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Updated: Jan 4, 2022

What are the possible actions to reduce the Company’s manpower in light of the current economic challenges?

Some companies may decide to reduce its manpower, as such, we set out below the options that may be taken by a Company:

  1. Undertake a Voluntary Separation Scheme (VSS) to invite employees to voluntarily leave the Company;

  2. Implement reduced salary measures or no pay leave; and

  3. Undertake a retrenchment exercise as a last resort.

Voluntary Separation Scheme (VSS)

The Company may look into undertaking a VSS exercise to reduce the Company’s manpower.

Under Malaysian employment law, the Company would be seen as opting for a more favourable method such as offering its staff a VSS as an alternative to retrenchment.


The employer would normally propose an attractive package based on grade and years of service, one that is better than the statutory minimum for retrenchment.

With regard to the above, the cost of conducting a VSS exercise is generally higher than retrenchment. However, as the VSS is carried out on a voluntary basis it will reduce the risk of employees initiating legal action against the Company.

Reduced Salary Measures

Ordinarily, implementing reduced salary measures or seeking for employees to go on no pay leave would require the consent of the employees, failing which the employees can claim constructive dismissal due to a breach of the terms and conditions of their employment contract.

However, if such temporary measures are necessary to avoid a potential mass retrenchment, the Company may consider the same although for a very limited period only.


The Company may opt to conduct retrenchment exercise across the board. The retrenchment may be carried out if it is done in good faith, especially in light of global economic recession affecting the Company’s overall business operation.

In a retrenchment exercise, the Company needs to consider the following:

  • The exercise of the Company’s prerogative must be done in good faith where we are of the view that the Company is justified in its exercise if the Company has suffered or will continue to suffer financial losses.

  • Last in First Out (LIFO) requirement ought to be considered wherein the junior most in service should be retrenched first.

  • In respect of EA employees, section 60N of Employment Act 1955 must be fulfilled where in a retrenchment exercise, the Company must first terminate its foreign employees before terminating its local employees.

Costs: Termination Benefits

For the purpose of costs in conducting retrenchment exercise, our suggestion is based on the following categories:

  1. EA Employees;

  2. Unionised Employees; and

  3. Non-EA Employees.

EA Employees

Take note that it is statutorily mandatory for EA employees protected under the Employment Act 1955 to receive retrenchment/termination benefits.

The calculation of the amount of termination benefits for EA employees is provided under Regulation 6(1) of the Employment (Termination and Lay-Off Benefits) Regulations 1980 where the amount of termination benefits payment is set out as follows:

Unionised Employees

If the Company has unionised employees, kindly furnish us with a copy of the related Union’s Collective Agreement so we can further advise you on the costs that may arise where unionised employees are concerned.

Non-EA Employees

For all others that are not covered by the EA, they are only entitled to termination benefits if it is provided in their respective employment contract. If the contract is silent, then it is up to the employer whether or not to pay termination benefits, and the quantum thereof .

Note: the obligation to pay retrenchment/termination benefits need not be expressly provided for in any document and may arise from conduct or practice. Therefore, we are of the view that the Company needs to first check for past practices of the Company to determine whether there is any precedent on any retrenchment exercise implemented by the Company in the past, and if so, the formula utilised.

Are we required to pay the salaries of the employees during the MCO?

As per the FAQ issued by the Ministry of Human Resources dated 19 March 2020, the Company is expected to pay full salary during the MCO especially for employees working from home.

However, if the Company faces financial difficulties in paying full salaries, the Company may seek the consent of the employees to pay reduced salaries during the extended period of MCO along with other cost cutting measures in order to avert risks of retrenchment.

Can we force the employees to use up their annual leave balances?

If employees are working from home, their annual leave should not be deducted since they are still working, just from a different location.

For employees who are unable to work from home – the FAQ issued by the Ministry of Human Resources on 19 March 2020 has stated that annual leave should not be deducted during the movement control period as the order is made under Prevention and Control of Infectious Diseases Act 1988.

Can we force employees to take unpaid leave?

Generally, we do not advise forcing employees to take unpaid leave during the MCO. Unpaid leave, reduction in salary and / or reduction in working hours is generally allowed if it is done in good faith in accordance with employment laws and should always be the Company’s last resort to avoid retrenchment.

We would like to advise the Company that forced unpaid leave carries a risk of claims by employees for breach of contract or unfair dismissal, so managing employee expectations and communication is crucial.

Can we enforce selective pay cuts if the MCO is extended for a further period

Generally, any reduction of pay is allowed with the consent of all staff, is done in good faith and is part of the employer’s last resort to avoid retrenchment.

Further, the Malaysian Government has also announced that employees who are forced to take unpaid leave will receive cash assistance of RM600 a month, which is a tacit recognition that it is expected to be common for employers to put their employees on unpaid leave.

It is interesting to note that the Ministry of Human Resources has clarified that this incentive only applies if the worker is on unpaid leave for a minimum period of one month.

Therefore, should the MCO be extended further and where the Company is considering pay cuts and/or putting employees on unpaid leave, the Company must discuss the best possible measures with its employees to alleviate the financial strains on the Company during this challenging time, before opting for a retrenchment exercise.

In any event, for employees governed by the Employment Act 1955 ("EA"), the Company may resort to temporary lay-off (with terms to be agreed with employee) or permanent lay-off in accordance with Regulations 5 & 6 of the Employment (Termination and Lay-Off Benefits) Regulations 1980.

For Non-EA employees, the Company may refer to the provisions contained in the contract of employment or handbook.

In essence, the Company can only reduce salary or reduce work hours by consent of the employees.

If the employees refuse then the unavoidable recourse may be to retrench them and pay them based on contractual obligations.

What type of allowances/incentives can we suspend payment of?

If employees are working from home, they should be paid their full salary minus allowances such as transportation allowance and meal allowance.

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