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A Brief Overview on Retrenchment Exercise in Malaysia

Retrenchment refers to the termination of employment due to redundancy or business restructuring. In Malaysia, retrenchment is governed by the Employment Act 1955 and the Industrial Relations Act 1967.



Retrenchment exercises have become more prevalent during the pandemic, and as Artificial Intelligence replaces jobs, they are likely to become even more common. In Malaysia, the Industrial Court scrutinizes retrenchment processes. This article outlines four basic legal principles of retrenchment in Malaysia.


(A) Redundancy as a Precondition for Retrenchment

In Malaysia, redundancy is a precondition for retrenchment. Employers must show a genuine redundancy or surplus of labour to justify retrenchment. Employers should exercise their prerogative in good faith; retrenchment must not serve as a pretext to dismiss unwanted employees. If retrenchment is deemed to be in bad faith, the Industrial Court can examine the decision.


(B) Guidelines for Retrenchment

The Code of Conduct for Industrial Harmony (“Code of Conduct”) provides guidelines for employers conducting retrenchment exercises. This Code of Conduct represents acceptable industrial relations practices and serves as a legal factor in determining whether retrenchment is genuine and justifiable. Employers should adopt measures such as limiting recruitment, restricting overtime, reducing work hours, and transferring employees to minimize workforce reductions.

When retrenchment is unavoidable, employers should provide early warning, introduce voluntary retrenchment schemes, pay redundancy and retirement benefits, retire workers beyond their normal retirement age, assist in job searching, spread terminations over a longer period, inform workers and their representatives before making announcements, and establish clear, objective selection criteria for retrenchment.


(C) Retrenchment Benefit

Employers must provide retrenchment benefits to retrenched employees. The amount of retrenchment benefits should depend on the employee’s length of service and last drawn salary. Regulation 6 of the Employment (Termination and Lay-Off Benefits) Regulations 1980 (Revised 1983) prescribes the minimum retrenchment benefits employers must pay to retrenched employees.

It is interesting to note that based on the latest changes to the Employment Act which has only been in force from 1 January 2023 onwards, the retrenchment benefits as provided under the Employment (Termination and Lay-Off Benefits) Regulations 1980 (Revised 1983) are not applicable to or do not cover those employees who earn more than RM4,000.00 salary per month.

Be that as it may, the Employment (Termination and Lay-Off Benefits) Regulations 1980 (Revised 1983) still serves as a very useful guideline for parties, to consider the amount of compensation or termination benefits that one (employer) may offer and/or one (employee) may accept in the case of termination, layoff or retrenchment.


(D) Industrial Court as a Forum to Challenge Retrenchment

The Industrial Court of Malaysia offers a forum for employees to challenge retrenchment if they consider it an unjust dismissal. Established under the Industrial Relations Act 1967, the Industrial Court investigates each case to determine whether the employer exercised the power of dismissal in good faith and for genuine reasons. The court considers the reasonableness and fairness of the retrenchment exercise, including whether the employer complied with legal requirements.



Retrenchment is a sensitive matter that requires careful handling. Employers must adhere to legal requirements and guidelines to avoid legal disputes and reputational damage. Employees should be aware of their legal rights and entitlements in a retrenchment exercise. Consulting an experienced employment lawyer is crucial for ensuring compliance with the law and safeguarding your interests.

The recent case of Mohd Arifin Mohd Aris v. Telekom Malaysia Berhad (Award No. 573 of 2021) emphasizes the importance of following retrenchment guidelines and legal principles. The Industrial Court deemed the employer’s retrenchment exercise an unfair dismissal due to non-compliance with guidelines and legal requirements.

In summary, retrenchment in Malaysia is subject to the legal principles and guidelines established in the Employment Act 1955 and the Industrial Relations Act 1967. Employers must ensure compliance, while employees must be aware of their legal rights and entitlements. Seeking legal advice from an experienced employment lawyer can help both parties navigate the complex legal landscape of retrenchment in Malaysia.


Key Takeaways

  1. 1) Redundancy must be established as a precondition for retrenchment in Malaysia.
  2. 2) Employers should follow the guidelines provided by the Code of Conduct for Industrial Harmony when conducting retrenchment exercises.
  3. 3) Retrenchment benefits must be provided to retrenched employees, as prescribed by Regulation 6 of the Employment (Termination and Lay-Off Benefits) Regulations 1980 and as far as the relevant laws so required.
  4. 3) The Industrial Court of Malaysia serves as a forum for employees to challenge retrenchment if they consider it an unjust dismissal.


This article is intended to be informative and not intended to be nor should be relied upon as a substitute for legal or any other professional advice.

About the author

Chau Yen Shen

Senior Associate
Contractual Disputes, Debt Recovery & Insolvency, Compulsory Land Acquisition, Employment Law, Family Law, Tenancy Disputes, Corporate Litigation
Halim Hong & Quek

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