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A Relook At The Laws On Retrenchment

During uncertain times and shrinking profits, organisations would usually decide to reorganise their business structure in order to create a leaner workforce therefore reducing their operating costs to weather the impact of a slowing economy. Inevitably, the reorganisation would result in the retrenchment of its employees which are considered a surplus to the needs of the organisation. With news of retrenchment exercises carried out in the financial, manufacturing and airline industries, we find that there is a need to restate the current position of the law in relation to retrenchment.

The right to reorganise the business left unquestioned

In a claim of unfair dismissal at the Industrial Court, the 1st hurdle the employer would need to overcome would be to show the basis of the reorganisation which led to the retrenchment exercise. Various reasons have been put forward and accepted by the Industrial court such as losses, reduced profits, mechanisation, partial or full closure of business, outsourcing etc as a reason for the reorganisation. The fundamental principle that remains till today is that the law recognises the employers’ right to reorganise the business in the way that it considers best as long as it was done in a bona fide manner. 


The next hurdle would be to show that there is a surplus in the workforce as a result of the reorgnisation process. On the one hand, the Industrial Court has long held that redundancy does not only mean the work no longer exist but it can also occur when the business require fewer employees of whatever kind. Therefore, this principle would naturally mean that a redundancy can occur even if the work still exist and can be performed by fewer employees. If the work is performed by fewer employees, clearly the existing employees will have to absorb the work of the employees that were retrenched. Surely if an employer can show that the work of the retrenched employee(s) was performed by existing employee(s) of the company, this would mean that the retrenched employee(s) was redundant. This is where there are conflicting views by the Industrial Court. In the case of Bayer (M) Sdn Bhd v Ng Hong Pau [1999] 4 CLJ 155, the Court held as follows:-

“On redundancy, it cannot be gainsaid that the appeallent must come to the court with concrete proof. The burden is on the appellant to prove actual redundancy on which the dismissal was grounded. (see Chapman & Others v Goonevan & Rostrowrack China Clay Co Ltd [1983] 2 ALL ER). It is our view that merely to show evidence of a reorganisation in the appellant is certainly not sufficient. There was evidence before the court that although sales were reduced , the workload was taken over by two of his former colleagues. Faced with these evidence, it is any wonder that the Court made a finding of fact that there was no convincing evidence produced by the appellant that the respondent’s function were reduced to such an extent that he was considered redundant.”

In the case of Credit Corporation (M) Sdn Bhd v Choo Kam Sing & Anor [1999] 8 CLJ 86 the Cour held as follows:-

“The evidence before the Industrial Court showed that the first respondent’s job functions were not abolished and in fact his duties taken over by other employees. Thus, the order of reinstatement was justified…”

Based on the above cases, the court is of the view that there is no redundancy when the work has been taken over by other employees of the company. We are of the view that these decisions are in direct contradiction that a redundancy can occur when an employer requires fewer employees to perform the work.  Although we do not necessarily subscribe to the views of the above cases, nevertheless until a clear ruling is handed down by the Court there would continue to be uncertainties.

Selection Criteria

Once redundancy has been established, an employer would need to show that he has applied the correct method of selection.  The recognised method would be the Last in First Out (“LIFO”) principle which means the most junior employee in terms of length of service in a specific category would need to be selected first for retrenchment as opposed to a longer serving employee. An employer would need to look at the length of service in the particular category only and not in other category. Although, the LIFO principle is not an immutable principle, nevertheless it can only be departed in certain exceptional situations only.

Other considerations

Apart from what is stated above, the employer must also take into consideration the following issues in a retrenchment exercise:-

a)            Retrenchment benefits – whether contractual or imposed by law

b)            Payment of contractual dues

c)            Notification of retrenchment exercise to the Labour Office

d)            Any requirements pursuant to Collective Agreement or Employee Handbook

Apart from undertaking a retrenchment exercise, many organisations have also taken the route of introducing a Voluntary Separation Scheme (“VSS)”or Mutual Separation Scheme (“MSS”). A VSS means that the employee would apply to terminate his employment with the company and the company would consider whether to approve the application or not. Whereas an MSS denotes that both parties are to mutually agree on the cessation of employment.


Prior to embarking on a retrenchment exercise, it would be best to first ascertain all the requirements of the law and the application of the principles regarding retrenchment. This is because each organisation is unique and therefore the law and principle may apply differently in different organisations.

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