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Retrenchment in Malaysia – principles and guidelines

06 Jul 2020 / 12:42 H.

IN this second part of the series, we consider the Malaysian principles and guidelines for retrenchment of employees, as well as the primary administrative requirements.

1. Criteria for Selecting Employees to be Retrenched

Employers must set out well-documented objective criteria for the selection of employees to be retrenched or to be retained.

The Code of Conduct for Industrial Harmony, an agreement between the Ministry of Human Resources, the Malaysian Council of Employers’ Organisations and the Malaysian Trades Union Congress offers a comprehensive guideline of the criteria to be considered including:

* Ability, experience, skill and occupation qualifications;

* Age;

* Family situation;

* Length of service and status (that is, non-citizens, casual, temporary, permanent).

A commonly applied principle – “Last in, First Out” – means the most junior employee (in terms of length of service) would be retrenched first, compared to those who have served for a longer duration.

In companies with foreign workers employed in a similar capacity as local employees, section 60N of the Employment Act 1955 (EA) mandates that the services of foreign workers are to be terminated first.

2. Providing the Employee with Notice

In a retrenchment exercise, the employer is required to give affected employees a Notice of Retrench-ment The dilemma employers often face is deciding what a reasonable length of notice would be. If notice is given too soon, it may be disruptive to morale, particularly where the retrenchment exercise is being done in stages.

The length of the notice depends on the terms of the employment contract or the collective agreement (if any). For those who constitute as “employees” under section 2 of the EA, i.e. those earning not more than RM2,000 a month or manual workers (irrespective of the amount of their monthly salaries), the length of notice depends on their length of employment. Section 12(2) of the EA provides:

Less than two years, not less than four weeks;

Two years or more but less than five years, not less than six weeks;

Five years or more, not less than eight weeks.

3. Reporting the Retrenchment to the Relevant Authorities

A key administrative requirement is the reporting of the retrenchment exercise to the relevant authorities. Failure to do so would constitute an offence under Section 99A of the EA and is punishable with a fine of RM10,000.

Under the Employment Retrenchment Notification 2004, employers are required to complete an Employment Notification Retrenchment Form (Borang PK) consisting of different parts which must be lodged with the nearest Labour Office at different stages of the retrenchment exercise:

a) Part I to IV must be submitted within 30 days before the retrench-ment exercise;

b) Part V to be submitted within 14 days after date of retrenchment;

c) Part VI to be submitted within 30 days after the date of retrenchment.

Borang PK requires employers to provide information including the reasons for the retrenchment, the number of local or foreign workers, the date of retrenchment and the benefits payable to the workers being retrenched, among others,.

4. Retrenchment Benefits

An additional administrative consideration is the retrenchment benefits to be paid out to affected employees. Pursuant to the Employment (Termination and Lay-off Benefits) Regulations 1990, an employee who falls within the EA is entitled to receive termination or lay-off benefits if employed under a continuous contract of employment for at least 12 months before the retrenchment exercise.

The amount to be paid is as follows:

Less than two years, 10 days’ wages for every year of employment;

Two years or more but less than five years, 15 days’ wages for every year of employment;

Five years or more, 20 days’ wages for every year of employment.

Where employees do not fall within the EA, the retrenchment benefits and the quantum are dependent on the terms of the employment contract, if appli-cable.

If there is no employment contract, the discretion to pay termination benefits and the quantum of this lies in the hands of the employer. If the employer decides not to provide any retrenchment benefits, then cogent reasons must be given as a failure to do so may entitle the retrenched employee to lodge a complaint for unfair and unjust termination with the Industrial Relations Depart-ment.

It is important that employers abide by the various guidelines and criteria provided to ensure the retrenchment exercise is administered in a lawful manner, and to avoid being liable for unfair dismissal. If unfair dismissal is established, the Industrial Court may order reinstatement or compensation in lieu of reinstatement and this will include back wages of a maximum of 12 months for a probationer or 24 months for a confirmed employee.

Ideally, employers should seek legal advice and guidance before confirming any retrenchment exercise in order to ensure that all the correct steps are being taken.

This article is the second of a two-part series on retrenchment, contributed by Ashley Tay and Rubini Murugesan of Christopher & Lee Ong.

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