Hafiz Zubir & Co.

Company Restructuring by way of Lay Off and Retrenchment

Company Restructuring by way of Lay Off and Retrenchment

Many businesses and organizations are facing financial difficulties and planning on cutting down their cost by retrenching or laying off their employees since the government extended the Movement Control Order (MCO) period to 14 April 2020 in order to curb the spread of Covid-19 in Malaysia.


Retrenchment means termination of employment as a result of redundancy or surplus of employees in excess of what the employer requires.  This may be due to reorganization of business, downsizing, as the impact of economic turmoil or losses in business.

Lay off is the temporary suspension, deferment of work for a specific period of time or permanent termination of employment of an employee or a group of employees for business reasons or due to temporary conditions such as a plant shut-down, fire, flood, refurbishment, renovation, etc.


In general, retrenchment is under the prerogative of an employer. It is every employer’s right to re-organize his businesses or organization for better profit or to avoid or reduce losses because of restructuring, downsizing, mergers, technological changes, economic downturn or natural disaster. If such reorganization results in a surplus of manpower than to retrench such surplus is lawful.

Therefore, if the company is facing financial problems as a result of the COVID-19 outbreak, it has strong legal reasons to retrench employees who are surplus and to reduce the workforce.

If any businesses or organization want to retrench or temporarily lay off their employees during the Movement Control Order (MCO), the employer must ensure that they comply with these requirements to ensure that the process is done fairly:

  • There must be a genuine financial impact on the business due to Covid-19.
  • Employers must first use other means before deciding to release workers such as reducing or restricting the hiring of new employees, reducing or limiting overtime, reducing work hours, limiting workers from working on weekends or public holidays, perform a temporary lay off or reducing workers’ salaries.
  • If the termination of employment is unavoidable, employers should first terminate the employment of foreign workers before considering local workers (ie First Foreign Workers).
  • When considering termination of local staff, employers are encouraged to comply with “Last In First Out


However, employers are advisable to do salary reductions as a step to avoid retrenchment. And any form of salary reductions has to be negotiated and obtained the consent of the employee first. This is because the reduction without consent from employees can be seen as a breach of contract that may result in unfair dismissal claims.


RETRENCHMENT Determine whether the situation faced by the Company is on permanent basis. No victimization.


Adhere to LIFO strictly. Do not break the law.
Notify the employees or prefer notice according to section 12(2) of Employment Act – employees cover under the act. Don’t use this structure to get unwanted employees.
Retrench foreign workers first before local workers.
Arrange for alternative employment.
LAY OFF Determine whether the situation faced by the Company is on a temporary basis. Do not unilaterally decide on lay-off exercise.


Specify the period of lay-off. Do not break the law.


The lay-off benefits to be offered Do not victimize the employees.
Notify the employees and make them understand the critical situation.
Regular contacts and communication with the employees must be enhanced.


An employee will be eligible to receive retrenchment benefits if his employment is terminated by the Company on grounds of redundancy i.e: whose services are surplus to the Company’s requirement.  Such benefits shall not apply to dismissal for disciplinary reasons or resignation or retirement or termination of employment for other causes.

Where the Company terminates the service of the employee on ground of redundancy, written notice shall be given and the period of such notice shall be in accordance with the individual or payment of salary in lieu of notice.  In addition of receiving such notice or payment in lieu thereof applicable to the employee concerned, the Company shall pay a lump sum payment herein after referred to as ‘retrenchment benefits’ computed as follows (in accordance to Employment Act 1955 (Act 265):

  1. Ten (10) days wages for every year of employment under a continuous contract of service if he/she has been employed for a period of less than two (2) years.
  2. Fifteen (15) days wages for every year of employment under a continuous contract of service if he/she has been employed for two (2) years or more but less than five (5) years of service.
  3. Twenty (20) days wages for every year of employment under a continuous contract of service if he/she has been employed for five (5) years or more.

Subject to all things being equal and wherever practicable, the general principle of last-in, first-out or vice versa shall be observed.

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