log in
All Articles | Back

Member Articles

A Re-look at the Laws on Retrenchment 

by Wong Kian Jun

Published: August, 2018

Submission: August, 2018





During uncertain times and shrinking profits, organisations may decide to reorganise their business structure in order to create a leaner workforce thereby reducing their operating costs to weather the impact of a slowing economy. Inevitably, the reorganisation would result in the retrenchment of its employees who are considered surplus to the needs of the organisation. With news of retrenchment exercises carried out in the financial, manufacturing and airline industries, we think it useful to restate the current position of the law in relation to retrenchment.


The right to reorganise the business left unquestioned

In a claim of unfair dismissal at the Industrial Court, the first hurdle the employer would need to overcome would be to show the basis of the reorganisation which led to the retrenchment exercise. Many reasons have been put forward and accepted by the Industrial Court such as losses, reduced profits, mechanisation, partial or full closure of business, outsourcing and many more, as a reason for the reorganisation. The fundamental principle that remains is that the law recognises the employer’s right to reorganise the business in the way that it considers best as long as it is done in a bona fide manner.



The next hurdle would be to show that there are surplus employees as a result of the reorgnisation. InStephen Bong v FCB Sdn Bhd[1], the Industrial Court held that a redundancy does not only mean the work no longer exists but it can also occur when the business requires fewer employees. Therefore, this principle would naturally mean that redundancy can occur even if the work still exists and can be performed by fewer employees. If the work is performed by fewer employees, clearly the existing employees will have to perform the work of the employees that are retrenched. Surely if an employer can show that the work of the retrenched employee(s) was performed by existing employee(s) of the company, this would mean that the retrenched employee(s) was redundant. This is where there are conflicting views by the Industrial Court.

In the case ofBayer (M) Sdn Bhd v Ng Hong Pau[2], the Court held as follows:

“On redundancy, it cannot be gainsaid that the appellant must come to the court with concrete proof. The burden is on the appellant to prove actual redundancy on which the dismissal was grounded. (seeChapman & Others v Goonevan & Rostrowrack China Clay Co Ltd[1983] 2 ALL ER). It is our view that merely to show evidence of a reorganisation in the appellant is certainly not sufficient. There was evidence before the court that although sales were reduced, the workload was taken over by two of his former colleagues. Faced with these evidence, is it any wonder that the Court made a finding of fact that there was no convincing evidence produced by the appellant that the respondent’s function were reduced to such an extent that he was considered redundant.” (Emphasis ours.)

In the case ofCredit Corporation (M) Sdn Bhd v Choo Kam Sing & Anor[3]the Court held as follows:

“The evidence before the Industrial Court showed that the first respondent’s job functions were not abolished and in fact his duties [were] taken over by other employees. Thus, the order of reinstatement was justified…” (Emphasis ours.)

Based on the above cases, it appears that there is no redundancy when the work has been taken over by other employees of the company which is in direct contradiction to the view that a redundancy can occur when an employer requires fewer employees to perform the work, as held in the case ofStephen Bong v FCB Sdn Bhd.


Selection criteria

Once redundancy has been established, an employer would need to show that he has applied the correct method of selection. The recognised method would be the Last in First Out (“LIFO”) principle which means the most junior employee in terms of length of service in a specific category would need to be selected first for retrenchment as opposed to a longer-serving employee. An employer would need to look at the length of service in a particular category only and not in other categories. Although the LIFO principle is not an immutable principle, it can only be departed from certain exceptional situations.


Other considerations

Apart from what is stated above, the employer must also take into consideration the following issues in a retrenchment exercise:

  1. Retrenchment benefits — whether contractual or imposed by law;
  2. Payment of contractual dues;
  3. Notification of retrenchment exercise to the Labour Office;
  4. Any requirements pursuant to Collective Agreement or Employee Handbook.
  5. Apart from undertaking a retrenchment exercise, many organisations have also taken the route of introducing a Voluntary Separation Scheme (“VSS”) or Mutual Separation Scheme (“MSS”). A VSS means that the employee would apply to terminate his employment with the company and the company would consider whether to approve the application or not. Whereas an MSS means both parties are to mutually agree on the cessation of employment.



Prior to embarking on a retrenchment exercise, an employer should first ascertain all the requirements of the law and the application of the principles regarding retrenchment. This is because each organisation is unique and therefore the law and principles may apply differently depending on the organisation.

[1]Stephen Bong v FCB Sdn Bhd.

[2]Bayer (M) Sdn Bhd v Ng Hong Pau.

[3]Credit Corporation (M) Sdn Bhd v Choo Kam Sing & Anor.






WSG Member: Please login to add your comment.


WSG's members are independent firms and are not affiliated in the joint practice of professional services. Each member exercises its own individual judgments on all client matters.

HOME | SITE MAP | GLANCE | PRIVACY POLICY | DISCLAIMER |  © World Services Group, 2022