The economic effects of the pandemic may not resolve itself soon. Many businesses have been forced to take drastic measures to cut costs, including retrenching employees. While many articles on the internet explain the legal principles of retrenchment, this write-up seeks to debunk some of the common misconceptions about retrenchment in Malaysia.
Myth 1: Retrenchment is Wrong
In Malaysia, retrenchment is viewed delicately but in reality an employer may legally reorganize his commercial undertakings for any legitimate reason, such as promoting their economic viability and long term business sustainability. This includes removing employees who are considered surplus to the needs of the organization. However, given that retrenchment involves the livelihood of employees, employers cannot retrench employees for a collateral purpose or to victimize a specific employee.
Retrenchment, if done correctly and in line with legal principles, is not a “wrong” act by the employer, although we have to be empathetic to those who have been affected. Sometimes, retrenchment may be a necessity for the business to survive – for example, businesses in the service industry where headcount costs comprise a bulk of their operating expenses. In critical cases, if the company does not retrench, it may cause a complete closure of business in which case all employees lose their jobs.
Myth 2: It is illegal not to comply with the Code of Conduct for Industrial Harmony (“Code”)
The Code is a set of guidelines and principles for employers and workers to achieve industrial harmony. While it does contain provisions on retrenchment, it does not have the force of law. The Code is not an Act of Parliament or a regulation. Compliance with the Code is recommended, but not mandatory. The Industrial Court will consider compliance with the Code as one factor in determining whether a retrenchment is fair.
Myth 3: Last In First Out (LIFO) is mandatory
LIFO involves the management commencing retrenchment with the latest recruit in the redundant category, and progressively selecting employees for retrenchment based on their tenure. While LIFO is recognized as an objective selection criteria, it is not a mandatory principle.
Employers may depart from LIFO if an alternative selection criteria is objective and fair. For example, some employers may select employees based on factors like disciplinary or performance.
Myth 4: Employers need approval from the Government to retrench
This is incorrect. A company which has retrenched its employees must file a “Borang PK” or Employment Retrenchment Notification. The form sets out brief details about the retrenchment. However, this is a notification of retrenchment and not a request for approval. Employers need not wait for the labour office to “approve” a retrenchment before they can implement it.
Myth 5: All employees are entitled to termination benefits
Only employees subject to the Employment Act 1955 (eg: those whose wages do not exceed RM2,000 a month and/or those involved in manual labour) are entitled to statutory termination benefits. The rate of termination benefits paid shall be calculated based on the formula provided in Regulation 6(1) of the Employment (Termination and Lay-off Benefits) Regulations 1980 (“Regulations”) which is calculated with reference to their length of service.
Employees who do not fall under the Employment Act 1955 are not entitled to statutory termination benefits. They do not have a legal basis to demand that the employer pays them the same amount as in the Regulations. Instead, their entitlement to termination benefits is subject to contract, i.e. whether this was promised by the employer in their employment contract, handbook or any other employment policy. Although termination benefits are not mandatory for these employees, the payment or non-payment of termination benefits is one factor that will be considered by the Industrial Court in determining whether the retrenchment was fair.
A company may initially say it requires retrenchment of its workforce to stay afloat, but that may not always be the case. Sometimes, a genuine retrenchment can still be held by the Industrial Court to be unfair, if the correct procedure or legal principles are not followed. Given the wide array of complexities involved in retrenchment, employers should obtain proper advice before implementing a restructuring. Many of the commonly held beliefs about retrenchment may, in actuality, be nothing more than myths.
Zi-Han Lim is an associate in the dispute resolution practice group at Donovan & Ho. He is experienced in dispute resolution, focusing on employment and industrial relations, administrative law and commercial litigation.
Donovan & Ho is a law firm in Kuala Lumpur, Malaysia. Our practice areas include employment law, dispute resolution (litigation and arbitration), corporate and tax advisory, and real estate/conveyancing. Have a query? Contact us.