General Article on Retrenchment

The following are the legal obligations that an employer must do in a retrenchment exercise.

1) Notice of termination must be served on the employees affected
2) Provision of reasonable notice
3) Payment of termination benefits
4) Written statement on termination benefits
5) PK form

1) Notice of termination must be served

The employers MUST give notice to the affected employee(s).  This is either as per the termination clause in the employment contract or as per the law.

A typical termination clause in an employment contract reads as follows: –

“Either party … may terminate contract of service by giving X months’ notice or by paying to the other party X months wages in lieu of notice.”

The purpose of a notice is to inform the affected employee that the employer is terminating his services.  How would the employee otherwise know his position in the company if the employer does not provide the notice? Additionally, a notice of termination serves to enable the affected employee to seek alternative employment as soon as possible.

For employees who are covered by the Employment Act 1955, section 12(3) is relevant.  It basically states that despite the notice period in the employment contract, employers must give at least the statutory notice.  Section 12 is reproduced below, but pay particular attention to 12(3):-


  1. Notice of termination of contract

(1) Either party to a contract of service may at any time give to the other party notice of his intention to terminate such contract of service.


(2) The length of such notice shall be the same for both employer and employee and shall be determined by a provision made in writing for such notice in the terms of the contract of service, or, in the absence of such provision in writing, shall not be less than —

(a) four weeks’ notice if the employee has been so employed for less than two years on the date on which the notice is given;

(b) six weeks’ notice if he has been so employed for two years or more but less than five years on such date;

(c) eight weeks’ notice if he has been so employed for five years or more on such date:
Provided that this section shall not be taken to prevent either party from waiving his right to a notice under this subsection.


(3) Notwithstanding anything contained in subsection (2), where the termination of service of the employee is attributable wholly or mainly to the fact that–

(a) the employer has ceased, or intends to cease to carry on the business for the purposes of which the employee was employed;

(b) the employer has ceased or intends to cease to carry on the business in the place at which the employee was contracted to work;

the employee shall be entitled to, and the employer shall give to the employee, notice of termination of service, and the length of such notice shall not be less than that provided in paragraph (2)(a), (b) or (c) as the case may be, regardless of anything to the contrary contained in the contract of service.


2) Provision of reasonable notice

If the affected employee is OUTSIDE the scope of the EA, follow the contractual provision that is provided for in the employment contract.  If there is no contractual provision, then the principle of reasonable notice would apply.  What is “reasonable notice” will depend on the facts and circumstances of the case, taking into consideration various factors, including the position of the employee and the industry of the employer.

3) Termination Benefits

If the affected employee is within the Employment Act 1955, the Employment (Termination & Lay-Off Benefits) Regulations 1980 would apply.

To be entitled to the termination benefits, the employment of the affected employee has to be terminated for any reason other than attainment of the age of retirement, on grounds of misconduct or on a voluntary basis by the employee.

Additionally, to be entitled for such benefits, the employee must be employed under a continuous contract of employment for a period of not less than 12 months before the date of termination.


Entitlement and Calculation under the Employment (Termination & Lay-Off Benefits) Regulations 1980

< 2 years service = 10 days for every year

> 2, < 5 years service = 15 days for every year

5 or more years service = 20 days for every year

Based on average true days wages.

For affected employees who DO NOT fall within the Employment Act 1955, then it depends on whether the contract of employment provides for it. It may be express or implied, eg past practices of the company.

4) Written statement on termination benefits

This is specifically provided for in Regulation 12 of the Employment (Termination & Lay Off Benefits) Regulations 1980 – employer to issue written particulars or statement to the employee stating the amount of termination benefits and manner of calculation.


5) Submission of PK form

The employer fills up and completes a termination form known as the PK form.  This requirement was gazetted as P.U. (B) 430/2004 on 11 November 2004 and any employer who fails to comply is guilty of an offence under section 63 of the Employment Act 1955, and if found guilty could be fined not more than RM10,000.

Employers are required to report to the nearest Jabatan Tenaga Kerja Semenanjung Malaysia at least 30 days before any action is implemented by using Form PK.

The PK Form is applicable to: 1) retrenchment; 2) VSS; 3) Temporary Lay-Off; 4) Salary Reduction.

There are 6 parts in the PK Form and there are time limits for the submission of the different parts. So, for Parts I to IV, the form has to be submitted at least 30 days before the retrenchment takes place. Part V has to be submitted within 14 days after the retrenchment takes place; Part VI would need to be submitted within 30 days after the retrenchment takes place.

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The article posted is for general information purposes only and should not be construed as legal advice. Facts and circumstances differ from case-to-case. Please consult your lawyer for specific legal advice and action to be taken.

This article is brought to you by Justin Lee and is copyrighted accordingly. Justin is an employment law specialist who can advice, draft and train your human resource managers.