NB: This article is updated as of the date of publication stated above. As this situation is novel and the government’s response to the outbreak is continuously developing, this article may not necessarily include updates or developments after this date. In situations of doubt, you are advised to check for updates directly with the government authorities.

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.

Can employers retrench their employees due to the COVID-19 outbreak?

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.

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.

Therefore, if a company is legitimately facing financial difficulties as a result of the COVID-19 pandemic, it has prima facie legitimate grounds to reduce its workforce and to retrench employees who are surplus.

What is the position of the Ministry of Human Resources? Do they allow businesses to retrench employees during the COVID-19 outbreak?

On 24 March 2020, the Ministry of Human Resources (“Ministry”) released its second FAQ on the COVID-19 outbreak (“FAQ”), where it covered the issue of retrenchment of employees. The Ministry of Human Resources has taken the position that retrenchment of employees is the prerogative of the employer, but 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 such as 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.
  • In the event, retrenchment of employees cannot be avoided, employers should terminate the services of foreign workers first before considering local employees (i.e. Foreign Worker First Out). 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.

One of the recommendations of the Ministry of Human Resources in the FAQ is that employers should consider alternatives to retrenchment first such as salary reductions.  Can employers therefore impose salary reductions on employees during the movement control order period, or if business is bad due to the COVID-19 situation?

While salary reductions are one of the recommended steps to be taken in order to avert retrenchment, it is advisable that employees’ consent be obtained for any salary reduction. This is because a unilateral salary reduction may be viewed as a breach of contract that may give rise to a claim of unfair dismissal.

In this regard, employers should communicate transparently with their employees about the reason for the salary reduction, and explain that this is an attempt to prevent more drastic action such as a retrenchment. An employer may also want to consider a corresponding reduction in working hours in order to justify the salary reduction.

In the FAQ, the Ministry advises that employees should be consulted first on any proposed salary reduction, and where unionised employees are involved, approval from the union should first be obtained.

Since there is a movement control order in place, employees of non-essential businesses cannot go to the office and may be unable to fulfill their functions. Since the purpose of their employment contract cannot be performed, can an employer treat the contract as being “frustrated” and they no longer have a duty to employ these employees?

No.  Employers are not advised to use the doctrine of frustration as a result of the movement control order. This is because the principle of frustration only applies when the contract becomes impossible to perform, and not merely more difficult to perform. Most employees may still be able to discharge their functions by working remotely.

In the FAQ, the Ministry’s position is that the concept of frustration does not apply because the movement control order is only temporary and for a short period of time.


This article was written by Donovan Cheah and Amirul Izzat Hasri. 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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