Employment Law
(How to conduct Retrenchment in Malaysia)

How to Conduct Retrenchment in Malaysia: A Step-by-Step Guide for Employers

Retrenchment is sometimes necessary for businesses facing financial constraints, restructuring, or downsizing, but it must be conducted fairly and in compliance with Malaysia’s labor laws. A poorly executed retrenchment process can expose employers to legal risks and claims of unfair dismissal. Here’s a guide to conducting retrenchment in Malaysia, following best practices and the latest legal requirements to ensure a fair and compliant process.

What is Retrenchment?

Retrenchment involves terminating employees due to reasons unrelated to performance or misconduct, usually for organizational or economic reasons. In Malaysia, retrenchment is governed by the Employment Act 1955, the Industrial Relations Act 1967, and guidelines from the Ministry of Human Resources (MOHR). Employers must follow a structured approach to protect both their legal standing and the welfare of their employees.

Key Steps to Conducting Retrenchment in Malaysia

Step 1: Establish the Need for Retrenchment

• Document the Business Rationale: Before initiating retrenchment, ensure you have a valid business reason, such as financial challenges, technological shifts, or restructuring needs.
• Evidence Collection: Keep comprehensive records, such as financial reports and strategic plans, to justify the decision if it is later questioned.

Step 2: Apply Fair Selection Criteria and LIFO Principle

• Selection Criteria: Create a fair, transparent selection process. The “Last-In, First-Out” (LIFO) principle is widely recommended, which gives priority to long-serving employees.
• Document Exceptions to LIFO: If exceptions are made (e.g., retaining employees with specialized skills), document the reasoning to avoid claims of discrimination.

Step 3: Consider Alternatives to Retrenchment

Explore all alternatives before proceeding with retrenchment. The Code of Conduct for Industrial Harmony recommends considering options like:

• Reduced Working Hours: Temporarily adjust work hours to maintain employment.
• Pay Cuts: Implement pay reductions as an interim measure.
• Voluntary Separation Scheme (VSS): Offer a VSS for employees to voluntarily resign with compensation.

Step 4: Notify Relevant Authorities

• Ministry of Human Resources Notification: For retrenchment exercises involving five or more employees in a month, submit the Employment Retrenchment Notification (ERF) form to MOHR at least 30 days prior to the retrenchment date. Failure to notify can result in penalties.

Step 5: Communicate with Employees

• Transparent Communication: Notify employees in writing, providing adequate notice as per their contracts or, at a minimum, the Employment Act requirements.
• Consultation: Where possible, engage in transparent discussions with employees and union representatives, explaining the rationale and selection criteria for retrenchment.

Step 6: Provide Fair Retrenchment Benefits

Under Malaysian law, retrenchment benefits are expected, especially for employees covered by the Employment Act 1955. The minimum retrenchment compensation is:

• 10 days’ wages per year for employees with less than 2 years of service.
• 15 days’ wages per year for employees with 2 to 5 years of service.
• 20 days’ wages per year for employees with more than 5 years of service.

For employees not covered by the Act, refer to their employment contracts for specific terms.

Step 7: Offer Outplacement Support (Optional)

Providing career support, such as job search assistance, career counseling, or resume-building workshops, can help affected employees transition more smoothly. While this step isn’t mandatory, it promotes goodwill and maintains the company’s reputation.

Step 8: Maintain Detailed Documentation

Keep thorough records of every decision, communication, and action taken during the retrenchment process. Comprehensive documentation is essential in defending against potential claims of unfair dismissal.

Avoiding Claims of Unfair Dismissal

To minimize the risk of unfair dismissal claims, employers must ensure that:

• Retrenchment is Genuine: The retrenchment must be based on legitimate business needs, not used to unfairly dismiss specific employees.
• Selection is Fair and Transparent: Follow established criteria and document any deviations from the LIFO principle.
• Retrenchment Benefits Are Provided Fairly: Meet all statutory and contractual obligations regarding compensation.

How Ng, Zainurul, Seke & Khoo Can Assist with Retrenchment

At Ng, Zainurul, Seke & Khoo, we offer expert legal guidance to ensure your retrenchment process is compliant, fair, and risk-free. Retrenchment requires careful planning, and our team is here to provide support every step of the way, from developing a clear retrenchment strategy to ensuring compliance with Malaysian employment laws.

Our Retrenchment Services Include:

1. Retrenchment Planning and Strategy: We work with your business to create a legally compliant and strategic retrenchment plan, providing advice on fair selection criteria, employee notice requirements, and documentation.

2. Notification and Compliance Assistance: Our team assists with all necessary notifications to the Ministry of Human Resources and ensures compliance with relevant regulations to avoid legal pitfalls.

3. Drafting Clear Communications: We can draft legally sound communications, including show cause letters and retrenchment notices, to convey the reasons for retrenchment professionally and transparently.

4. Representation in Legal Disputes: In the event of an unfair dismissal claim, our experienced lawyers will represent your company’s interests in the Industrial Court, minimizing potential legal and financial liabilities.

5. Workshops and Training for HR Teams: We offer training sessions for HR professionals on best practices for managing retrenchment, maintaining compliance, and preventing disputes.

Conclusion

Conducting retrenchment in Malaysia requires not only a sound business rationale but also strict compliance with employment law to ensure a fair and transparent process. By following best practices, employers can navigate the complexities of retrenchment while protecting the rights of employees and minimizing risks.

For professional guidance through every step of the retrenchment process, contact Ng, Zainurul, Seke & Khoo. Our dedicated team of employment law experts will help you handle retrenchments with confidence, compliance, and care for all involved.