Recent reports stated that more than 38,000 workers were retrenched in Malaysia during the first five months of 2026 (NST - Retrenchment statistics 2026). The figures are not something employers should ignore. They suggest that many businesses are still dealing with restructuring, cost pressure, operational changes, automation, reduced demand, or manpower realignment.

For HR and Industrial Relations practitioners, the important point is not simply that retrenchments are increasing. The more important point is this: when business pressure rises, employment decisions tend to move faster. That is when mistakes happen. Retrenchment is legally recognised in Malaysia. Employers are allowed to reorganise, reduce manpower, close departments, merge roles, automate functions or restructure the business where there is a genuine commercial reason to do so. However, retrenchment is not just a management decision. It is a decision that must be capable of being explained, supported and defended.

The Industrial Court will not merely ask whether the company used the word “redundancy”. The Court will look at whether the redundancy was genuine, whether the selection was fair, whether the employer acted in good faith, and whether the process was properly carried out.

This is where many employers get into trouble.

They may have a genuine business reason, but poor documentation. They may have a restructuring plan, but no clear selection criteria. They may have a cost-saving objective, but the employee’s duties continue to be performed by someone else without proper explanation. They may issue the retrenchment letter first, then try to build the justification later.

In retrenchment, the strength of the employer’s case is usually built before the notice is issued.

When Can a Company Carry Out Retrenchment?

A company may consider retrenchment when there is a genuine redundancy situation.

In simple terms, redundancy means that the employee’s role, position or manpower requirement is no longer needed in the same way as before. This may happen because the company is closing a department, reducing headcount, merging roles, outsourcing certain functions, automating work, losing a major contract, changing its business model, or facing financial or operational pressure.

It may also happen where there are too many employees performing the same or similar functions, and the company no longer requires the same manpower size.

However, employers should be careful not to confuse redundancy with poor performance or misconduct.

If the real issue is poor performance, the proper route is performance management eg PIP. If the real issue is misconduct, the proper route is disciplinary action. Retrenchment should not be used as a shortcut to remove a difficult employee, avoid a domestic inquiry, or bypass a weak performance process.

The question HR should ask is simple:

Is the role genuinely redundant, or are we actually trying to remove the person? If the answer is the latter, retrenchment is the wrong tool.

Redundancy Must Be Genuine, Not Convenient

A genuine retrenchment usually has a business reason behind it. But the business reason must be more than a general statement. Saying “cost-cutting”, “business restructuring” or “management decision” may not be enough if the matter is later challenged.

Employers should be able to show the basis of the decision. This may include financial records, manpower planning papers, revised organisation charts, reduced workload, automation plans, loss of business, duplication of roles, management approval papers, or documents showing that the company has reviewed alternatives.

The employer should also be able to explain why a particular employee, position or department was selected.

This is especially important where the employee’s work continues after the retrenchment. If the same duties are later performed by another employee, a newly hired replacement, a junior employee, a contractor, or an outsourced service provider, the company must be able to explain why the role was still considered redundant.

What Are the Compulsory Actions in a Retrenchment Exercise?

There are several actions that HR must pay attention to before implementing retrenchment.

Step 1: The first is the submission of Borang PK to the Labour Department.

Employers are required to submit the retrenchment notification to the nearest Labour Department office before carrying out retrenchment, separation scheme, lay-off or pay-cut exercises. As a general rule, Parts I to IV of Borang PK must be submitted at least 30 days before the action is taken.

Where the exercise involves retrenchment or a separation scheme, the relevant post-implementation parts must also be submitted within the required timeline. This is not a minor administrative step. Failure to notify the Labour Department may expose the employer to an offence under the Employment Act 1955.

Step 2: The second compulsory action is to ensure that the employee is given proper notice of termination or payment in lieu of notice, depending on the contract of employment, collective agreement, company policy or applicable statutory requirement. A retrenchment does not remove the employer’s obligation to honour notice. Step 3: The third is payment of all final employment entitlements. This normally includes salary up to the last employment date, payment in lieu of notice where applicable, accrued but unused annual leave, and any other contractual or statutory payment due to the employee.

The third is payment of all final employment entitlements. This normally includes salary up to the last employment date, payment in lieu of notice where applicable, accrued but unused annual leave, and any other contractual or statutory payment due to the employee.

• 10 days’ wages for every year of service where the employee has served less than 2 years;
  

• 15 days’ wages for every year of service where the employee has served 2 years or more but less than 5 years; and
  

• 20 days’ wages for every year of service where the employee has served 5 years or more.
  

The calculation should also be pro-rated for an incomplete year of service, calculated to the nearest month.

Employers should also provide the employee with the written calculation of termination benefits. This is important because many disputes arise not only over the decision to retrench, but also over how the benefits were calculated. Step 4: The fourth is to comply with any collective agreement, union consultation requirement, internal policy or contractual benefit that gives employees a better entitlement than the statutory minimum. If the company has a collective agreement providing one month per year of service, for example, the employer cannot simply rely on the statutory minimum if the collective agreement provides a better benefit. Step 5: The fifth is to ensure that statutory contributions, tax-related processes and cessation documentation are handled properly. This includes EPF, SOCSO, EIS, PCB matters and tax clearance where applicable.

What HR Should Avoid

Employers should avoid issuing retrenchment letters without proper supporting documents.

They should also avoid selecting employees based on vague reasons such as “not suitable”, “not aligned”, “too expensive”, or “management preference” without further explanation.

HR should be careful where the affected employee had recently raised a grievance, made a complaint, joined union activity, suffered a medical condition, returned from maternity leave, or had a strained relationship with a superior. These facts do not prevent retrenchment, but they increase the need for strong evidence that the selection was objective and not retaliatory or discriminatory.

Employers should also avoid hiring replacements too soon after retrenchment for substantially similar roles. If a role is said to be redundant, but a replacement is hired shortly after, the employer must be prepared to explain the distinction clearly.

Another common mistake is treating retrenchment as a confidential management decision until the last possible moment. While sensitive information must be protected, HR should still ensure that the legal and procedural groundwork is completed before the announcement (especially on the notice obligation).

The Human Side of Retrenchment

It is easy to discuss retrenchment in terms of process, documents and compliance. But HR should not forget that retrenchment affects people’s lives.

A retrenched employee may be supporting a family, paying a housing loan, managing medical expenses or nearing retirement. The law may allow the employer to restructure, but how the employer handles the exit will affect the company’s reputation and the morale of those who remain.

A respectful process does not weaken the employer’s position. In fact, it strengthens it.

Clear communication, proper benefits calculation, reasonable assistance, outplacement support where possible, and allowing employees to ask questions can reduce hostility and help the organisation move forward with less damage.

Retrenchment may be a business decision, but it must still be handled with humanity.

E2 Consultant’s Note

In our experience, retrenchment disputes rarely arise because the company has no business reason at all. More often, the problem is that the company did not prepare the evidence properly.

• The business says the role is redundant, but the documents do not show it.

• The company says selection was fair, but there is no selection matrix.

• The employer says alternatives were considered, but there are no minutes or papers.

HR says the exercise was genuine, but the employee’s duties are still being performed by someone else.

This is where the case becomes difficult. For employers considering retrenchment, HR should prepare a simple retrenchment file before any letter is issued. This file should include the business rationale, before-and-after organisation chart, affected positions, selection criteria, LIFO consideration, alternatives considered, management approval, Form PK submission, draft communication, benefit calculation and final letter.

It does not need to be overly complicated. But it must be complete enough to tell the story if the matter is later challenged.

The best retrenchment exercise is not the one with the most legal language in the letter. It is the one where the employer can show that the decision was genuine, the process was fair, and the documentation was ready before the announcement was made.

With retrenchment numbers rising, employers may be forced to make difficult manpower decisions in the months ahead. There is nothing wrong with restructuring where the business genuinely requires it. But the process must be handled carefully. Retrenchment is not simply about reducing headcount. It is about making a business decision in a way that is lawful, fair, documented and defensible.