled to organise his business in the manner he considers best. So long as the managerial power is exercised bona fide, the decision is immune from examination even by the Industrial Court. However, the Industrial Court is empowered, and indeed duty-bound, to investigate the facts and circumstances of the case to determine whether the exercise of power is in fact bona fide.

In this regard, some employers may refer to retrenchment exercise as 'downsizing', ‘rightsizing’, 'reorganising' or ‘lay-off’ for the sake of strategizing or restructuring their business, but whatever employers call it, they all connote to be retrenchment in nature.

This may trigger numerous emotions on the employees affected, such as feeling sad, angry, helpless, so on and so forth. The main question is whether there is any legal recourse for employees or is this just part of the ups and downs in their employment and nothing can be done.


It must be noted that out of the many employment dismissal cases that end up in the Malaysian Industrial Court, there is in fact, a considerable number of dismissal founded purportedly on the ground of redundancy or retrenchment which have been found by the court to be unfair dismissal. As to this, employers must take note that any retrenchment exercise is subject to scrutiny if the matter is referred to the Industrial Court.

In this instance, these are the 5 basic legal principles that every employer and employee should be aware of in relation to retrenchment.

  1. Redundancy is a precondition for retrenchment

    Redundancy or surplus of labour is a precondition for the exercise of retrenchment by the employer.

    In the case of BAYER (M) SDN BHD V. NG HONG PAU [1999] 4 CLJ 155, the Court of Appeal held as follows:

    "On redundancy, it cannot be gainsaid that the appellant must come to the court with concrete proof. The burden is on the appellant to prove actual redundancy on which the dismissal was grounded. (see Chapman & Others v. Goonevan & Rostrowrack China Clay Co Ltd [1983] 2 ALL ER). It is our view that merely to show evidence of a reorganisation in the appellant is certainly not sufficient. There was evidence before the court that although sales were reduced, the workload was taken over by two of his former colleagues. Faced with these evidence, is it any wonder that the Court made a finding of fact that there was no convincing evidence produced by the appellant that the respondent's function were reduced to such an extent that he was considered redundant."

    There is no doubt that it is the prerogative of the employer to reorganise its business for whatever reason. The Court of Appeal decision in WILLIAM JACKS & CO (M) SDN BHD V. S BALASINGAM [2000] 7 MLJ 1 held that an employer is entitled to organise his business in the manner he considers best, so long as it is exercised bona fide. Some common reason for redundancy 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 which requires fewer employees. Other reasons include a decline in profit and reduction in business or even cessation or closure of business or in our current situation, the outbreak of Covid-19.

    However, such prerogative is not without qualification. If the decision for retrenchment was made in an unlawful manner or without a genuine reason, or even worse, done in bad faith against a particular employee, such decision will be scrutinised and reviewed by the Industrial Court.

  2. Employers’ guidelines for retrenchment

    The Code of Conduct for Industrial Harmony (the Code) is an agreement made between the Ministry of Human Resources (then known as the Ministry of Labour and Manpower) and the Malaysian Council of Employers' Organisations (MCEO). It serves as a guideline to employers on retrenchment exercise and must be complied by the employers in any retrenchment exercise.

    The Code is an acceptable industrial relation practice and is recognised by law as a factor to be considered in determining whether the retrenchment was carried out genuinely and justifiably. Nevertheless, it must be noted that in the case of EQUANT INTEGRATION SERVICES SDN BHD (IN LIQUIDATION) v. WONG WAI HUNG [2012] 1 LNS 1296, the Court of Appeal held inter-alia that the Code is a mere guideline and cannot be enforced as if it is a binding statute on employers. Failure to comply with the Code per se would not be fatal in a proper retrenchment exercise.

    Be that as it may, in circumstances where redundancy is likely, employers should take steps to avert or minimise reductions of the workforce by the adopting measures such as:-

    1. Limitation on recruitment

    2. Restriction of overtime work

    3. Restriction of work on the weekly day of rest

    4. Reduction in number of shifts or days worked a week

    5. Reduction in the number of hours of work

    6. Re-training and/or transfer to other department/work.

    In the event that retrenchment becomes necessary, despite having taken all appropriate measures as stated above, employers should also take the following measures:-

    1. Give early warning

    2. Introduce schemes for voluntary retrenchment (or VSS) and for payment of redundancy and retirement benefits

    3. Retrench workers who are beyond retiring age

    4. Assist in job searching

    5. Spread the termination of employment over a longer period

    6. Ensure that no such announcement is made before workers and their representatives or trade union has been informed

    7. 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 condition)

    In cases involving the retrenchment of workmen, our superior courts have recognised the well-established principle of "LAST IN, FIRST OUT" ("LIFO"). The LIFO principle is to be applied according to the respective categories of workmen, i.e., their job functions, regardless of the "labels" given to their position.

    In the case of AMZ CORP SDN BHD V. SYE AH CHAI [1989] 1 MLJ 238, Abdul Malek J (as he then was) held that employers must also adhere to the principle of “last in first out” (LIFO) in any retrenchment exercise.

    The LIFO principle means that the most junior employee 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.

  3. Retrenchment benefits for employees

    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 based on the following formula :-

    1. ten days' wages for every year of employment under a continuous contract of service with the employer if he has been employed by that employer for a period of less than two years; or

    2. fifteen days' wages for every year of employment under a continuous contract of service with the employer if he has been employed by that employer for two years or more but less than five years; or

    3. twenty days' wages for every year of employment under a continuous contract of service with the employer if he has been employed by that employer for five years or more, and pro-rata as respect an incomplete year, calculated to the nearest month

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

    For employees who are not covered by the EA 1955, their retrenchment benefits would be based on their employment contract or contract of service, subject to other principles of law in decided cases, relevant industrial law and guidelines such as CCIH as previously mentioned.

    If the contract is silent, it is for the employer to decide whether or not to provide termination benefits, and on the amount to be given.

    In the case of EQUANT INTEGRATION SERVICES SDN BHD (IN LIQUIDATION) v. WONG WAI HUNG [2012] 1 LNS 1296, the Court of Appeal held as follows:

    Even under the Regulations (Employment (Termination and Lay-Off Benefits) Regulations 1980), a person employed more than one year would be entitled to ten days wages for one year of service. For others, it would depend on his contract of employment or in a case of unionised employee the term of their respective collective agreements. A standard industry labour practice is to compensate the retrenched employee with a salary of one month to one year of service.

  4. Other considerations under retrenchment exercise

    Apart from the above, employers must also take into consideration the following issues in exercising retrenchment:

    1. Payment of contractual dues;

    2. Notification of retrenchment exercise to the Labour Office;

    3. Any requirements pursuant to Collective Agreement or Employee Handbook.

    Besides undertaking a retrenchment exercise, many organisations have also taken the route of introducing a Voluntary Separation Scheme ("VSS") or Mutual Separation Scheme ("MSS"). A VSS is where an employee would apply to terminate his employment with the company and the company would consider whether or not to approve the application. Whereas an MSS is where both parties mutually agree on the cessation of employment.

  5. Industrial Court as a forum to challenge retrenchment

    As mentioned earlier, the Industrial Court of Malaysia is no doubt a popular forum to challenge the retrenchment exercise where an employee has been dismissed unfairly by an employer.

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


To conclude, understanding the principles of law on retrenchment is not only beneficial to employees to safeguard their rights to a gainful employment but also to employers in implementing lawful retrenchment exercises due to reorganisation or restructuring to reduce its headcount and overhead expenses in an attempt to ensure its survival and sustainability.

For further advice on the above, you may contact Encik Ahmad Imran Azlan at 03-2171 1484 or at

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