Employers and their Human Resource Managers that have to undertake any exercise which involves reduction of workforce who may involve colleagues of their own dread when such instruction are issued but these practical consideration are aimed at assisting discharging their duties fairly and in accordance with the law

Company’s Right

Company always has the right and prerogative to undertake any retrenchment exercise as employer is entitled to organize their business in the way it deem best provided that the managerial power is exercised bona fide. There cannot be any ulterior motives by the Company, used to victimize certain employee and must correspond with the financial position or structure of the company. In simple terms the company cannot be claiming financial losses but in actual fact making healthy profits or reorganizing to eliminate only senior employees with higher remuneration package.

It is imperative that financial information that leads to such exercise is secured by the Human Resource team to justify in the event any challenge is made in the future. This can be in the form of financial data or independent expert reports that can be used as corroborative evidence that would satisfy the legal position that this managerial power is exercised in a bona fide manner.

Potential Liability for Non-Compliance

Any exercise not done genuinely, fairly or accurately will expose the company to the following;

  • Claims of Unfair Dismissal

If the Courts deem the exercise is not conducted genuinely and against established principles, award of compensation can be ordered against the Company

  • Committing an Offence pursuant to Employment (Termination and Lay-off Benefits) Regulations 1980

Employers are required to submit an employment notification retrenchment form (Pemberitahuan Pemberhentian Pekerja 2004-PK Form) to the Jabatan Tenaga Kerja, failure of which carries a punishment of a fine of RM10,000.00.  There are deadline to be adhered to which is 30 days prior, 14 days and 30 after. There are requirement to provide pertinent information such as the reasons for the retrenchment, action taken to avoid retrenchment number of workforce, number of workers being retrenched.

Compliance with Section 60M and 60N Employment Act 1955

For employees that fall within the scope of the Employment Act, there must be strict compliance of the following;

  • Section 60M Employment Act 1955

No employer shall terminate the contract of service of a local employee for the purpose of employing a foreign employee

  • Section 60N Employment Act 1955

where an employer is required to reduce his workforce by reason of redundancy necessitating the retrenchment of any number of employees, the employer shall not terminate the services of a local employee unless he has first terminated the services of all foreign employees employed by him in a capacity similar to that of the local employee

Selection Principles

It is important that these practices must be considered and/or adhered if practicable to avoid any potential liability;

  • LIFO Principle (“Last In First First Out”)
  • FWFO Principle (“Foreign Worker First Out”)
  • Code of Conduct for Industrial Harmony (“Code”)

Code of Conduct for Industrial Harmony

Where redundancy is likely, an employer should take positive steps to avert or minimize, 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

Alternative Avoidance Measures

Any employer before undertaking retrenchment which is well within the discretion of the employer is always advised to adopt avoidance measures such as offering;

  • Mutual Separation Scheme
  • Voluntary Separation Scheme


It is worthwhile to note employees that have consented to such scheme are not allowed to then renegade on their acceptance and claim unfair dismissal as decided by the Federal Court  in Zainon bt Ahmad & 690 others v Padiberas Nasional Berhad [2012] 8 CLJ 29

Retrenchment Benefits Payable

  • Employee covered by the Employment Act (EA Employee)

An employee is entitled to termination benefits if he has been employed for at least 12 months payable as follows:

  • 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.

Payment to be made within seven days and this payment will be in addition to any notice period payment payable if applicable. Please note if the employment contract provide for more favourable terms then those terms will be applicable

  • Employee not covered by the Employment Act (Non-EA Employee)

These employee are subjected to their respective employment contract and if there is no provision for retrenchment benefits than it is subject to employer’s decision if payable but it is always advisable to provide benefits payment no lesser that the statutory formula in Employment (Termination and Lay-off Benefits) Regulations 1980




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