Written by Richard Wee and Ian Phua


The Covid 19 pandemic has become one of the largest obstacles in the history of mankind. It has disrupted the operation of businesses and it has had a devastating impact on jobs across the globe, as the “Movement Control Order (PKP)” and the government lockdowns makes it difficult for the smooth running of businesses. Unfortunately, the Covid-19 pandemic has drastically affected the revenues in all kinds of industry, most employers are struggling to maintain their businesses, thus cutting jobs seems to be the only way out. There have been waves of retrenchments in Malaysia, with even more to come.

So, what does Retrenchment mean in law?

A company is permitted under the law to organise and reorganise its business for better business management, one of the methods being retrenching surplus labour. Some employers would call it “rightsizing” , “downsizing”, “resizing” or “recalibration”, but ultimately they all imply the meaning of retrenchment.

Retrenchment is defined as the discharge of surplus labour or staff by the employer for any reasons whatsoever otherwise than as a punishment inflicted by way of disciplinary action” in the case of Hariprasad v Divelkar AIR [1957] SC 121 as per S. K Das J. It is also cited in the Malaysian case of Jebsen & Jessen Engineering (M) Sdn Bhd v David A/L Sandanasamy & Ors [2004] 2 MLJ 576. Retrenchment can also be seen as “the ordinary acceptation that the business itself is being continued but that a portion of the staff or the labour force is discharged as surplusage” (Pipraich Sugar Mills v Pipraich Sugar Mills Mazdoor Union 1957 AIR SC 95)

However, retrenchment must be done in good faith and not with motives of any unfair labour practices. The courts normally would not intervene the decision of the management boards as it is the prerogative of the management to decide on the reorganisation of its business but not to include circumstances when the employer’s decision was not genuine or when a termination is disguised as a redundancy.

Redundancy is the justification and the precondition for retrenchment, there must be a surplus of labour or the requirements of the job functions of the employee have ceased or diminished to the extent that the job no longer exists (ie. when an employer has more employees than it needs.) The following are some of the common reasons which cause redundancies to occur:

  1. The company is having financial difficulties.
  2. A rescaling of the workforce to increase work efficiency.
  3. The termination of products or services which are unprofitable.
  4. A surplus of employees who are performing similar tasks.
  5. Merger of businesses with lesser workforce requirements.

What are the considerations to take note when it comes to retrenchment?

  • For employees who earn not more than RM2,000 monthly AND manual workers,The length of notice period depends on the employee’s length of employment according to the Employment Act 1955 (“EA”) and the Employment (Termination and Lay Off Benefits) Regulations 1980 which governs the retrenchment exercise of this group.
  • For employees who do not fall within the EA (ie. Those who earn > RM2,000 monthly), the length of notice period would be in accordance with their employment contract.

How do Courts interpret “manual workers”/ “manual labour”?

In the leading case of Colgate Palmolive (M) Sdn Bhd v Cheong Foo Weng & 12 Ors (and Another Appeal) [2002] 2 AMR 2107, the term “manual labour” was elaborated as:

  1. “Involvement of physical exertion as opposed to mental/intellectual effort. Thus it is not manual labour if “the real labour involved is labour of the brain and intelligence”. Whilst all manual labour would entail some manual work, it cannot be readily assumed that the person performing the manual work is a manual labourer and further it cannot also be accepted that the person is in law “engaged in manual labour”
  2. “Whether the work in question is purely physical in nature, as opposed to work which has a physical/manual content but which is really dependent upon acquired skill, knowledge or experience.”

Following the recent case of  Syed Ibrahim Syed Mohd & Ors v Exxonmobile Exploration & Production Malaysia Inc [2014] MLRHU 1458, the court applied the test mentioned above and ruled that an employee is deemed a manual worker if:

  1. His work involves manual labour for more than half of the time;
  2. He does his work repetitively with his hand according to specific instructions and at specific intervals;
  3. Purpose of his job is the use of hands.

In relation to the code issued by the Ministry of Human Resource, where redundancy is likely, an employer should take positive steps to minimise reductions of workforce by adopting appropriate measures such as:

  1. Limitation on intakes;
  2. Restriction of overtime work;
  3. Reduction of the number of hours of work;
  4. Reduction in number of shifts or days worked a week;
  5. Transfer surplus employees to another department.

Besides that, Clause 22(a) of the code provides that if retrenchment becomes necessary , employers should:

  1. Give early warnings ASAP.
  2. Introduce voluntary retrenchment schemes;
  3. Assist its employee to find an alternative job;
  4. Retrench foreign workers first before the locals;
  5. Retire workers who are above the age of 60 (Section 4 of the MRAA 2012);
  6. Ensure that the employees are informed or consulted before a formal announcement is made.

An employer should not randomly retrench his/her employee, it is highly recommended to follow the “Last in, First Out” principle. It means that the most junior employee (ie. the employee with the shortest length of service with the employer, and not the age or rank of the employee) must be retrenched first. Note also that it is the most junior employee in the relevant category to be retrenched first and not the most junior employee in the entire company. For example, if the retrenchment is due to the outsourcing of marketing services, employees in the design department would not be affected. This principle is confirmed in the case of Dynacraft Industries Sdn Bhd v Kamaruddin bin Kana Mohd Sharif & Ors [2012] 6 MLJ 453.

  • For employees who earn not more than RM2,000 monthly, they fall within the ambit of the Employment Act 1955 (“EA”) and the Employment (Termination and Lay Off Benefits) Regulations 1980 thus must be entitled to retrenchment benefit if he has been employed for at least 12 months.

The retrenchment benefits payable are as follows (or the amount in the employment contract if it is higher):

Length of Service

Termination Benefits

Less than 2 years

10 days’ remuneration for every year of service

2 years or more, but less than 5 years

15 days’ remuneration for every year of service

5 years or more

20 days’ remuneration for every year of service

  • For employees who do not fall within the EA (ie. Those who earn less than RM2,000 monthly), the requirement to pay retrenchment benefits and the quantum of retrenchment benefits would be in accordance with their employment contract, if any. If it is not provided under the contract, it is up to the employer’s discretion whether to pay termination benefits, and also how much to pay. An employer may also be excused from providing retrenchment benefit packages if he provides proof of severe financial difficulties at the time of the retrenchment.

It is mandatory for the employers to report the retrenchment, voluntary separation, temporary lay-off or an employee’s pay-cut, if applicable, to the nearest Labour Office before any said act termination action via the prescribed Termination Form.

Failure to submit the form constitutes an offence under the Section 63 of the EA, the employer shall be liable to a fine of RM 10,000.


The court may come to a decision that the dismissal was unjust if the court is not satisfied that there was fair labour practice with regards to the retrenchment as the courts will not hesitate to protect the employee’s interest and may order reinstatement.

During the infamous national lockdown in March 2020, the Ministry of Human Resource issued a few Frequently Asked Questions (FAQ) to address queries from the employers and employees. In the FAQ Vol 3 dated 4th April 2020, the Ministry (at Q5) addressed this issue where the Ministry highly recommended a transparent approach to carry out retrenchment. In summary, the Ministry stated :-

  1. There must be genuine reasons for such retrenchment.
  2. Employers must have exhausted other means before the retrenchment exercise.
  3. Employers should retrench foreign workers first and adhere to the LIFO principle in retrenching local workers.

Drawing inference from that FAQ it is clear and obvious that to carry out any retrenchment exercise, companies are strongly advised to adhere to the principles which are mentioned in this article above. 

Lastly, the laws on retrenchment is not only designed to safeguard the interest of the employees but at the same time also helps the employers in implementing a recalibration exercise in a lawful manner to maintain its business and to ensure survivability.


Published on 10 July 2020

Photo by Markus Winkler on Unsplash

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