To reduce or not to reduce (the number of employees)? - Q&A for 'Redundancy' and 'Re

Q1: What is redundancy?

“Redundancy" is the termination of employment contract as a result of reduction of workforce or reduction in the requirements of the business as a whole for employees to carry out a particular type of work.

It is settled law that the test for dismissal due to redundancy is whether there has been a cessation of, or diminution in the requirements of the employers’ business for the employees to carry out the kind of work for which he had been engaged.

Q2: What should be the employers’ considerations and the measures involved if they want to make their employees redundant?

Guidelines in relation to Redundancy are provided for under Guidelines on the Implementation of Retrenchment (“Guidelines”) as contained in the Code of Conduct for Industrial Harmony issued by the Ministry of Human Resource.

Where there is a need for redundancy, an employer should take positive steps to avert and minimise workforce by adopting the appropriate measures such as:-

  • limitation on recruitment;

  • restriction of overtime work;

  • restriction of work on weekly day of rest;

  • reduction in number of shifts or days worked a week;

  • reduction in the number of hours of work; and

  • retraining and/or transfer to other department/work.

However, if redundancy is necessary after adopting the above measures, an employer should carry out the following steps in order to minimise the negative effects on the workers involved:-

  • inform and conduct a discussion with the workers or their unions as soon as possible on the retrenchment exercise;

  • offer a voluntary termination or separation scheme with the best compensation package possible;

  • retire workers who are over the normal age of retirement;

  • assist workers in finding alternative employment before the retrenchment exercise in stages and stagger it over a long period;

  • retrench foreign workers before retrenching local workers of the same category;

  • if the retrenchment involves local workers, the last in first out (LIFO) principle should be practised. However, an employer may also retrench according to certain criteria after negotiating with, and getting the agreement from the workers or their union.

Q3: How long is the notice of retrenchment required to be given?

The employer should give a notice of retrenchment to the retrenched employees. The length of the said notice is subject to the contract of employment or collective agreement (where applicable). However, if an employee comes within the purview of the Employment Act (“”), the period of notice shall not be less than those provided under s. 12(2) of the EA, i.e. Less than 2 years of service- ; two years or more but less than five years- ; five years or more-. The retrenched employees may either be required to work for the notice period or be paid in lieu of notice.

*The EA governs matters relating to employment in Malaysia and applies to employees whose wages do not exceed Ringgit Malaysia 2,000 or who are engaged in specified work (i.e., manual labor or supervising manual labor, or operation or maintenance of a motor vehicle, irrespective of salary amount).

Q4: Is there a statutory requirement to pay at least a minimum amount of severance/termination pay upon terminating an employee?

In Malaysia, employees who have been retrenched or whose service has been terminated as the result of redundancy, and who have been employed for at least 12 months prior to the date of termination, are entitled to payment of minimum termination benefits as prescribed by the Employment (Termination and Lay-Off Benefits) Regulations 1980 (“Regulations”). However the termination benefits under the Regulations only cover employees who fall under the purview of the EA. Any employee falling outside the scope of the EA will not be expressly entitled to payment of termination benefits, unless they are provided for in their contract of employment or in any collective agreement applicable to them. Nevertheless, in practice, termination payments are often made to such employees in a redundancy situation, to mitigate the risks of a claim of dismissal ‘without just cause and excuse’.

Q5: If so, what is the minimum statutory severance/termination pay requirement?

The quantum of termination benefits payable under the Regulations is set out below:

Where an employee has only worked for a portion of a year, payment is to be prorated and calculated to the nearest month of employment. These benefits are in addition to wages paid in lieu of notice.

Q6: Does the severance/termination pay have to be paid in a lump sum on the date of termination, or can it be paid over time on the employer’s regular payroll payment schedule?

The severance pay must be paid in one lump sum not later than 7 days from the date the employee’s contract is terminated as a result of retrenchment or redundancy.

Q7: If an employer has a company severance policy that provides for more than the minimum severance pay, can the employer change the policy to match the statutory minimum and apply the change immediately to all current employees?

To change the company’s severance policy to match the statutory severance pay, the issue is whether that policy is part of the contract of employment of the concerned employee(s). That is a question of fact dependent upon various factors such as whether policies are incorporated by reference into the contracts of employment or, if not, the degree of publicity given to such policies. If the severance policy forms part of the terms of contract of employment, generally the consent of the employee is required to change such a term unless the employer has reserved an unfettered right to change such a policy without the employee’s consent prior to the termination of the employment.

Q8: Is retrenchment part of the prerogative of the management?

Although the law recognizes that retrenchment exercise is part of the management prerogative, the burden of proof always lies with the employers to prove that the retrenchment exercise is bona fide (i.e. conducted in good faith) and not capricious or motivated by victimization or unfair labour practice. The functional title of an employee (rather than the job/corporate title) shall always be the consideration of the employer in a retrenchment exercise

In executing the retrenchment exercise, employers must always comply with the existing statutory provisions and the provisions in the collective agreement (where applicable). The last in first out (LIFO) principle shall always be observed as a good practice in a retrenchment exercise.

Writer's Profile:

Christopher is a partner in Munhoe & Mar. His main practice areas are corporate and commercial advisory and litigation. He has advised and acted for both the employers and employees in various employment issues and disputes.


#employmentlawMalaysia #ChristopherMar #Redundancy #Retrenchment #howtoretrenchemployees #labourlaw #retrenchmentlawmalaysia

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