Retrenchment in Malaysia 2021: What it is, Guidelines and Calculations

What are the considerations to take note of when it comes to retrenchment in Malaysia?

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:

Prevention

Retrenchment should be your final card. There are many ways to minimise expenses and costs such as:

• Pay cut
• Freeze headcount
• Reduce overtime work
• Limit working hours or days
• Transfer surplus employees to another department

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Eligibility

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:

• Business is expected to close down
• Facing a financial bind
• Rescale or reorganise your workforce to increase efficiency
• Terminate unprofitable products or services
• Extra employees performing similar tasks
• Merge businesses with fewer headcount needs

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).

Getting Started

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:

• Section 1 to 4: 30 days before retrenchment date
• Section 5: 14 days after retrenchment date
• Section 6: 30 days after retrenchment date

Selection: Who to retrench

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:

• Age
• Ability
• Experience
• Skills
• Qualifications
• Family situation (wife is not working, having 3 newborns, sick elderly parents, etc.)
• Length of service
• Status (e.g. non-citizens, casual, temporary, contract, permanent)

Notice Period

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:

• Less than 2 years: At least 1 month
• 2 - 5 years: At least 6 weeks.
• 5 years and above: At least 8 weeks.

Compensation

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.

The Malaysia retrenchment benefits for EA-eligible employees are as follows:

• Less than 2 years: 10 days of salary (per year of employment)
• 2 - 5 years: 15 days of salary
• 5 years and above: 20 days of salary

Say, an employee earning RM 1,900 who has worked for 6 years is about to get retrenched. What would be his compensation?

The MSS or VSS calculation formula is:

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:

• Offer 1 to 3 months of salary (or based on the VSS calculation above)
• Give a percentage of their salary for a fixed duration (say, 30% of their salary for 3 months after retrenchment)
• Provide retirement benefits such as pension or allowance for workers above 60

Non-monetary retrenchment benefits:

• Assist in job search
• Write a recommendation letter
• Give access to free training for upskilling