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THE LAWS ON RETRENCHMENT AND ITS IMPLICATION
TO HUMAN RESOURCE MANAGEMENT
PRACTICES IN MALAYSIA
BALAKRISHNAN MUNIAPAN1
School of Business & Design
Swinburne University of Technology (Sarawak Campus)
Abstract
This paper explores the legal right to retrench employees and its
implication to human resource management in Malaysia. The
paper is based on the analysis of the relevant statutes on
retrenchment such the Employment Act 1955, The Industrial
Relations Act 1967, the Employment (Termination and Lay-Off
Benefits) Regulations 1980 and the Code of Conduct for Industry
Harmony 1975. The author has also used criterion based sampling
of the Industrial Court and superior court awards on retrenchment
to provide recommendations to human resource practitioners.
Findings from these cases reveal that many of the retrenchment
awards were made against the employers due to poor selection of
workforce for retrenchment, and the handling of the retrenchment
exercise itself which violated the relevant statutes and the
established procedures. The author suggests that retrenchment
should not be viewed as a reactive but a proactive exercise, which
begins with effective human resource planning aligned with the
organisational strategic plan. The retrenchment exercise should
also be seen as a last resort when limiting recruitment, reducing
working hours, helping employees (workmen) find alternative
employment, encouraging early retirement, offering voluntary
separation scheme (‘VSS’) and other measures have been
1
Balakrishnan Muniapan is a Senior Lecturer in HRM at the School of
Business & Design, Swinburne University of Technology, Sarawak
Campus, in Kuching (Malaysia). He had previously taught HRM at Curtin
University of Technology, Sarawak Campus in Miri, Hertfordshire
University program at BIMC in Beijing (China) and Economics for
British and Australian universities program in Penang. He has more than
45 publications which include journal articles, book chapters and
conference proceedings (refereed and non-refereed). He has also
presented HRM papers at academic conferences in several countries
within Asia, Australia and Europe. He can be contacted at
mbalakrsna@yahoo.com.

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exhausted. The author hopes that with many proactive measures
taken by employers in the management of retrenchment, the
number of unfair retrenchment claims made to the Industrial
Relations Department will be reduced. This will eventually improve
or maintain harmonious employment relations.
INTRODUCTION
Retrenchment means the termination of the contract of service of
employees2 (workmen)3 in a redundancy situation which arises from
several factors such as restructuring, reduction in production,
mergers, technological changes, business takeover, economic
downturn and others.
Retrenchment is the legal expression used to describe an exercise
where a business entity terminates the services of employees that it
considers as surplus to its business requirements. It is pertinent to
note that a retrenchment exercise is distinguishable from an exercise
involving a closure of business as in a business closure where all
employees are discharged as result of a cessation of operation.
Therefore, a closure of business is separate and distinct from a
retrenchment (Thavarajah and Low, 2001).
This distinction was drawn by the Supreme Court (now Federal
Court) in Hotel Jaya Puri Bhd v National Union of Hotel, Bar &
Restaurant Workers & Anor (1980). In that case, the court accepted
the following observation:
Retrenchment connotes in its ordinary acceptation that the business itself
is being continued but that portion of the staff or labor force is discharged
as surplus-age.The termination of services of all the workmen as a result of
the closure of the business cannot, therefore, be properly described as
retrenchment. Though there is discharge of workmen both when there is
retrenchment and closure of business, the compensation is awarded under
2
3
Employee as defined in the Employment Act 1955, s 2(1) — any person,
irrespective of his occupation, who has entered into a contract of
service with an employer under which such person’s wages do not
exceed Ringgit Malaysia one thousand and five hundred (RM1,500).
The term workman is different from the term ‘employee’ as defined in
the Employment Act 1955. In the Industrial Relations Act 1967, the term
‘workman’ is defined as ‘any person, including an apprentice, employed
by an employer under a contract of employment to work for hire or
reward and for the purposes of any proceedings in relation to a trade
dispute …’. In this paper, both the term ‘employee’ and also ‘workman’
are used interchangeably depending on the context of the Employment
Act 1955 and also the Industrial Relations Act 1967.

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the law, not for discharge as such but for discharge on retrenchment, and,
as retrenchment means in ordinary parlance, discharge of the surplus, it
cannot include discharge on the closure of business.
The term ‘retrenchment’ has also been explicitly explained by His
Lordship Datuk Gopal Sri Ram JCA in William Jacks and Co (M) Bhd
v S Balasingham (1997) as follows:
Retrenchment means the discharge of surplus labor or staff by an employer
for any reasons whatsoever otherwise than as a punishment inflicted by
way of disciplinary action. Whether the retrenchment exercise in a
particular case is bona fide or otherwise is a question of fact and degree
depending on the peculiar circumstances of the case. It is well settled that
the employer is entitled to organise his business in the manner he
considers best. So long as the managerial power is exercised bona fide, the
decision is immune from examination even by the Industrial Court.
However, the Industrial Court is empowered and indeed duty-bound to
investigate the facts and circumstances of the case to determine whether
the exercise of power is in fact bona fide.
In the Indian context, s 2 of the Indian Industrial Disputes Act 1947
defines ‘retrenchment’ (cited in Pathmanathan, et al, 2003 at pp 129)
as:
the termination by the employer of the service of a workman for any
reason whatsoever, otherwise than punishment inflicted by way of
disciplinary action, but does not include:
(a) voluntary retirement of the workman; or
(b) retirement of the workman on reaching the age of superannuation if
the contract of employment between the employer and the workman
concerned contains a stipulation in that behalf; or
(c) termination of service of a workman on the ground of continued illhealth.
An organisation may have surplus employees due to a downturn in
business, installation of new labour saving machinery or device or
standardisation or improvement of plant or technique which may
result in retrenchment. Recently, The Star (2 February 2009) reported
that the Seagate Technology in Penang will be cutting a few hundred
jobs in its Penang plant. The job loss, which is part of Seagate’s plan
to reduce its global workforce by 6%, will be incurred through the
introduction of the voluntary separation scheme (‘VSS’).4 The Star (5
February 2009) also reported that 12,000 workers of Bumiputra
4
For details, see http://skorcareer.com.my/blog/seagate-penang-to-cut200-jobs/2009/02/15/.

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Commerce Bank (‘BCB’) have been asked to decide if they want to
stay with the company or opt for a mutual separation scheme (‘MSS’)
which allows them to discontinue their service with the banking
group. The MSS, unlike the more familiar VSS, is where employees are
given less than a month to decide on whether to quit their service or
to stay on with their organisation5.
Redundancy occurs when an organisation has excessive workers
but with little work to do. This will result in the reorganisation of the
employers’ undertaking and consequently some employees may be
found redundant, and therefore retrenched. In Baxter Healthcare SA
(Malaysian Operations) v Mazlina Abu Bakar (1992), the Industrial
Court held that retrenchment is a necessary incidence of running an
industry, but retrenchment is justified only when the reason behind it
is due to the shortage of work, whether permanently or for an
indefinite period, there has arisen a surplus in the number of
workmen in the employment of a company or redundancy.
In the English law, under the Employment Protection
(Consolidation) Act 1978, redundancy is defined in s 81(2) of the Act
to cover a dismissal attributable wholly or mainly to:
(i)
the fact that the employer has ceased, or intends to cease, to carry on
the business for the purpose for which the employees was employed
by him; or
(ii) the fact that he has ceased, or intend to cease, to carry on that
business in the place where the employee was so employed; or
(iii) the fact that the requirements of the business for employees to carry
on out work of a particular kind in the place where the dismissed
employee was so employed, have ceased or diminished or are
expected to cease or diminish.
There are various reasons given by employers in proving redundancy,
thus justifying them to retrench such excess employees. Nevertheless,
the employer ought to be able to produce evidence in court to show
that redundancy was the real reason for retrenchment. If an employer
fails to establish that the principle reason for the dismissal was due to
redundancy, the dismissal will be unfair and it is the duty of the court
to protect the employees from unfair redundancy (Rozanah, 1998).
Retrenchment seems to be a popular measure taken by many
employers during the economic down. This is evident in the context
of Malaysia during the economic downturn in the mid 1980s, the
5
For details, see http://thestar.com.my/news/story.asp?file=/2006/2/5/
nation/13275387&sec=nation.

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economic and the financial crisis in the late 1990s and also the recent
worldwide economic downturn. Sometimes, it may not be due to an
economic downturn but cases of retrenchment still arise due to a
reorganisation, reallocation of duties, restructuring exercises,
reduction in the requirements for employees, reduction in work or
due to the changes of the company policy.
In Malaysia, s 13(3) of the Industrial Relations Act 1967 (‘IRA
1967’), recognises the right to terminate an employment contract by
an employer of any workman by reason of redundancy or by reason of
the reorganisation of an employer’s profession, business, trade or
work or the criteria for such termination.
Besides the termination of the employment contract due to
redundancy or reorganisation, the section also recognises five other
prerogatives of employers, which includes:
(a) The right to promote by an employer of any workman from lower
grade or category to a higher grade or category;
(b) The right to transfer by an employer of a workmen within the
organisation of an employer’s profession, business, trade or work,
provided that such transfer does not entail a change to the detriment
of a workman in regard to his terms of employment;
(c) The right to employ by an employer of any person that he may
appoint in the event of a vacancy arising in his establishment;
(d) The right to dismiss and reinstatement of a workman by an employer;
and
(e) The right to assign or allocate by an employer of duties or specific
tasks to a workman that is consistent or compatible with the terms of
his employment.
In employment law, employers are required to have a reasonable
reason to terminate a contract of employment via retrenchment as
s 206 of the IRA 1967 provides remedies to employees for dismissal
without just cause or excuse. In this context, whether a workman is
a member of a trade union or not, he can file a representation to the
Director General of Industrial Relations (‘DGIR’) in writing within
6
Section 20(1) of the Industrial Relations Act 1967 states: ‘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 representation may be filed at the office of the
Director General nearest to the place of employment from which the
workman was dismissed.’

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60 days of his dismissal seeking for reinstatement to his former
employment if he considers that he was dismissed without just cause
or excuse.
Upon receipt of the representation, the DGIR will take steps as
necessary or expedient for a settlement. The DGIR will try to resolve
the case through conciliation. If there is a failure to do so through
conciliation, the DGIR will refer the case to the Minister, who may, if he
thinks fit, refer the matter to the Industrial Court for an award. Thus
from the above process, it is clear that a dismissed workman cannot
bring his case directly to the Industrial Court as only the Minister of
Human Resources can refer his case to the Industrial Court.
An award, decision or order of the court is final and conclusive
and cannot be challenged, appealed against, reviewed, quashed or
called in question in any court. Although the award or decision made
by the Industrial Court is final, however it can be challenged in the
High Court by way of certiorari on the ground of error of law or
excess of jurisdiction.
The Industrial Court statistics over the last three years (2006–
2009) has shown an increase in termination cases due to
retrenchment. Other cases which have also seen an increase over the
years are unfair dismissal (termination) due to misconduct and
constructive dismissal. In most of the unfair dismissal cases, the
awards were made against the employers who were not able to
provide evidence or the reasonableness of the reason for dismissing
the workmen.
Similarly, in most retrenchment cases, awards were made against
the employers due to the poor selection of workforce for
retrenchment, and for handling the retrenchment exercise itself
which violated the relevant statutes and the Malaysian Code of
Conduct for Industry Harmony 1975.
Analysis of Awards of Termination Cases (2001–2009)
Types of
Termination
2001
2002
2003
2004
2005
2006
2007
2008
2009
Constructive
26
35
40
34
22
42
97
126
140
Misconduct
726
810
763
878
613
Retrenchment
41
52
61
61
16
32
422
155
114
Others
–
–
–
–
–
–
402
573
328
Total
793
897
864
1638 2144 2051 1200
1733 2182 2125 2121 1732 1195
Source: Malaysia Industrial Court, http://www.mp.gov.my/

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Employers are still ignorant of the relevant statutes, the required
procedures for retrenchment and the code of conduct itself.
Therefore, this paper will be useful to employers and human resource
practitioners in managing retrenchment. The management of
retrenchment should not be viewed as a reactive but a proactive
exercise, which begins with effective human resource planning
aligned with the organisational strategic plan.
The retrenchment exercise should also be seen as a last resort
when limiting recruitment, reducing working hours, helping
employees (workmen) find alternative employment, encouraging
early retirement, offering voluntary separation scheme (‘VSS’) and
other measures have been exhausted.
METHODOLOGY
Research in employment law is qualitative in nature and involves the
analysis of both statutes and case laws. Statutes are primary while the
case laws are secondary. Thus, this paper is based on the analysis of
the relevant statutes on retrenchment such as the Employment Act
1955 (‘EA 1955’), the IRA 1967 and the Employment (Termination and
Lay-Off Benefits) Regulations 1980. The Malaysian Code of Conduct
for Industry Harmony 1975 was also analysed for this purpose. Besides
case analysis based on criterion based sampling of the Industrial Court
awards on retrenchment, the implications of the awards to human
resource management practice were also made. The inputs for this
paper are also based on the author’s experience from conducting
several trainings for managers in employment law, which includes
retrenchment and various discussions on retrenchment issues with
several human resource management practitioners. The author is also
familiar and has been involved in the field of human resource
management and employment law as a lecturer, consultant, trainer
and speaker for more than 12 years, and is also familiar with the
employment laws and cases in Malaysia.
LITERATURE REVIEW
Academic studies in the area of employment law in Malaysia are
limited but there has been a growth over the years. Over the last two
decades, some of the authors who have written about Malaysian
employment laws are Ayadurai (1996), Anantaraman (1997; 2005),
Rozanah (1998), C’ruz (1999), Idid (1993), Rajkumar (1999), Gomez
(1997), Wu (1995), Amminudin (2003), Ramasamy (2006),
Pathmanathan et al (2003), Thavarajah and Low (2001), Hew (2002),
Muniapan (2006; 2007), Muniapan and Parasuraman, (2007),

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Parasuraman (2004), and Chen (2007). Although there are many
articles, write ups and coverage on the topic of retrenchment written
in the context of Malaysia, specific academic studies in this area are
limited. One of the most recent studies on retrenchment in Malaysia
was done by Marsono and Yussof (2008) from the perspectives of the
employers’ legal right to retrench. As there has not been any further
study done recently on retrenchment law and its implications to
human resource management, this paper aims to fill the gap in the
Malaysian retrenchment literature.
THE MALAYSIAN EMPLOYMENT LAWS ON RETRENCHMENT
In carrying out a retrenchment exercise, employers must base it on
the legal requirement and justification to carry out the reorganisation
and restructuring. In the Malaysian context, besides s 13(3) of the IRA
1967, which recognises the right to terminate a contract of
employment due to redundancy or reorganisation, s 12(3) of the
Employment Act 1955 also provides the following:
Notwithstanding anything contained in sub-s (2), where the
termination of service of an employee is attributable wholly or mainly
to the fact that:
(a) employer has ceased, or intends to cease to carry on the business for
the purpose of which the employee was employed;
(b) the employer has ceased or intends to cease to carry on the business
in the place at which the employee was contracted to work;
(c) the requirements of that business for the employee to carry out work
of a particular kind have ceased or diminished or are expected to
cease or diminish;
(d) the requirements of that business for the employee to carry out work
of a particular kind in the place at which he was contracted to work
have ceased or diminished or are expected to cease or diminish;
Another legislation, which is the Employment (Termination and LayOff Benefits) Regulations 1980, provides the amount of termination or
lay-off benefits payment as follows:
Regulation 6
Amount of termination or lay-off benefits payment
(1) Subject to the provisions of these Regulations, the amount of
termination or lay-off benefits payment to which an employee is
entitled in any case shall not be less than—
(a) ten day’s wages for every year of employment under a continuous
contract of service with the employer if he has been employed by
that employer for a period of less than two years; or

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(b) fifteen days’ wages for every year of employment under a
continuous contract of service with the employer if he has been
employed by that employer for two years or more but less than
five years; or
(c) twenty days’ wages for every year of employment under a
continuous contract of service with the employer if he has
been employed by that employer for five years or more,
and pro-rata as respect an incomplete year, calculated to the nearest month.
(2) For the purposes of this regulation ‘wages’ shall have the meaning
assigned thereto under section 2(1) of the Act and ‘a day’s wages’ shall
be computed in such manner so as to give the employee his average
true day’s wages calculated over the period of twelve completed
months’ service immediately proceeding the relevant date.
(3) For purposes of this regulation, the period of employment under a
continuous contract of service shall include any such employment
prior to the date on which these Regulations come into force.
(4) The termination or lay-off benefits payment to which an employee is
entitled under this regulation shall be in addition to any payment to
which he may be entitled under section 13 of the Act.
The Employment (Termination and Lay-Off Benefits) Regulations
1980 also provides for retrenchment due to a change of ownership of
business which is as follows:
Regulation 8 Change of ownership of business
(1) Where a change occurs (whether by virtue of a sale or other
disposition of by operation of law) in the ownership of a business for
the purposes of which an employee is employed or of part of such
business, the employee shall not be entitled to any termination benefits
payable under these Regulations, if within seven days of the change of
ownership, the person by whom the business is to be taken over
immediately after the change occurs, offers to continue to employ the
employee under terms and conditions of employment not less
favorable than those under which the employee was employed before
the change occurs and the employee unreasonably refuses the offer.
(2) If the person by whom the business is to be taken over immediately
after the change occurs does not offer to continue to employ the
employee in accordance with paragraph (1), the contract of service
of the employee shall be deemed to have been terminated, and
consequently, the person by whom the employee was employed
immediately before the change in ownership occurs and the person
by whom the business is taken over immediately after the change
occurs shall be jointly and severally liable for the payment of all
termination benefits payable under these Regulations.
(3) Where an offer by the person by whom the business is taken over
immediately after the change occurs to continue to employ the

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employee is accepted by such employee the period of employment of
the employee under the person by whom the employee was
employed immediately before the change occurs, shall, for the
purposes of these Regulations, be deemed to be a period of
employment under the person by whom the business is taken over,
and the change of employer shall not constitute a break in the
continuity of the period of his employment.
REASONS FOR RETRENCHMENT
The right of an employer to close down the whole or a part of his
business has been recognised by the Industrial Court and the superior
courts. In Siemens Malaysia Sdn Bhd v Cheong Kok Leng (2004), the
Industrial Court highlighted the employer’s right to retrench in
industrial jurisprudence is well settled as can be seen from existing
case law and textbook authorities. The court will not intervene as long
as the reason is bona fide. However, when an employer terminates the
employment contract of an employee based on reasons other the
employees participation in lawful activities of trade union, it is called
victimisation.
There are several reasons for retrenchment which can be
classified as both external and internal reasons. The major external
reason or factor is economic crisis; recently in Malaysia, many
employers suffered great financial losses and were forced to retrench
many of their employees. Market failure and unexpected competition
in the business also lead to retrenchment.
Some of the internal factors that lead to retrenchment are as
follows:
(1) Drop in the product market. This will affect the organisation’s
financial status as the products that are being sold in the market
does not make enough profit to cover the production cost.
Thus, the company will try to reduce labour cost by retrenching
some of its employees.
(2) High production cost. In this case, the employees are victims of
cost cutting. The employers would want to reduce labour costs
and free resources by removing unwanted employees.
(3) Part of the operation shifted to different location. The number
of employees needed at the operation workplace will decrease
as there is not much work to be done.
(4) No demand for products or services. When there is no demand
for the products or services, the employees are no longer
needed. Keeping them will result in a financial loss for the
company.

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(5) Outsourcing of production or part of its service. This is usually
done when the company is able to get cheaper labour cost by
outsourcing.
(6) Outsourcing helps a company to maximise profits and reduce
production costs simultaneously.
(7) Shift to automated system. The use of new technology reduces
the need for human resources as most of the work is being done
by machineries especially in the manufacturing sector.
(8) Sale of company. This happens when a company is being taken
over by another company or combined with another company;
this would result in a major restructure in the company. Some of
the employees may no longer be needed and may be retrenched.
This situation can be seen on the issue of our local television
station, ntv7 which was taken over by Media Prima Bhd by the
end of 2005.7
(9) Business closure. This happens when an organisation loses
money and is declared bankrupt which results in the employees
losing their job. This issue occured recently at Prai, Penang,
where 950 employees of Nikko Electronics Bhd were
retrenched after the company closed down its factory.8
In the past, the Industrial Court handed down an abundance of
awards involving retrenchment. Employers intending to carry out a
genuine retrenchment exercise should be prepared to reveal to the
court their reasons for the exercise and the steps that they have
taken to reduce costs. Most of the awards acknowledged the
principle that the retrenchment due to the reorganisation of a
business is a function within the power and the prerogative of the
management and no arbitrator should intervene with the bona fide
exercise of the power (Chen, 2007). However in Nepta Holdings
Sdn v Tan Sin Eoh (2001), the Industrial Court held that the
retrenchment of an employee was unfair as the company had not
7
8
After the take over by Media Prima Bhd, ntv7 has started a downsizing
exercise with contract employees being the first to be let off. ntv7 has
also targeted 200 staff members who applied for the VSS in the
retrenchment exercise. Available at http://groups.yahoo.com/group/
alternatif-net/.
For further details, please see Combating Global Financial Crisis:
Proposals to Revive Penang’s Economy, prepared by Penang Joint
Chamber of Commerce, 26 April 2009, which is available at http://
www.pccc.org.my/supplier/images/1/English%20Final%20Combating%
20Global%20Financial%20Crisis%2009.pdf.

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adduced sufficient evidence to support its cost saving measures,
such as whether there were other employees termination exercise
and if such amount made a substantial difference to its survival or
closure and its accounts of alleged projected loss.
CONDITIONS PRECEDENT TO RETRENCHMENT
If redundancy is real, the employers will have to adhere very strictly
to the provisions relating to redundancy and retrenchment in the
Code of Conduct for Industrial Harmony (‘Code’). The signatories to
this Code on 9 February 1975 were the Ministry of Labour and
Manpower (now known as the Ministry of Human Resources), the
Malaysian Trade Union Congress (‘MTUC’) and the Malaysian
Employers Federation (‘MEF’), then known as the Malaysian Council
of Employers’ Organisations. The underlying rationale for this Code
was to lay down principles and guidelines to employers and
employees on the practice of industrial relations for achieving
industrial harmony.
Where redundancy is imminent, the conditions precedent to
retrenchment is that the employer should, in consultation with the
employers’ representatives or their trade union and in consultation
with the Ministry of Human Resources, take positive steps to minimise
reductions of the workforce by adopting appropriate measures such
as:
(1) Limitation on recruitment — hire employees only where it is
absolutely necessary and when there is loss of employees
through natural wastage or attrition. No hiring should be
undertaken and existing jobs should be redesigned through job
rotation, job enlargement job enrichment including formation of
autonomous work groups or self directed work teams;
(2) Restriction of overtime work — spillover of work should be
undertaken by employees who are under utilised;
(3) Restriction of work on day of rest — work on rest days should
not be encouraged unless it is deemed absolutely necessary as it
can be costly;
(4) Reduction in the number of shifts or working days in a week —
this would reduce maintenance costs of plant and machinery
including utilities during off peak periods; however, employees
cannot be compelled to use their annual leave for this purpose
unless it is by mutual consent or it is provided for in the
collective agreement;
(5) Reduction in the number of hours of work — although the EA
1955 sets out the maximum number of hours an employee is

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allowed to work in a day, there is a provision for the employer to
seek the permission of the Director General of Labour to exceed
the limits especially when the employer reduces the working
hours for certain days in a week and makes up for the loss over
the remaining days in the week by allowing employees to work
beyond eight hours daily subject to a maximum of 48 hours of
work in each week;
(6) Retraining which may include transfer to other departments or
reassignment of duties — employees must be allowed to
undertake systematic and planned training before embarking on
a new job and training in anticipation of jobs to be created in the
future.
PROCEDURE OF RETRENCHMENT
A retrenchment exercise is subject to some governing procedures
based on the Code. The employer, after having taken the foregoing
appropriate measures which, inter alia, includes cost containment or
cost control measures, and retrenchment becomes a ‘necessary evil’
then certain measures have to be undertaken.
In Antah Drilling Sdn v Boey Sow Fong (1997), the issue was on
whether there was redundancy in the company, whether the
company was entitled to retrench the claimant pursuant to the
redundancy situation and whether the retrenchment was bona fide.
The test was held to decide on whether there had been redundancy
and simply whether there had been a cessation of, or diminution in
the requirement of the kind of work in which the claimant had been
engaged with. The facts in this case established that the requirement
for the claimant’s services had diminished following the completion
of the contract in February 1994. In law therefore, there was a
redundancy and the company was entitled to economise by reducing
labour costs. If the company did so fairly, the court would not
interfere with the company’s prerogatives (Rozanah, 1998).
In an earlier case of Food Specialties (M) Sdn Bhd v Esa bin Hj
Mohamad (1989) regarding on whether the redundancy situation
and retrenchment by the employer was a colorable exercise to get
rid of the employee, the learned chairman of the Industrial Court
said:
The company must come to court with concrete proof of redundancy, for
the burden is on it to prove that there was actual redundancy on which the
dismissal was justifiably grounded. Were it not so, any employer could use
the exercise of reorganisation and purported redundancy to dismiss
particular workmen with impunity.

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Similarly in Aluminum Company of Malaysia v Jaspal Singh (1987),
the Industrial Court held:
In the law of redundancy it is important to note that it is the service of the
employee which must be made redundant, not his position or title.
Therefore, in that case, it was clear that there was no redundancy as
claimed by the company. The company continued to exist. It also
made profit in the year 1991, although the company claimed that the
company’s margin was reduced. It was also clear that the company’s
loss of profit was not because the business was doing badly but firstly
because the company ordered new equipment for itself and secondly
because the company showed a loss in the year ending 1990/1991.
These losses were mainly due to the depreciation in value of its fixed
assets, which amounted to a loss in the profit margin of the company.
Therefore, the claimant’s termination was unfair labour practice and
also a dismissal without just cause or excuse since there was no
redundancy (Hew, 2002).
According to Marsono and Yussof (2008), if the retrenchment
exercise is done in accordance with the relevant procedures, then
there is very little chance for the employee to win his case in court.
This can be evidenced by looking at the Industrial Court’s decision in
Plusnet Communication Sdn Bhd & Ors v Leong Lai Peng (2005)
where it was held that a redundancy situation did exist in this case as
a result of a reorganisation and downsizing exercise made by the
company to minimise its losses.
In the event that the issue of retrenchment is referred to the
Industrial Court, the court will generally look at the following issues:
(1) whether the retrenchment was justified, that is by looking at the
circumstances of the case;
(2) whether the employer is in a position to give the true grounds
for the retrenchment; and
(3) whether the retrenchment is made bona fide.
The Industrial Court in Rocon Equipment Sdn Bhd & Anor v
Zainuddin Muhamad Salleh & Anor (2005) emphasised that even if
redundancy did exist, the retrenchment must be done in accordance
with the accepted standards of procedure. In this context, cl 22(a) of
the Code of Conduct for Industrial Harmony 1975 provides the
following measures to be taken by the employer:
(1) to give as early a warning as practicable to the workers
concerned;
(2) to introduce schemes for voluntary retrenchment and retirement
and for payment of redundancy and retirement benefits;

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(3) retiring workers who are beyond their normal retiring age;
(4) to cooperate with the Ministry of Labour and Manpower to
help his or her workers to find work outside the company’s
undertaking;
(5) to spread the termination of employment over a longer period;
and
(6) to ensure that no such announcement is made before the
employer’s workers and their representatives or trade union
have been informed.
The Code is not a legally enforceable document; however employers
have a moral obligation to adopt the guidelines as set out in the Code.
The importance of the Code was emphasised by the Federal Court in
Said Dharmalingam Abdullah v Malayan Breweries (Malaya) Sdn
Bhd (1997), which stated:
The reasonableness of the dismissal may well depend on the procedure
followed. It is pertinent to point out that article of the Code of Conduct for
Industrial Harmony, jointly agreed on 9 February 1975, by the Malaysian
Council of Employers’ Organisation and the Malaysian Trade Union
Congress with the Minister for Labour, provides, inter alia, for pre-dismissal
inquiry …
The Government also introduced a new sub-s 30(5A) to the Industrial
Relations Act 1967 to give the Code the desired ‘teeth’ in 1980, which
stipulates that in making the award, the Industrial Court may take into
consideration any such code or agreement relating to employment
practices.
Although the provision under s 30(5A) is only discretionary and
not mandatory, the Industrial Court has been consistent hitherto in
being guided by the Code in arriving at decisions in retrenchment
cases. The time is right for the government to legislate the Code to
make it mandatory for employers to adhere to, in the interest of
enhancing social justice and security of tenure of employment.
RETRENCHMENT
PRINCIPLES
INDUSTRIAL COURT
ENUNCIATED
BY
THE
The Industrial Court in Cycle & Carriage Bintang Bhd v Cheah Hian
Lim (1992) laid down the salient points of general principles on
retrenchment as follows:
(i)
It is for management to decide on the strength of the staff which it
considers necessary for efficiency in its undertaking. When the
management decides that its workmen are surplus and that there is

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therefore a need for retrenchment, an arbitration tribunal will not
intervene unless it is shown that the decision was capricious or made
without reason, mala fide, or actuated by victimisation or unfair
labour practice.
(ii) It is the right of every employer to reorganise his business in any
manner for the purposes of economy or convenience, provided that
he acts bona fide.
(iii) An employer has the right to determine the volume of his staff
consistent with his business and if, by the implementation of a
reorganisation scheme adopted for reasons of economy and better
management, the services of some employees become in excess to its
requirements, the employer is entitled to discharge such excess.
(iv) In the absence of any agreement on the point, an employer is not
obliged to find suitable employment for redundant workers.
(v) In effecting retrenchment, the employer should comply with the
industrial law principle of last in first out (‘LIFO’) unless there are
sound and valid reasons for the departure from the principle.Thus, an
employer is not entirely denied the freedom to depart from this
principle.
(vi) The retrenchment of an employee can be justified if it was carried out
for the profitability, economy or convenience of the employer’s
business. The services of an employee may well become a surplus if
there was a reduction, diminution or cessation of the type of work
the employee was performing.
It has been established in employment law that in effecting
retrenchment, an employer should comply with the industrial
principles of LIFO. The principle of LIFO has to be adhered to by the
employer in retrenchment exercises very strictly unless there are
valid, acceptable and sufficient reasons for departure from the said
principle.
The LIFO principle is subject to two limitations: first, the rule
operates only within the establishment in which the retrenchment is
to be made, and second, the rule applies only to the category to which
the retrenched workmen belong. Establishment, or industrial
establishment, means the place at which the workmen are employed.
Consequently, it would not include the several branches of a company
situated in different locations in the country. Category means a class
or trade such as a turner, a motor mechanic, an electrician and the
like.
As the principle of LIFO is not provided for by statutory law and is
only one of the objective criteria in the Code, this principle should
always be considered as an important feature in the selection of
employees for retrenchment.

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It must be emphasised that the employer is not denied the
freedom to depart from the LIFO principle, if, after taking into
consideration the objective criteria and special circumstances, the
employer has sufficient and valid reasons to do so. In Maybank
Discount Bhd v Nooraini binti Mohd Ishak (1994), the Industrial
Court asserted that the LIFO principle is not applicable where there is
only one workman in the particular job category. Some of the other
reasons for the departure from the LIFO principle are, that:
(1) The employer may take into account the efficiency and trust
worthiness of the employees, and if he is satisfied that a person
with long service is inefficient or unreliable in the discharge of
his duties, it would be open to the employer to retrench him,
while retaining in employment another who may be junior to
him in service. However, there should be substantive and
reliable evidence (recorded history) showing the inefficiency or
unreliability of the employee. If poor performance is to be
asserted, then it is vital for the employer to maintain a proper
and transparent appraisal system.
(2) An employee who is less productive due to long absences
through medical leave may be selected for retrenchment in the
interest of operational efficiency.
(3) Staff members possessing special qualification in the interest of
the business may be retained over a senior employee with
longer years of service.
In any analysis of the Industrial Court cases on retrenchment, it would
become apparent that the allegation would invariably be that the
employer had not followed the LIFO procedure in selecting
employees for retrenchment. The fact that the LIFO principle may be
departed from gives rise to complaints of abuse of the procedure by
the employer, and their subsequent justification, in some cases by the
Industrial Court, could give rise to questions of fairness of its awards.
The Industrial Court seems to argue that so long as the selection
of employees for retrenchment is on the basis of objective criteria as
perceived by the employer and acquiesced by the court, any violation
of the LIFO principle it may incidentally entail, is justifiable in the
interest of the efficiency of the enterprise. In other words, the
selection of employees to be retrenched on the basis of such objective
criteria may acceptably result in some seniors being retrenched in
preference to their juniors who, according to these criteria are
retained.
Retrenchment must therefore be conducted fairly and not tainted
by any unfair legal practice. Thus, while retrenchment is permissible,
a justifiable retrenchment exercise could be declared invalid simply

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because the selection of the employees for retrenchment is not in
accordance LIFO (Anantaraman, 2005).
The violation of the LIFO principle it may incidentally entail, is
justifiable in the interest of the efficiency of the enterprise. In other
words, selection of employees to be retrenched on the basis of such
objective criteria may acceptably result in some seniors being
retrenched in preference to their juniors who according these criteria
are retained. In the case of Malaysian Shipyard and Engineering
Company v Mukhtiar Singh & 16 Ors (1991), the selection of
employees to be retrenched was based on selection criteria drawn up
by the company unilaterally. Nevertheless, the company claimed that
the selection was based on a point system embodying the objective
criteria as stipulated in the Code guidelines such as age, in the terms
of physical fitness and endurance (as ascertained from the claimant’s
medical record), ability (as assessed from the claimant’s performance
record over a three year period) and the claimant’s conduct from his
disciplinary record over a five year period. The way the Industrial
Court, in this case, sought to justify the employer’s retrenchment
exercise makes one wonder whether the court indeed acted
according to equity and good conscience as it ought to do. For
example, the Industrial Court exonerated the employer for not
consulting the union on the ground that there was no legal obligation
on the part of the company to consult or warn its employees before
retrenchment; the court averred that in employment law, the burden
of proof is on the employer to show that the factors that he had relied
on in selecting an employee for retrenchment are such as to prove
that he had acted reasonably in his determination of the issue
(Anantaraman, 2005).
Apart from the principle of LIFO, there is a requirement that
mandates all employers to comply with s 60N of the EA 1955 when
carrying out a retrenchment exercise. With effect from 1998, where
an employer is required to reduce his workforce by reason of
redundancy, the employer shall not terminate the services of a local
employee unless he has terminated the services of all foreign
employees employed by him in a capacity similar to that of a local
employee.
IMPLICATIONS TO HUMAN RESOURCE MANAGEMENT
Retrenchment can bring diverse impacts to all parties concerned
including employers, employees and the organisation. It also affects
the harmonious working relationship in any organisation. Exercising
retrenchment without just reason or failing to abide by procedures
may affect the operations in an organisation. This is because some

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retrenched workers may claim that the retrenchment was a wrongful
dismissal and demand that the organisation either reinstate them or
offer them equivalent retrenchment benefits. They may also file a
report claiming that they have been wrongfully dismissed by their
former employers and claim for either a reinstatement or for
compensation in the labour department. The organisations concerned
would then have to spend additional time to handle the issue in the
Industrial Court. They would need to provide adequate evidence to
prove that the retrenchment was necessary and that they exercised it
according to lawful procedures. Such claims can affect the
smoothness of operations in the organisation.
Human resource practitioners must remember that the Code of
Conduct places the burden on them to provide advanced warning of
any impending retrenchment to its employees and to take other
measures to lessen the impact for the retrenched employee. If the
Code was not observed and the matter goes to the Industrial Court
and if it is proven that the company had not been fair to the
retrenched workman, the court may order the company to reinstate
the workman or pay compensation in lieu.
Retrenchment can decrease employees’ loyalty to the
organisation. The remaining employees may be dissatisfied with the
organisation for retrenched workers to save its business. Their
willingness to put in the effort and to invest their time in
accomplishing tasks assigned to them may also decrease. Hence, their
work productivity also decreases and affects the organisation’s
profitability. The remaining employees may also feel less secure
towards their job. These reactions easily threaten the organisation’s
performance.
Retrenchment also causes the loss of talented employees.
Organisations invest time, money and resources to train their
employees to perform their jobs effectively. As soon as these
employees are retrenched, the company loses its investment in them.
The situation will worsen if the retrenched employees are employed
by the organisation’s competitors. The competitiveness of the
organisation in the industry can be threatened since the retrenched
workers may reveal its strategy to the competitors.
An effective human resource planning in getting the right number
of the right employees for the right jobs at the right wage and at the
right time is a proactive approach in managing retrenchment. In fact,
retrenchment will not even take place with a good human resource
planning aligned with the organisational strategic plan. However, if
retrenchment is inevitable and does takes place, the human resource
practitioners play a major role in helping the employees and

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management cope and manage the retrenchment exercise. They
should start discussing with their employees and unions on the
possibility of retrenchment due to the financial situation of the
company.
Close communication and consultation with employees and
unions at each step of the way prior to the actual retrenchment taking
place, goes a long way to reduce the impact of a surprise to its
employees and provides the opportunity for the employer to explain
the reasons for the need for retrenchment They can spread the
retrenchment period over a longer period of time and a implement a
specific formula which is equitable and fair to select employees for
retrenchment, applying the LIFO principle as closely as possible.
Human resource management can introduce a fair and reasonable
voluntary retrenchment scheme (‘VSS’). If the VSS is attractive enough
in terms of the years of service and actual graduated rates of benefits
in terms of per year of service, naturally, it would be to the employee’s
advantage to accept such a ‘golden handshake’. The management can
also assist employees who have been chosen to be retrenched to find
alternative jobs. They can also advise the employees concerned to
register with employment exchanges (operated by the Ministry of
Human Resource) or send their resumes to reputable recruitment
search consultants.
CONCLUSION
The employer has a right to reorganise his business for reasons of
economy or convenience and this will lead to the discharge of some
employees which is permissible. However, the retrenchment must be
bona fide and not for the purpose of victimising the employees in
order to get rid of their services. In Malaysia, there are several
employers with poor understanding of the legal requirement and the
procedures for retrenchment termination due to redundancy and
reorganisation. As far as possible, retrenchment should be avoided
and seen as a last resort. However, when the need to retrench arises,
it must be done without violating the relevant statutes and the code
and it must be based on the established procedures. Before embarking
on the retrenchment of employees, the employer must take into
consideration other alternatives such as the adoption of the
appropriate measures as outlined in the Code of Conduct, such as
restricted hiring, reduction in overtime work, shorter working days,
etc. When effecting retrenchment, the employer must comply with
the principle of LIFO unless there are sound and valid reasons for
departure. The management of retrenchment should not be viewed as
a reactive but a proactive exercise. A good management of a

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retrenchment exercise will help reduce the number of retrenchment
cases and claims made to the Industrial Relations Department, as well
as create harmonious working relations.
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