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  • Writer's pictureThomas W. L. Chin

What Should Employers Be Aware of Before Embarking on a Retrenchment Exercise?

Updated: Jul 17, 2020

Before embarking on a retrenchment exercise, employers should be aware of: -

  • The legal meaning of ‘retrenchment’

  • The grounds for retrenchment

  • What amounts to a genuine commercial justification to carry out restructuring within the organization

  • How to decide which employee to retrench

  • When to notify the Labour Office

  • Which employee is entitled to termination benefits

  • How to calculate the amount of termination benefits to be paid

  • Period of notice of termination

  • What are the retrenchment prevention guidelines that must be complied with

  • What measures must be taken if retrenchment becomes necessary

What is Voluntary Separation Scheme (VSS)?

A scheme offered at the discretion of the employer to selected employees to be retrenched calling for their voluntary resignation in return for a fair compensation.

Advantages of VSS

  • Employer is not obliged to accept every application or offer by the employee to opt for VSS.

  • Reduced risk of the employee claiming that he or she has been unfairly dismissed in the Industrial Court.

What is the employer’s maximum exposure if found liable for unfair dismissal in the Industrial Court?

  • Where compensation is ordered in lieu of reinstatement: 1 month’s salary for each completed year of service.

  • Where back wages is ordered: up to 24 months of salary (for confirmed employees), and 12 months of salary (for probationers) calculated from the date of dismissal until the date of award.


  • Employee’s last drawn salary: RM5,000

  • Years of service within the organization: 10 years

  • Compensation in lieu of reinstatement: RM50,000

  • Back wages: RM120,000

Total Maximum Exposure: RM170,000

Legal Costs: RM 10,000 upwards (may exceed RM100,000 depending on the amount involved, complexity of the case, volume of documents, length of trial etc.)

Learn more by watching the "Business Sustainability: Dissolve or Evolve" webinar available here (1:00:30 onwards)

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