Demystifying The Complexities In A Retrenchment Exercise

Jan 25, 2016 1 Min Read

5 burning questions to ask

Malaysia (and other countries around the world) is currently facing economic challenges. Coupled with the plummeting value of ringgit and escalating cost of living, the future of employment market looks pretty bleak.

Whenever anyone mention about companies from the oil and gas industry, the banking sector and the airline industry in Malaysia, one common denominator emerges: Malaysians are seeing a wave of retrenchments in these industries.

At this juncture, it is common that an employee will have many burning questions in mind.

This article attempts to address some of these areas to demystify the complexities in a retrenchment exercise as much as possible.

Question 1

What are the common causes that lead a company to carry out a rightsizing exercise?

Some of the common causes cited are:

  • decreasing demand for product or services in the market
  • increase in production cost
  • change in production system from manual to automation
  • business loss
  • outsourcing
  • sale of business
  • mergers and acquisitions of business

Question 2

Can the company merely cite those reasons and dive straight on to carry out a retrenchment exercise?

The law makes it mandatory for employers to have proper reasons before embarking on a retrenchment exercise.

In fact, the success of the company in defending its position to carry out such exercise is dependant upon the documentation that they have that forms the basis of the rightsizing exercise; and not merely by giving a lip-service to the reasons cited.

For example, if the reason cited is business loss, then the balance sheet and profit and loss accounts must be produced to establish the financial losses suffered by the company. It must be able to show actual financial loss, not just paper loss.

On the other hand, if the company is saying that the reason is due to reduction in market demand, it must be able to show a significant business decline over the months and years, including a reduction in the company’s profits.

In a recent rightsizing that I have advised on, the company is able to demonstrate not only a decline in the market demand for the past three years but the very fact that the company has to take up a bank loan in the past six months to pay the wages of the employees!

Question 3

What are the regulatory bodies that the company needs to inform when they embark on a retrenchment exercise?

In a unionised environment, there is highly likely to be a provision in the collective agreement that dictates the requirement of an employer to inform the union that the company will be embarking on a retrenchment exercise wherein the categories or grades of employees identified for retrenchment would need to be communicated to the union, before the lodgement of PK form (also known as “Termination Form”).

In a non-unionised environment, the company is first required to fill up a PK Form issued by the Ministry of Human Resources and lodge it at the nearest Labour Department, at least one month before the retrenchment exercise is carried out.

The form entails the important details of the employer, types of jobs retrenched, measures undertaken prior to retrenchment exercise and most importantly, items payable to the employees, together with the formula of computation used.

In addition, the company should also assist the employees to apply for tax exemption from the Inland Revenue Department and prior to releasing the retrenchment benefits. Currently, a retrenched employee is entitled for a tax exemption up to a maximum of RM10,000 for each completed year of service.

Question 4

How should the employer notify the employees on the retrenchment exercise?

In a non-unionised environment, once the PK form has been lodged with the Labour Department, the company is required to issue a letter of notification of retrenchment to the affected group of employees.

There is no legal requirement dictating the mode of communication to the employees other than the need to issue a letter of notification.

In my experience advising conglomerates, how such news is communicated to affected employees plays a crucial role in maintaining a harmonious relationship between the employee–employer, or it is highly likely to turn into an acrimonious one.

This situation is more prevalent if the employees are unionised. Therefore, regardless whether it is a non-unionised environment or otherwise, an engagement session with the employees is highly recommended. An added emphasis must be given to the content of the engagement slides so that the right message gets across to the employees.

Common mistakes made by employers which I have witnessed is to hand out letters of notifications without any sympathy or by merely putting a letter notifying the retrenchment on the employees’ work desks.

Another instance is to instruct an employee to pack his/her belongings and leave the office premises upon issuing a retrenchment letter. Such instances would highly likely lead the employee to file a claim for unfair dismissal under Section 20 of Industrial Relations Act 1967.

Question 5

What are the items payable to an employee who has been retrenched or made redundant by the company?

This must be dealt with by first identifying whether a person is an employee who is covered under the scope of Employment Act 1955 (EA 1955) or otherwise.

Generally, a person is an employee under the scope of EA 1955 if he/she is earning RM2,000 (inclusive of wages and fixed allowances) and below or employees who are in the special categories enlisted in the First Schedule of the EA 1955.

If a person is an employee under the scope of EA 1955, he/she should take note of some these items (see Knowing your rights below).

The situation greatly differs when a person is not an employee (a non-EA employee) under the scope of EA 1955. This is simply because the employer is not legally required to comply with the provisions under EA 1955. This may mean that a non-EA employee would not be entitled to any termination benefits provided under Regulations 1980, unless the employment contract or company handbook stipulates otherwise. As the biggest amount of payout usually stems out from termination benefits, this may appear to be an unfortunate situation for employees to be in.

Concluding thoughts

Retrenchment is a very traumatic exercise and the problems can be overwhelming if a company handles it badly. In the companies that I have advised in the past, especially in a situation where both EA 1955 and non-EA 1955 employees are involved, I have strongly encouraged them to make a payout for termination benefits for both categories of employees.

While a company needs to retrench employees, the importance of handling the exercise with empathy and dignity cannot be overlooked because all employees have an unfettered right to file a claim under Section 20 of Industrial Relations Act 1967 for unfair dismissal.

If the employee succeeds in proving that the termination was without just cause, the company may be susceptible up to a maximum of 24 months of backwages, in addition to one month wages for each year of service.

Therefore, how quickly a company can move forward positively after carrying out a retrenchment exercise depends largely on how the retrenchment exercise was planned and implemented.

Effective communication and lucrative formula for termination benefits are certainly the name of the game!

Knowing your rights

(i) Termination benefits
The applicable law here would be Employment (Termination and Lay-Off Benefits) Regulations 1980, a regulation which stems from EA 1955.
Regulations 6(1)(a), (b), and (c) governs the amount to be paid as termination or lay-off benefits which is dependent on the length of the employee’s tenure.
(a) if the employee has been employed for less than two years, the benefits shall be 10 days wages for every year in service
(b) if the employee has been employed for more than two years but less than five years, the benefits shall be 15 days wages for every year in service; or
(c) if the employee has been employed for more than five years, the benefits shall be 20 days wages for every year in service.
In situations where the employment contract, company handbook or collective agreement provides a more favourable formula for termination benefits, that formula shall prevail against Regulations 6(1)(a), (b), and (c).

(ii) Notice period
Generally, the length of notice depends on the employee’s length of employment. Section 12(2)(a), (b) (c) of EA 1955 stipulates:
(a) if the employee has been employed for less than two years, notice must be given at least four weeks in advance;
(b) if the employee has been employed for more than two years but less than five years, notice must be given at least six weeks in advance; or
(c) if the employee has been employed for more than five years, notice must be given at least eight weeks in advance.
If the employer is unable to provide such notice, the employer would then need to pay salary in lieu of notice period.
However, in situations where the employment contract, company handbook or collective agreement provides a more favourable length of notice, that notice period shall prevail against Section 12(2)(a), (b) (c) of EA 1955.

(iii) Unutilised or unconsumed annual leave
Employer are required to make payment for any unutilised annual leave, calculated on a pro-rated basis up to the last employment date of the employee.

(iv) Any other contractual terms contained in employment contract, company handbook or collective agreement
A good example here will be contractual bonus.

*** *** ***

Another point to note would be Section 20 of Industrial Relations Act 1967. By virtue of this provision, you can file a complaint if you are unhappy with the retrenchment exercise. If the judge in the Industrial Court decides in your favour, you are likely to receive a lucrative compensation!

Section 20 states as follows:

Representations on dismissals
Where a workman, irrespective of whether he is a member of a trade union of workmen or otherwise, considers that he has been dismissed without just cause or excuse by his employer, he may make representations in writing to the Director General to be reinstated in his former employment; the representations may be filed at the office of the Director General nearest to the place of employment from which the workman was dismissed.

Natalie Chong is a legal adviser in MECA. Her role consists of providing advice to employers on all areas of labour laws and industrial relations which includes restructuring exercise, union negotiations, investigation on sexual harassment and corporate bullying and any other types of employment misconduct. She also trains on topics within the realm of Malaysian employment laws and has spoken to audience ranging from blue-collared workers to professors in universities. To share your experience on how you survived retrenchment and how you overcame that tough season without employment, email us at

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