RETRENCHMENT IN MALAYSIA: NAVIGATING LEGAL RESPONSIBILITIES AND BEST PRACTICES 

Retrenchment is the discharge of surplus labour or staff by an employer for any reason whatsoever otherwise than as a punishment inflicted by way of disciplinary action. 

Retrenchment is a necessary business decision at times to enable businesses to cope with challenges such as economic downturns, financial constraints, business restructuring or technological redundancy. The Industrial Relations Act 1967 recognizes the right of the employer to terminate the services of the employee due to redundancy or the reorganization of the employer’s business, trade or work. However, employers must ensure that the retrenchment exercise is done in compliance to the laws and ethical standards in Malaysia.

This article will explore the legal framework for retrenchment in Malaysia as well as the Code of Conduct for Industrial Harmony which provides best practices for companies managing such processes. 

Legal Framework for Retrenchment in Malaysia

Retrenchment is primarily governed by the Employment Act 1955 and the Industrial Relations Act 1967.

The Employment Act 1955 outlines basic employment rights and protections, including rules pertaining to retrenchments. Key provisions that employers should follow in retrenchment exercises are as follow:

1. Notice Period: Employees must receive notice based on their length of service:

• Less than 2 years: 4 weeks

• 2 to 5 years: 6 weeks

• More than 5 years: 8 weeks Employers may also choose to provide payment in lieu of notice.

2. Severance Pay (Retrenchment Benefits): Quantum of termination benefits payable to employees is provided for under Reg 6:

On the other hand, the Industrial Relations Act 1967 provides a mechanism for resolving disputes related to retrenchment whereby S. 20 of the Industrial Relations Act 1967 provides that retrenched employees have the right to file a claim at the Industrial Court if the employee believes that the termination was not done with just cause and excuse.

Code of Conduct for Industrial Harmony

The Code of Conduct for Industrial Harmony is a voluntary guideline issued by the Ministry of Human Resources. The Code of Conduct may not be legally binding on employers, but the Industrial Court encourages compliance with the Code and may conclude that the retrenchment exercise was carried out mala fide if the employer blatantly disregards the Code.

The Code of Conduct lays down key principles in retrenchment exercises such as the justification for retrenchment, consultation and communication, fairness and transparency, minimizing impact, dispute resolution and union engagement. 

Best Practices for Employers.

To ensure a smooth and legally compliant retrenchment process, employers should:

• Document the Process: Keep records of the reasons for retrenchment, the selection criteria, and consultations with employees or unions. This helps demonstrate compliance with the law and fairness.

• Communicate Clearly: Open, honest communication about the retrenchment process, selection criteria, and available support helps maintain employee trust and reduce uncertainty.

• Offer Support: Provide retrenched employees with support such as severance pay, job placement assistance, and retraining. This shows the company’s commitment to its employees even during difficult times.

• Consult Legal Advisors: Employers should seek legal advice before proceeding with retrenchment to ensure compliance with labor laws and to avoid potential disputes.

Conclusion

Even though retrenchment might be an unavoidable business decision at times, employers must ensure that the retrenchment exercise is done carefully and in compliance with the law and best practices. By adhering to the guidelines provided under the Employment Act 1955 and the Code of Conduct for Industrial Harmony, employers can ensure that the retrenchment processes are done fairly, transparently and respectfully thus minimizing the risk of future legal ramifications while providing much-needed support to employees during a challenging transition.

By: Heidi Syahira Hamzah