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

A client in the travel industry informed us recently that they are considering to retrench 50% of his employees due to COVID 19. This is not an isolated case, we have received numerous calls from clients and friends sharing with us similar dilemma that they are facing. In response to the economic downturn, businesses may have to make tough decisions to ensure survivability. One of these is whether to retain or retrench their staff.


Despite all these challenges, we have also heard encouraging news that people are stepping out to help one another, some restaurants are preparing meals for health workers in the frontline, a doctor in Ipoh is giving out meal vouchers to the needy, NGOs and business community are providing food for our immigrant workers, and many more.


We must believe in the goodness of people and we ought to help one another, especially during tough times like this. With this article, we hope to give you a clear answer on tough questions such as retrenchment and pay-cut but at the same time we aim to offer some alternative solutions that employers may consider. Can employers retrench or terminate their employees as a cost-cutting measure? Some businesses are suffering significant downturn and may need to retrench some of their employees as they are no longer required. Some businesses will close down entirely.


Retrenchment is allowed in the case of a genuine redundancy. This is where there is a change in the operational requirements of the business or the business is experiencing significant business and financial losses, and the employer no longer require the job to be performed by anyone.


However, before undertaking retrenchment exercise, employers must consider and attempt to implement other alternative solutions to resolve the crisis as retrenchment would have a significant impact to the employees and their family.

What are the other alternatives beside retrenchment?

Employers should exhaust other means first before opting to retrench employees, these include:

a. Training and redeployment of worker within the business or other subsidiaries within the organisation.

b. Freezing the hiring of new employees.

c. Limiting overtime.

d. Limiting work on weekends and public holidays .

e. Implementing shorter work week or reduce the number of shifts.

f. Reducing daily working hours.

g. Laying-off their employees temporarily (temporary shutdown) and helping them to secure temporary jobs elsewhere until normal operations resume.

h. Undertaking pay-cut fairly after other cost-cutting measures have been implemented.



When retrenchment is necessary and alternatives have been exhausted

If retrenchment of employees is unavoidable, employers should:

a. Undertake the retrenchment responsibly and hold discussion sessions with the employees as soon as possible.

b. Offer voluntary separation or retirement scheme with reasonable rate of compensation.

c. Give notice of termination of contract of service as required by the law or in accordance with the contract of service, whichever is better.

d. Assist the employees to find alternative jobs elsewhere before retrenchment is implemented.

e. Implement retrenchment in stages over a longer period of time.

f. Terminate the services of foreign workers first before considering local employees.

g. If retrenchment of local employees is being considered, employers should follow “Last In - First Out” principle whereby the employees who have just joined will be retrenched first.

h. Provide termination benefits in accordance with the requirements of the Employment Act or the contract of service as the case may be.

i. Employers must notify the Department of Manpower, Ministry of Human Resource (www.mohr.gov.my) before implementing retrenchment, voluntary separation, lay-off or pay-cut.


What do I need to know about salary reduction?

This may only be done if both parties mutually agree to it as in essence reduction of salary is a variation of terms in the employment contract. This should be done in writing where both parties shall state and agree to the quantum of reduction, the period where the reduction is applicable and other essential variations.


Disclaimer: Every effort has been made to provide accurate information. However, the information and regulations contained in this article are subject to changes and amendments by the relevant authority at any time. As such, the information in this article may not be current.

And the information provided in this article is general commentary only and shall not be considered as advice or recommendation.

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