HR Guide: Retrenchment Procedures in Malaysia

A company has the power to organise and reorganise its business in the way it considers best for better business management. This includes the restructuring or reorganising through retrenching surplus labour. However, the company must act bona fide (in good faith) and not with motives or unfair labour practices.

To prove retrenchment, there must first be redundancy. In proving redundancy, there must be a surplus of labour or the requirements of the job functions of the employee have ceased or diminished to the extent that the job no longer exists.

Retrenchment Procedures

(A)  Providing the Employee Notice

The Employment Act 1955 and the Employment (Termination and Lay-Off Benefits) Regulations 1980 govern the retrenchment procedures of employees who earn not more than RM2,000 monthly and manual workers irrespective of the number of their monthly salaries. For employees who fall within the Employment Act, the length of notice period depends on the employees' length of employment. 

For employees who are not a part of the Employment Act, the length of notice period would be in accordance with their employment contract. 

(B) Compliance with Code of Conduct for Industrial Harmony 1975

If it is determined that there is redundancy, the Industrial Court has advised for retrenchment procedures to be carried out, in accordance with the accepted standards of procedure and guidelines such as the Code. Clause 22(a) of the Code states that if retrenchment becomes necessary despite having taken appropriate measures, the employer should take among others, the following measures:-

1. Provide early warning to the employees concerned;

2. Introduce voluntary retrenchment and retirement benefits schemes;

3. Retire employees who are above the normal retiring age;

4. Help in co-operation with the Ministry of Human Resources, the employees to find jobs;

5. Spread termination of employment over a longer period;

6. Make sure that no such announcement is made before the employees and their representatives or trade union have been informed.

(C) Reporting the Retrenchment

Employers must inform the retrenchment, voluntary separation, temporary layoff or an employee's pay-cut to the nearest Labour Office before any act of termination action through the prescribed Termination Form.

Failure to submit the report within the specified timeline is an offence under the EA and the employer could be fined for not more than RM10,000 for each offence.

(D) Retrenchment Benefits

For employees who are within the Employment Act, the Regulations grant that an employee would be entitled to termination or lay-off benefits if the employee was employed under a continuous contract of employment for at least 12 months before the termination. Following the Regulations, the quantum of termination benefits to be paid is prescribed.

For employees who are not a part of the Employment Act, the obligation to pay retrenchment benefits and the quantum of retrenchment benefits, if any, would be in accordance with their employment contract, if suitable.

Employers are also needed to submit the prescribed form to the Inland Revenue Board of Malaysia at least 30 days before the date of retrenchment.

Misusing Retrenchment 

With natural rights that allow employers to manage their employees, there have been situations where employers have dismissed their employees under the guise of retrenchment. In these circumstances, the Court may find that the employees are being terminated without just cause.

For instance, it was held that the retrenchment procedures were not bona fide where the employee was made redundant but the job with the same duties and functions remain or where employees who were terminated were, in fact, all active union members.

If the Court finds that there is unfair labour practice under the guise of retrenchment due to abuse of power or there is no genuine retrenchment, the Court may conclude that the dismissal was without just cause or excuse.

In this case, the Court may order reinstatement or compensation in lieu of reinstatement and back wages of a maximum of 12 months of the employee's last drawn salary for a probationer or a maximum of 24 months for a confirmed staff.

It is of utmost importance to comply with the requirements for retrenchment because the Court will not hesitate to protect the employees if it is found that the retrenchment procedures were made mala fide (in bad faith) or that the requirements for retrenchment were not met. 

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Source: Mondaq

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