In Hariprasad v. Divelkar AIR  SC 121, S. K Das J stated that “Retrenchment is defined as “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”
When a Company reorganise, restructure, merge or conduct cost cutting measures due to a financial downturn, it is inevitable that the amount of work would diminish leading to a surplus of employees and the reduction of work would lead employees to be redundant.
In PJ Community College Sdn Bhd v. Sathival V Sundram  2 ILR 891, Court stated that “It is the right of every employer to reorganise his business in any manner for the purpose of economy or convenience provided he acts bona fide… If the employer goes through the exercise of a reorganisation only for the purpose of providing himself with an excuse to get rid of the services of an innocent workman who had incurred his displeasure, he would be acting mala fide. But the employer has a right to determine that the volume of his labour force be consistent with business and organisation.”
In Mohd Azhan Ariffin v. Ranhill Berhad  3 ILR, Court stated that “…management of a company should be the managerial prerogative of the Company and that a Company has the right to reorganise its workforce structure which includes the number of employees in its payroll provided it is done bona fide.”
An employer forced to undertake a retrenchment exercise must abide by the Two mandatory principles i.e. ‘Foreigners out first’ and ‘Last in First Out’ (LIFO).
Section 60N of Employment Act 1955 states that “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.” When a Company hires both local and foreign workers for the same job and position and retrenchment is required for the survival of the Company, the employer is first required to retrench the foreign worker before the local worker regardless the length of service in the Company.
Last in Frist Out (“LIFO”) is an established principle that employers are required to retrench the most junior employee in service first while the long serving employees are retained. For a Company to depart from the LIFO principle it must show that it was done bona fide with valid justification.
Malaysia Shipyard & Engineering Sdn Bhd v, Mukhtiar Singh & Ors  1 ILR 626, the Company was able to convince the Industrial Court to depart from the LIFO principle through a complex point system which took into consideration of seniority of employees and also records of absenteeism, discipline, performance reflected in the annual appraisal.
Nirmala Devi N Letchumanan v, Informatics Training Technologu Sdn Bhd 1 ILR 121, Court stated that “… the reasons given by the Company to depart from the LIFO Principles are valid reasons, All the junior lecturers were able to teach many other subjects compared to the Claimant. In considering the LIFO Principles, seniority was not the only factor. Under Article 22(b) of the Agreed Industrial Relation Practices clearly stipulates the criteria in selecting employees to be retrenched.”
It is important for an Employer to remember that while a Company may decide to depart from the LIFO principle, it can only be exercised on exceptional grounds and with extremely strong justification.