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Responsible Retrenchment Practices in Malaysia

Updated: Apr 19, 2022

Retrenchment is a term used to describe when a business chooses to significantly cut or scale-back its activities, leading to the dismissal of employees who have become a surplus to the needs of the company.

It is established that any organization has the legal right to organize and reorganize its operations in whatever way it sees fit for better business management and effectiveness. In order to embark these reorganizing or restructuring strategies companies must comply with legitimate retrenching strategy and practices. The organization must do so in good faith and not arbitrarily with victimization or unfair labor practices in mind for example in the case of Mohd Zakir Yusoff v. Telarix (M) Sdn Bhd.

The burden of proving that whether the retrenchment was justified or not lies on the employer. Hence it is advised to follow responsible retrenchment practices, let’s have a look into how retrenchment is practiced in Malaysia.

1. Retrenchment in Malaysia – principles, procedures and guidelines

In the Malaysian context 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 regardless of the amount of their monthly salaries. For employees who fall within the Employment Act, the length of notice period depends on the employees’ length of employment. Also, The Malaysian Code of Conduct for Industrial Harmony 1975 (the Code) which was endorsed in February 1975 provides a guideline that the employer must make a proper selection on the category of employees to be retrenched.

1.1 Criteria for selection of employees to be retrenched

The Code contains recommended criteria for employers to consider when selecting employees to retrench. This includes:

  • Capability

  • Experience

  • Skill and occupation credentials

  • Age

  • Family condition

  • Span of service

  • Status (non-citizens, casual, temporary, permanent)

Additionally, another common practice followed to retrench employees based on the LIFO principle, i.e. “Last In, First Out”, according to which the employee who has joined recently and has the shortest length of service is chosen for retrenchment. It is not mandatory for employers to use the LIFO principle, although it is known as one of the more objective means of selection.

1.2 Guidelines to the Procedure of Retrenchment

Clause 22(a) of the Code of Conduct for Industrial Harmony 1975 (the Code) provides the subsequent measures to be taken by the employer:

  1. to communicate an early warning as possible to the workers concerned. This refers to giving notices to the employees which depends on the employee’s length of employment.

For employees who do not fall under the preview of the Employment Act, the length of notice period would be in accordance with their employment contract.

  1. introducing schemes for voluntary retrenchment and retirement and for payment of redundancy and retirement benefits

  2. retiring workers who are beyond their normal retiring age.

  3. co-operating with the Ministry of Labor and Manpower to help the workers to find work outside the undertaking.

  4. spreading termination of employment over an extended period.

  5. ensuring that no such announcement is announced before the workers and their representatives or trade union have been informed.

1.3 Reporting Retrenchment to the authorities

Employers are required to submit an employment notification retrenchment form (PK Form) to any Labour Office, failure of which carries a punishment of a fine of RM10,000.00. Employers are required to disclose information such as the reasons for the retrenchment, number of workers involved in voluntary separation schemes, etc.

1.4 Retrenchment benefits

For employees who fall within the EA, the Regulations provide that an employee would be entitled to termination or lay-off benefits if the employee was employed under a continuous contract of employment for a minimum of 12 months before the termination.

Retrenchment benefit calculations can be done as follows:

For employees who do not fall within the EA, the obligation to pay retrenchment benefits and the quantum of retrenchment benefits, if any, would be in accordance with their employment contract, if applicable.

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

2. Can Retrenchment be Challenged?

Yes, if any retrenched employee feels that the retrenchment conducted was not on fair grounds, they then can file an action against the employer for wrongful dismissal by virtue of Section 20 of the Industrial Relations Act 1967. The court will then re-investigate the conditions leading to the retrenchment and if a claim is successful, the court may order the employer to reinstate the employee or to pay compensation in lieu of reinstatement and back wages (a maximum of 24 months).

One of the recent retrenchments in Malaysia that has become the buzz of the hour is AirAsia retrenchment. But we would like to categorize it as responsible retrenchment strategy because:

  • Reason for retrenchment was justified-the global hit of pandemic had put the aviation industry on halt.

  • AirAsia had been built on change management, which made it easy for its employees to move jobs.

  • Proper medical benefits and other retrenchment benefits were provided.

  • Their Group CEO has made a statement recently of rehiring all the retrenched employees which greatly signifies the psychological safety provided to both existing and retrenched employees.

3. Alternatives to Retrenchment

Ideally it is said that organizations should follow alternatives that averts retrenchment. These alternatives are an extraction from the code:

(a) Limitation on recruitment/Freezing recruitments.. (b) Restriction of overtime work. (c) Restriction of work on a weekly day of rest. (d) Reduction in the number of shifts or days worked a week. (e) Reduction in the number of hours of work. (f) Re-training and/or transfer to other department/work.

It’s clear that the more the employers and the businesses adopt international best-practice retrenchment programs less will be the chances of its negative impacts. The responsible retrenchment practices empower those being retrenched – both emotionally and practically therefore those remaining within the company would similarly recover faster.

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