MCO - Business Downsizing. What can an employer do/not do.


During this uncertain time, business downsizing should always be the very last resort after deploying several other alternatives.

Government Initiatives

In an attempt to provide support to as many businesses as possible as they battle the effects of the Covid-19 pandemic and the Movement Control Order, the government has introduced relief mechanisms:- the Employee Retention Program (“ERP”) and the Wage Subsidy Program (“WSP”). As these initiatives are not infinite and short-term, we shall not discuss further on this.

Sustaining business with the right business strategies

The employers may strategize to undertake cost cutting measures to sustain their operations with the current workforce. Bear in mind that such measures could only be done with the mutual agreement of the employees.  Among the likely measures include instituting unpaid leave or compulsory annual leave, removing non-contractual allowances, cutting down working hours, negotiating a salary deferment or a reduced salary rate. Implementation of such measures would consider the best solutions to ensure employees’ retention for a company to continues effectively with the current situation. Various approaches should be explored by the employers before resorting to manpower reduction.


Such terms of temporary or permanent arrangement between an employer and employee amount to changes to employment terms and conditions or variation of employment contract. Hence, advance consent must be obtained and recorded in writing even in the electronic platforms. Any unilateral imposition could give rise to potential claim by the employee. Where the employee is subject to the Employment Act 1955, the employers may be liable to an offence of contravening the Employment Act 1955 which is punishable with a fine not exceeding RM10,000.


Downsizing strategies

Undeniably, an employer has management prerogative to manage his employees. A retrenchment exercise could be a viable option to eliminate redundancy to reduce its operational costs, subject to compliance with Malaysian industrial practice standards.


Retrenchment must be carried out in good faith and in accordance with the Employment Act and/or the employment contract as well as the Code of Conduct for Industrial Harmony. Although this is merely a guideline, an agreement made between the Ministry of Human Resources and the Malaysian Council of Employers’ Organisations, the employers are encouraged to comply with the Code in ensuring the retrenchment exercise is conducted in a fair and just manner.


Where retrenchment is inevitable, the employer should carry out the following measures:

  1. Hold discussions with workers of the Trade Unions about the impending retrenchment;
  2. Offer voluntary separation / retirement scheme with reasonable rate of compensation;
  3. Pay compensation or termination benefits to eligible workers;
  4. Terminate the contract of service of workers who have attained their retirement age;
  5. Give notice of termination of the contract as stipulated under the law or in accordance to employment contract;
  6. Assist workers to find alternative jobs;
  7. Implement retrenchment in stages over a longer period;
  8. Implement the principle of ‘FWFO’ (Foreign Worker- First Out) in the same job category;
  9. Implement the principle of ‘LIFO’ (Last in first out) when the retrenchment involves only local workers in the same job category.


For the employees covered under the Employment Act 1955, statutory benefits such as wages in lieu of notice, lay-off and termination benefits and payment in lieu of balance annual leave are expressly stipulated in the Employment (Termination and Lay-Off Benefits) Regulations 1980. Both employers and employees should be aware of all their rights and obligations thereof. For employees not covered under the Employment Act 1955, termination benefits payable are as stated in their employment contracts and/or pronounced in the company policy.


Given the impact in these unprecedented times, in the event of a retrenchment exercise, the employers should be mindful of their legal obligations, including but not limited to reporting to the nearest labour department by completing the Termination Form (Form PK). Otherwise, an employer may be exposed to potential claims of unlawful termination, where the compensation in lieu of reinstatement is computed as one-month salary for each year of service and the award of back wages to a maximum of 24-month salary will be granted to the dismissed employee if the employer is found liable.



Tong Siew Hua