Retrenchment Benefits in Malaysia: Your Legal Entitlements

Retrenchment occurs when an employer terminates the employment of one or more employees due to reasons such as restructuring, downsizing, financial difficulties, automation or the closure of a business operation. In Malaysia, retrenchment is governed by the Employment Act 1955 (EA), the Industrial Relations Act 1967 and the Code of Conduct for Industrial Harmony 1975. While Malaysian law does not mandate a fixed formula for retrenchment benefits, there are established guidelines and legal principles that determine what a retrenched employee is entitled to receive. This guide explains your legal entitlements if you are facing retrenchment in Johor Bahru or elsewhere in Malaysia.

Who Is Protected Under the Employment Act?

The Employment Act 1955 applies to all employees in Malaysia regardless of salary, although certain specific provisions relating to termination benefits apply primarily to employees earning below RM4,000 per month. For employees above this threshold, the terms of the employment contract and common law principles determine the entitlements. However, all employees, regardless of salary level, are protected against unfair dismissal under the Industrial Relations Act and may file a representation under Section 20 if they believe the retrenchment was carried out without just cause or excuse.

Employer Obligations in Retrenchment

Employers in Malaysia who plan to retrench employees must comply with the following obligations:

• Notice to the Ministry: Under Section 63P of the Employment Act, employers who intend to retrench employees must notify the nearest office of the Department of Labour at least 30 days before the retrenchment takes effect.
• Proper notice period: The employer must give the employee the contractual or statutory notice period, whichever is longer. Under the EA, the minimum notice period ranges from four weeks for employees with less than two years of service to eight weeks for employees with five or more years of service.
• Follow the LIFO principle: The Code of Conduct for Industrial Harmony recommends that employers apply the "last in, first out" (LIFO) principle when selecting employees for retrenchment, meaning that the most recently hired employees should be retrenched first, all other things being equal.
• Priority of re-employment: Retrenched employees should be given priority for re-employment when the company's situation improves.

Retrenchment Benefits and Compensation

The amount of retrenchment benefits payable depends on whether the employee is covered by the Employment Act's specific provisions or falls under common law. The established guidelines for retrenchment benefits in Malaysia are:

• Less than 2 years of service: 10 days' wages for each year of service
• 2 to 5 years of service: 15 days' wages for each year of service
• More than 5 years of service: 20 days' wages for each year of service

These guidelines are widely followed by Malaysian employers and have been endorsed by the Industrial Court as a reasonable benchmark. However, the actual amount may vary depending on the employment contract, any collective agreement (for unionised employees) and the specific circumstances of the retrenchment. In addition to retrenchment benefits, the employee is entitled to payment for any accrued annual leave, unpaid wages and the balance of the notice period if the employer chooses to pay in lieu of notice.

Employment Insurance System (EIS)

The Employment Insurance System, administered by SOCSO (PERKESO), provides financial assistance to employees who have lost their jobs due to retrenchment, closure of business or other qualifying circumstances. Under the EIS, retrenched employees may be eligible for a cash benefit known as the Job Search Allowance, which provides up to 80% of the assumed monthly wage for a period of up to six months. The EIS also provides access to re-employment placement programmes, training and career counselling. Employees who have contributed to SOCSO for at least 12 months in the preceding 24 months are generally eligible for EIS benefits.

What to Do If You Are Being Retrenched

If you have been informed that you are being retrenched, take the following steps:

• Request a formal letter of retrenchment stating the reasons for the retrenchment and the benefits being offered
• Review the offer carefully and compare it against the established guidelines
• Do not sign any acceptance document without understanding the full implications
• Check your SOCSO contributions to ensure they are up to date and apply for EIS benefits
• Consult an employment lawyer to understand your rights and options

Challenging a Retrenchment

If you believe the retrenchment was not genuine or was carried out without following proper procedures, you may file a representation under Section 20 of the Industrial Relations Act within 60 days of the termination. Common grounds for challenging a retrenchment include failure to follow the LIFO principle, failure to notify the Labour Department, retrenching employees while simultaneously hiring new staff for the same positions and using retrenchment as a pretext to remove specific employees. The employment law team at Messrs S K Song can assess your case and advise you on the best course of action.

How Messrs S K Song Can Help

The employment lawyers at Messrs S K Song represent both employees and employers in retrenchment matters. For employees, we assess the fairness of the retrenchment, negotiate enhanced benefits where appropriate and file Industrial Court claims when necessary. For employers, we advise on lawful retrenchment procedures, draft retrenchment letters and ensure compliance with the Employment Act and the Code of Conduct. Contact our Johor Bahru office for a consultation.