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Legal Obligations of an Employer during a Retrenchment  

Updated: Sep 24, 2023

One of the many commercial decisions a financially distressed company might make is the retrenchment of its employees. We outline four legal obligations borne by an employer during a retrenchment.


One of the many commercial decisions a financially distressed company might make is the retrenchment of its employees. A certain sensitivity surrounds retrenchment, and understandably so as it results in the exodus of employees and impacts the livelihoods of affected employees. Yet, retrenchments may be necessary especially when a company faces possible insolvency.


In the context that retrenchments often happen in financially sensitive circumstances, it is prudent that employers retrench their employees in compliance with the law to avoid incurring further financial losses. Below we outline four legal obligations borne by an employer during a retrenchment.




Notice of termination must be served


Firstly, employers must give notice to employee(s) affected by a retrenchment. 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 of termination is to inform the affected employee(s) in hard writing that that the employer is terminating their contract of service. Additionally, a notice of termination serves to enable the affected employee(s) to seek alternative employment as soon as possible.


As the Employment (Amendment) Act 2022 provides that the Employment Act 1955 is applicable to all employees regardless of their salary, section 12(3) is relevant. There, the law mandates that irrespective of the notice period within the employment contract, employers are required by section 12 to give the employee statutory notice by a certain time. This ranges from four weeks’ notice to eight weeks’ notice depending on the employees’ years of service. Section 12 is reproduced below: -


12. 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.


(emphasis ours)


Retrenchment Benefits


According to regulation 6 of the Employment (Termination & Lay-Off Benefits) Regulations 1980, employees whose monthly salary stands at RM2,000 and below and falls within the Employment Act 1955 (to which, all employees are pursuant to the Employment (Amendment) Act 2022), retrenchment benefits are applicable depending on their tenure of employment.


Those whose tenure of employment is less than 2 years are entitled to 10 days’ wages for each year of employment. For those whose tenure stands at 2 years and upwards until (but not including) 5 years are entitled to 15 days’ wages for each year of employment. Lastly, for those whose tenure stands at 5 years and above are entitled to 20 days’ wages for each year of employment.


This is provided that the employment of the affected employee was terminated for any reason other than attainment of retirement age, i.e., grounds of misconduct or on a voluntary basis by the employee. Additionally, to be entitled for termination 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.


Written statement on termination benefits


Per regulation 12 of the Employment (Termination & Lay Off Benefits) Regulations 1980, the employer is required to issue written particulars to the affected employee stating the amount of termination benefits and the manner of calculation.


Submission of PK form


Lastly, employers are required to complete a termination form known as the PK Form in compliance with the Employment Retrenchment Notification 2004 and report to the nearest Jabatan Tenaga Kerja Semenanjung Malaysia (Department of Labour) at least 30 days before any action is implemented by using the PK Form.


The PK Form is applicable to:

  1. Retrenchments

  2. Voluntary Separation Schemes

  3. Temporary Lay-Offs

  4. Salary Reductions


The PK Form comprises of six parts and there are time limits for the submission of the different parts. For example, Parts I to IV, the form must be submitted at least 30 days before the retrenchment takes place. Part V must 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.


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.


 

Legal Disclaimer


We trust that you have gained some information from this article. If you have any specific questions related to this article, please contact us at askdonny@dwc.com.my.


This article is posted 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.



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