There have been many waves of retrenchments in Malaysia which has been increasing consecutively every year. The COVID-19 pandemic has placed much strain on businesses, as government lock-downs and movement control across the globe make it difficult to secure new businesses or continue with ongoing projects. Many businesses in Malaysia are facing financial difficulties which have been exacerbated as the outbreak continues, and a natural consideration is whether they can legally undergo cost-cutting measures such as downsizing and retrenchment.
What does Retrenchment really mean?
Retrenchment is the dismissal of employees who have become surplus to the needs of the organisation. Retrenchment or downsizing can happen when the business no longer requires the same number of employees it used to because the functions of the employee have either ceased or diminished to a significant extent. This could be caused by various factors such as loss of profits, lack of business, change of business direction, outsourcing of functions, or right-sizing exercises.
Can employers retrench their employees due to the Covid-19 pandemic?
Yes, they can! A company on legitimate grounds may reduce its workforce and retrench employees who are surplus.
This is only if a company is legitimately facing financial difficulties as a result of the COVID-19 pandemic.
The law recognises that a business has the right and prerogative to manage its workforce, subject to fair labour practice being adopted. As such, if a company has legitimate commercial grounds to retrench an employee and this exercise is not done in bad faith or to victimise a particular employee, the Court will not usually interfere with that decision.
The Position of the Ministry of Human Resource (MHR)
In March 2020, the MHR has taken the position that retrenchment of employees is the prerogative of the employer. However, it is said that the employers should ensure that they comply with these 3 basic requirements:
- There must be a genuine financial impact on the business
- Employers must exhaust other means first before opting to retrench employees. (Example: reducing working hours, reducing or freezing the hiring of new employees, reducing or limiting overtime, limiting employees from working on weekends or on public holidays, reducing employees’ wages or laying -off their employees temporarily)
- As retrenchment being the last resort, employers should terminate the services of foreign workers first before considering local employees. If retrenchment of local employees is being considered, employers are encouraged to comply with “Last In First Out”. However, the Ministry has stated that employers can depart from these principles if it has strong justifications to do so.
