Retrenchment in Malaysia: The Legal Checklist Every Employer Should Follow

A lawful retrenchment in Malaysia requires a genuine redundancy situation, fair selection of affected employees (applying LIFO unless departure is justified), termination of foreign workers in the same category first, statutory notice and benefits, and notification to the Labour Department using Borang PK at least 30 days before termination.

When is retrenchment justified?

It is well established that an employer is entitled to organise its business in the manner it considers best, and the courts will not interfere with bona fide reorganisation — but the redundancy must be genuine. The Industrial Court examines whether the functions of the affected position actually ceased or diminished, and whether the financial or operational rationale is supported by evidence such as audited accounts, restructuring plans or declining order books.

Red flags that convert a retrenchment into an unfair dismissal include hiring replacements for the same role shortly after, retrenching while recruiting, and selecting employees with live grievances or protected characteristics.

How must employees be selected?

The accepted industrial practice, reflected in the Code of Conduct for Industrial Harmony 1975, is last in, first out (LIFO) within the same category of employees. An employer may depart from LIFO for sound business reasons — such as retaining critical skills — but bears the burden of justifying the departure.

Section 60M of the Employment Act adds a statutory rule: an employer may not terminate a local employee’s services for redundancy unless foreign employees in a similar capacity are terminated first.

What procedural steps and payments are required?

Employers must give contractual or statutory notice (whichever is greater), pay termination benefits to eligible employees under the Employment (Termination and Lay-Off Benefits) Regulations 1980, and submit the PK form (Borang PK) to the nearest Labour Department office at least 30 days before the retrenchment takes effect. Failure to notify is an offence.

The Code of Conduct also expects employers to take mitigation steps before retrenching — limiting recruitment, reducing overtime, freezing hires, and offering voluntary separation schemes. Evidence of these steps materially strengthens the employer’s case if the retrenchment is later challenged.

Key Takeaways for Employers

• Redundancy must be genuine and provable with contemporaneous business evidence.
• Apply LIFO within the same category unless a documented business justification supports departure.
• Foreign employees in similar roles must be released before local employees (section 60M EA).
• Submit Borang PK to JTK at least 30 days before termination — non-notification is an offence.
• Mitigation measures (hiring freezes, VSS, redeployment) should precede and accompany any retrenchment exercise.

Frequently Asked Questions

Is retrenchment considered dismissal in Malaysia?

Yes. A retrenched employee may file a representation under section 20 of the Industrial Relations Act 1967, and the employer must then prove the redundancy was genuine and the selection fair.

Must an employer always follow LIFO?

LIFO is the default industrial practice, but employers may depart from it for sound, documented business reasons such as retaining essential skills. The burden of justification lies on the employer.

What is Borang PK? It is the statutory notification form that employers must lodge with the Labour Department at least 30 days before any retrenchment, voluntary separation scheme or temporary lay-off takes effect.