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Retrenchment, Voluntary Separation Schemes and Mutual Separation Schemes 

Updated: Sep 24, 2023

The termination of employment entails difficult decisions the law provides several methods of termination, three of which will be discussed.

The exit of employees necessitated by financial constraints is never an easy ordeal in the lifecycle of companies and businesses.

The termination of employment entails difficult decisions the law provides several methods of termination, three of which will be discussed below:

  1. Retrenchments

  2. Voluntary separation schemes

  3. Mutual separation schemes

Though all three methods result in termination of employment, the way in which the employee exits the company greatly differs between the three.


This entails the dismissal of employees who are regarded as a surplus to business requirements. The company or department itself does not shut down, but rather a select group of employees are retrenched. Note that the dismissal of all employees does not constitute as retrenchment.

When carrying out retrenchments, companies are required to abide by the Employment Act 1955 (where relevant) and the general principle of LIFO (Last In First Out).

Voluntary Separation Schemes

Voluntary Separation Schemes (‘VSS’) arise when a company is not officially retrenching but nonetheless wishes to reduce the headcount of its employees. In this scenario, the company will announce to their employees that the company will undergo a VSS, much alike an advertisement that invites applicants to be considered for the VSS.

Typically, the company will also talk about the terms and conditions of the VSS (compensation terms, qualifications, requirements etc) and the company ultimately reserves the right to accept or reject the application of the employee.

Malaysian courts have accepted the legal validity of VSS overall, and a well-drafted, airtight VSS will make it more difficult for employees who opted for the VSS to later challenge this before the Malaysian courts.

Mutual Separation Schemes

Mutual Separation Schemes (‘MSS’) arise when both the employer and employee agree to terminate the employment relationship. The keyword here is “mutual”, i.e., both parties agree to a settlement that is perceived as a win-win scenario for them.

MSS generally are done on a selective basis whereby the employer pre-selects employees eligible for the MSS before approaching them whilst VSS are offered at large to employees of the company.

Burden of Proof (section 20 of the Industrial Relations Act 1967)

As is the case with all dismissals of employees, the employer bears the burden of proving just cause or excuse in dismissing the employee(s) per section 20 of the Industrial Relations Act 1967.

If it is a retrenchment and the purported reason is e.g., loss for the preceding xx number of years, then the employer must be able to show these losses by way of adducing evidence of profit and loss account, etc.

A VSS is typically more difficult for an employee who had opted for such to later argue against the VSS unless it can be shown that the employee was coerced into it or there existed unusual elements that may render the VSS void or voidable.


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

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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