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Best Practices HR Must Know for Retrenchment and Downsizing Exercise

Nikki Blog
by Nikki Blog
Apr 14, 2020 at 4:16 PM

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To clear any misconception, to undertake any retrenchment exercise is not merely filling up the “Borang PK” and submitting it to Jabatan Tenaga Kerja.  There is no Carte Blanche for employer to select employees to be retrenched.

It is established law that it is the Business right and prerogative to undertake any retrenchment exercise. If exercised in good faith, genuinely and in adherence of established principle, it will be upheld and dispel any assertions of unfair dismissal. The following are the factors that must be considered as part of best practice to be applied to in any retrenchment exercise


LIFO Principle (“Last In First Out”)

The LIFO principle in basic terms provides that the most junior employee is retrenched before senior employees in the same job scope and category. The basis for this principle is to avoid the common ground of contention that a retrenchment exercise is to target the higher paid but perceived less efficient senior employee.


FWFO Principle (“Foreign Worker First Out”)

This is similar to the LIFO principle but is emphasized that Foreign Employees are to be selected first.  Section 60N Employment Act 1955 states clearly where an employer is required to reduce his workforce by reason of redundancy necessitating the retrenchment of any number of employees, the employer shall not terminate the services of a local employee unless he has first terminated the services of all foreign employees employed by him in a capacity similar to that of the local employee. 


Code of Conduct for Industrial Harmony

The Code of Conduct for Industrial Harmony (“Code”) aims to lay down principles and guidelines to employers and workers on the practice of industrial relations for achieving greater industrial harmony. Though not legally binding, it has been the position of the Industrial Court for adherence of the Code of conduct of Industrial Harmony. It provides valuable recommendations which serves as a guideline to be adopted as part of best practice



The Code provides that where redundancy is likely, an employer should take positive steps to avert or minimize reductions of workforce by adopting appropriate measures such as:

  1. limitation on recruitment
  2. restriction of overtime work
  3. restriction of work on weekly day of rest
  4. reduction in number of shifts or days worked a week
  5. reduction in the number of hours of work
  6. re-training and/or transfer to other department/work

Employers are always advised to adopt avoidance measures such as offering;

  1. Mutual Separation Scheme
  2. Voluntary Separation Scheme

Unsure of the difference between Mutual and Voluntary Separation Scheme (MSS and VSS)? Read this: https://www.ajobthing.com/blog/more-layoffs-in-malaysian-companies-understanding-vss-and-mss

Selection Criteria

  1. The need for the efficient operation of the establishment or undertaking
  2. Ability, experience, skill and occupational qualifications of individual workers required by the establishment
  3. Consideration for length of service and status (non-citizens, casual, temporary, permanent)
  4. Age
  5. Family situation
  6. Such other criteria as may be formulated in the context of national policies



Where a retrenchment becomes necessary, the Code encourages employers to take the following measures:

  1. Giving as early a warning as practicable to the affected employees
  2. Introducing schemes for voluntary retrenchment and retirement and for payment of redundancy and retirement benefits
  3. Retiring workers who are beyond the retirement age
  4. Assisting workers to find alternative employment
  5. Spreading the termination of employment over a longer period
  6. Ensuring that the employees are informed or consulted before a formal announcement is made



The best practices undertaken by businesses in any retrenchment exercise should and must include;

  1. Implementing mitigating and avoid measures factors first to avoid retrenchment exercise
  2. Only adopting retrenchment exercise when it is an unavoidable measure
  3. Be objective in their approach of selection of employee
  4. Conduct the retrenchment exercise genuinely and fairly


The above consideration are not exhaustive nor conclusive but are suggested best practices that must be considered as it would eliminate any potential risk and liability to any business as there are numerous Court Authorities where the Courts have awarded compensation against companies utilizing the pretext of retrenchment exercises to unfairly dismiss it employees.


This article is by IRLAW2U.my

If you have any enquiries, you may visit www.IRLAW2U.my to refer to our IR consultants.