FAQ on Retrenchment

The consequence of the COVID-19 pandemic has not seen its end with businesses in Malaysia facing a myriad of challenges, namely, operational restructuring, economic downturn or changing market conditions. Given these commercial realities and difficulties, some companies have resorted to retrenchment exercises to downsize their business and manage financial constraints with a limited workforce.

The process of retrenchment requires careful consideration and assessment. Here are a few key points to consider before contemplating or implementing a retrenchment exercise.

1. What is the difference between a “retrenchment” and “layoff?”

Retrenchment has an element of permanence attached to it where an employee’s services is terminated by their employer due to the redundancy of their role in the company.

On the other hand, a layoff can be temporary where the employee does not receive work and does not receive pay for a specified period.

 

2. Are there statutory procedures for an employer to comply with during a retrenchment exercise?

There is no legislation regulating a step-by-step checklist/process to be implemented by an employer conducting a retrenchment exercise.

However, the Code of Conduct for Industrial Harmony 1975 (the “Code”) sets out guidance to be considered by employers. The Code does not have legal force though the guidance provided by the Code is instructive not only to employers but also considered by the Industrial Courts in assessing steps taken by an employer before retrenching its employee(s).

The Employment Retrenchment Notification 2004 requires an employer to notify the nearest Labour Office at least 30 days before the retrenchment exercise, by submitting an employment notification retrenchment form, Form PK.

 

3. What guidance does the Code set out for a retrenchment exercise?

Some guidance in the Code on best practices when conducting a retrenchment exercise include the following:

1. Employers are to first consult with the employees’ representatives or their trade union (if any) and with the Ministry of Human Resources (“MOHR”) on the intended retrenchment and measures to be taken to minimise reduction in workforce.
2. If retrenchment is inevitable, non-exhaustive best practices include :

• Providing early warning to affected employees.
• Introducing voluntary retrenchment schemes/redundancy payments/retirement benefits.
• Retiring employees who are beyond their normal retirement age.
• Assisting and cooperating with MOHR affected employees to find alternative jobs elsewhere.
• Retrenchment of employees to occur in stages over a longer period.

 

4. What are general “selection criteria” to be considered by the employer in identifying employees who are redundant in a retrenchment exercise?

1.  Status of the employee – Consider the Foreign Worker, First Out Policy (“FWFO” Policy) pursuant to Section 60N of the Employment Act,1955 where employers shall not terminate a local employee unless he has first terminated all foreign employees who are employed in a similar capacity as that local employee.
2. Length of service – Adopt the “last in, first out” (“LIFO”) principle, i.e. the employee with the shortest length of service will be selected first in the retrenchment exercise, unless there are exceptional reasons to deviate from this principle.
3. Ability, experience, skill and occupational qualifications of each employee.
4. Age of the employee.
5. Family conditions.
6. Consider the company’s need for the efficient operation of the establishment or undertaking.

 

5. What factors are considered by the Industrial Court in evaluating whether a retrenchment-based termination was performed with just cause and excuse?

The courts will generally consider whether the retrenchment exercise was bona fide and whether the termination of the employee was justified or performed in good faith.

Some questions commonly asked are as follows:

1. Are there sufficient justification and cogent evidence to support the company’s reasons that the employee’s role in the company is redundant? (This would include an objective examination of the factual matrix of the company’s financial or business situation)
2. Did the company comply with procedural fairness in the retrenchment exercise? (See our response in item 4 above). If not, were there valid reasons to depart from it in the retrenchment exercise?
3. Are there other reasons that would lead to the termination of the employee, which could amount to the retrenchment being done in bad faith?

 

6. Is there a minimum termination notice period that an employer must provide to an employee in a retrenchment exercise?

The length of notice period depends on the notice period stipulated in the employment contract. If the contracted termination notice period is more favourable than the period stated under Section 12 of the Employment Act,1955, then the contractual period shall apply.

In the absence of a contractual notice period or if the contracted termination notice period is less favourable than the notice period provided under Section 12 of the Employment Act, 1955, then the statutory notice period shall apply for terminations performed as a result of, among others, redundancy or closure of business:

 

Employment with the Company	Notice Period
Less than 2 years	4 weeks’ notice
More than 2 years but less than 5 years	6 weeks’ notice
More than 5 years	8 weeks’ notice

 

7. Can employers terminate a pregnant female employee in a retrenchment exercise?

YES, if the ground for terminating a pregnant female employee is due to a closure of the employer’s business.

 Section 41A of the Employment Act, 1955 provides that where a female employee is pregnant or is suffering from a pregnancy-related illness, it shall be an offence for her employer to terminate her services or give her notice of termination UNLESS the grounds for such termination is due to her willful breach of a condition of her employment contract, misconduct or closure of the employer’s business.

 The burden of proving that the termination of a pregnant female employee is not on account of her pregnancy or pregnancy-related illness, rests with the employer.

 

8. Would the employee have to serve their notice period?

NO. Section 13 of the Employment Act,1965 allows for payment in lieu of notice. If the nature of the business closure is such that, operationally it may not be feasible for employees to serve their termination notice period, payment in lieu of such notice period must be paid by the employer to the employee.

 

9. What are the relevant documents needed to conduct a retrenchment exercise?

There are no fixed list of documents. As a matter of best practices, an employer should ensure that their documentation surrounding the conduct of a fair and proper retrenchment exercise is kept, including:

1. Form PK.
2. Supporting documents/statement/information on the company’s rationale for the retrenchment exercise.
3. List of employees to be retrenched including information such as their respective positions, length of service, brief reasons for retrenchment.
4. Copies of the employees’ retrenchment notice.
5. Other records demonstrating due and proper communications held with the affected employees on the retrenchment exercise.

 

10. Are retrenched employees entitled to retrenchment/termination benefits?

Employees who earn RM4,000 and below are entitled to receive minimum termination benefits as set out in the Employment (Termination and Lay-Off Benefits) Regulations 1980 (“Regulations”) which shall be paid no later than seven (7) days after the date of termination, as follows:

 

Employment with the Company	(Severance) Wages Payable
Less than 2 years	10 days’ wages for every year of employment
More than 2 years but less than 5 years	15 days’ wages for every year of employment
More than 5 years	20 days’ wages for every year of employment
and pro-rata as respect an incomplete year

Employers are not statutorily obliged to provide termination benefits to employees who earn more than RM4,000 where this would depend on eligibility pursuant to the employment contract or a commercial decision to be exercised by the employer.

The responses above serve as a general guide to help businesses navigate any retrenchment exercises that are being considered whilst minimising risks of wrongful dismissal claims. However, in view that every retrenchment exercise is unique and fact-specific, it is crucial for businesses to carefully thread such exercises with due diligence.