Covid-19 has taken over almost every aspect of our lives, bringing nations into lockdown with many businesses battling to stay afloat. On our end, we’ve been receiving a number of questions relating to retrenchment.  To help address the multitude of queries we have been receiving, we held a special Q&A Webinar titled, “Retrenchment during the Covid19 Pandemic” on 3 December 2020, where we addressed frequently asked questions about retrenchments in Malaysia, particularly practical issues arising from the implementation of a retrenchment exercise.

In case you missed the webinar, here are 5 questions we addressed, with some important takeaways.

  1. Can a company retrench if it is still profitable?

Yes. A company does not have to be making losses before being able to retrench. What is important is that there is a genuine redundancy. A genuine redundancy is where a certain role ceases to exist or has diminished greatly such that it becomes a surplus to the operational needs of the company.

For example, Company AZ is in the retail business and has a sales team of 10 people who prior to the pandemic would go door-to-door. During the Covid-19 pandemic and lockdown, Company AZ moved its business online. As such, even if Company AZ has been able to maintain profits from its online sales online, Company AZ may still be able to retrench some of its sales staff if Company AZ no longer requires all 10 people in its sales team.

Without a genuine redundancy, everything else does not matter. In other words, if there is no genuine redundancy, a company cannot validly retrench its employees even if it is making losses.

  1. Can a company apply unused annual leave of the employees to shorten the employees’ final days in the company?

Yes, unused annual leave can be applied to “bring forward” a retrenched employee’s last physical day in the office. Do note however that when the annual leave is being utilised in this manner, an employee remains an employee as they are just treated as “being on leave” while serving their notice period. As at the final day of their employment, the employee should be compensated for any accrued but unused annual leave. 

  1. Can a company impose a cap on the number of years of service of an employee to be taken into account for the purposes of retrenchment benefits calculation?

EA employees (those earning less than RM2,000 per month or are in manual labour) are entitled to a minimum termination benefit based on their years of service as set out under the Employment (Termination and Lay-Off Benefits) Regulations 1980.  These Regulations do not impose any cap on the years of service. Therefore, an EA employee must be paid their minimum termination benefits following the regulations and a cap on the number of years of service cannot be imposed.

The company can however impose a cap for Non-EA employees as long as it is not in breach of any agreed terms of the employment agreement.

  1. If the company has already implemented a salary reduction earlier where salaries of employees were reduced, in the event of a retrenchment exercise, which salary is used in calculating retrenchment benefits?

For EA employees, the Employment (Termination and Lay-Off Benefits) Regulations 1980 specifically provides that the “wages” used to calculate the termination benefits shall be computed to give the employee their average “true day’s wages” calculated over the last 12 months. In other words, the company will have to calculate how much was the employee’s wages based on the total received over the past 12 months.

For Non-EA employees, as there is no legal obligation to pay termination benefits, it is largely up to the company to decide how to compute or assess the termination benefits to be paid. This is so long as it is not in breach of any agreed terms of the employment agreement or the salary reduction agreement, and the company acts reasonably and fairly.

  1. Can a company retrench a senior employee and hire a junior employee as a cost saving measure?

No. If a senior employee is retrenched and merely replaced with a new junior employee to perform the same functions, this means the role is not redundant. It is possible to retrench the senior employee if their functions are genuinely redundant (eg: due to business conditions or current headcount structure, you no longer require a senior employee to manage/supervise the other employees). If a new junior employee is hired, the Company must be able to demonstrate that the junior employee was performing a different function/role from the senior employee and is therefore unrelated to the senior employee’s redundancy.


This article was written by Donovan Cheah and Yan Nie Th’ng. Donovan has been named as a Recommended Lawyer for Labour and Employment by the Legal 500 Asia Pacific 2017, 2018, 2019 and 2020, and he has also been recognised by Chambers Asia Pacific and Asialaw Profiles for his employment law and industrial relations work.

Donovan & Ho is a law firm in Malaysia. Our practice areas include employment law, dispute resolution, tax advisory and corporate advisory.  Have a question? Please contact us.


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