Retrenchment in Malaysia is one of the most sensitive topics in the country. The word strikes fear in employees' hearts and HRs try their best to steer away from the subject.
As the Malaysia Government announces multiple lockdowns since February 2020, businesses had no choice but to retrench talents to balance the accounting numbers.
Often, HR professionals are unsure whether they are following the laws and regulations for retrenchment or not. Getting sued by retrenched employees is the last thing businesses want during this turbulent time.
Thus, HR needs to understand how to retrench employees while abiding by the law and best practices and providing appropriate compensation.
Let's start with the basics: what retrenchment is.
Retrenchment is the process of dismissing employees due to a lack of work or financial reasons.
It can be done in two ways - Mandatory Severance Scheme (MSS) and Voluntary Separation Scheme (VSS).
MSS requires you to select who to retrench (not a choice for employees) and negotiate appropriate notice periods and compensation with the soon-to-be ex-employee.
VSS gives employees a choice to leave voluntarily with a letter of termination and lay-off benefits.
In Malaysia, you can opt for either scheme to retrench your staff based on specific considerations outlined below.
Need to send termination letters? Download a Termination Letter template here.
Before retrenching, the employer must have a good reason for doing so. There will be no retrenchment if the company is profitable and has healthy growth prospects in the foreseeable future.
The following are considerations employers should take note of before deciding to retrench employees:
Retrenchment should be your final card. There are many ways to minimise expenses and costs such as:
Is expensive corporate health insurance giving you headaches? Read this article to learn 3 cost-saving alternatives without sacrificing coverage.
You've done all you could to cushion the loss and it's still not enough. Retrenchment is the only way out.
Even so, you must have a valid reason to retrench your workforce. But what situations are considered valid and how do you prove it?
First, the acceptable reasons to retrench people are:
Second, the authorities require you to submit proof of your reason and back that up with circumstances showing you have redundant employees (for all reasons except No. 1).
Report to relevant authorities by submitting an Employment Notification Retrenchment Form (Borang PK) at the nearest Labour Office (headquarter and branch)
You need to fill 3 parts of the Borang PK at 3 different timelines:
If your business employs foreign and local workers, the Code of Conduct for Industrial Harmony 1975 (The Code) requires you to retrench the foreign workers first.
Otherwise, retire workers above age 60.
Done all of these and still need to retrench? A commonly applied principle is the "Last In, First Out". Meaning the shortest-duration employee in your company will be retrenched first.
Another set of criteria you should consider while selecting who to retrench is based on the employees' condition, such as:
Retrenchment can only happen after serving an employee with notice but how long should it be?
The length of notice depends on the terms of the employment contract or the collective agreement (if any).
If your employees fall under the Employment Act (those earning less than RM 2,000), the notice period depends on the length of their service:
Retrenchment is a heavy critical blow to your employees. It's important that you handle them responsibly and treat them with care and compassion.
This is where compensation comes in.
According to the Employment (Termination and Lay-off Benefits) Regulations 1980, an EA-eligible employee who has served your business for at least 12 months is entitled to receive termination benefits.
Say, an employee earning RM 1,900 who has worked for 6 years is about to get retrenched. What would be his compensation?
Year x ((monthly salary / 30 days) x 15) = Compensation
6 x ((1,900 / 30 days) x 15) = RM 5,700
For employees who are non-EA-eligible, their compensation lies in your hands. It's your opportunity to help employees ease their financial burden, even if temporarily.
If your employment contract specifies retrenchment compensations, by all means, follow that guideline.
But if you do not have one, here are some benefits you can choose to offer to your soon-to-be ex-employees:
Monetary retrenchment benefits:
Non-monetary retrenchment benefits:
Retrenchment in Malaysia, however the law sugarcoat it, leaves bitter feelings between you and the employee.
It’s best for you to treat the retrenched employees with compassion and empathy.
They would need as much support from you as possible, whether monetary or non-monetary.
Retrenchment is one way to save costs and expenses.
If you’ve reduced and eliminated everything and still need to find ways to save cost, switching your employee benefits to these 3 low-cost alternatives might help.