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MALAYSIA: An Introduction to Malaysia

Alex De Silva
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Chambers Asia-Pacific 2021: Practice Area Overview

Malaysia: Employment & Industrial Relations

Contributor: Messrs Bodipalar Ponnudurai De Silva

1. Alex De Silva
2. Jane Tan Yang Qian
3. Quek Yiing Huey



1. The COVID-19 pandemic has presented unprecedented challenges to the economy and to the job market on a global scale. As companies globally suffer the financial setbacks caused by the pandemic, employers have resorted to various measures to scale back on their operational costs and sustain their businesses through retrenchment exercises. At the same time, this has also sprouted concerns of unemployment and threats to employees’ job security.

2. It is reasonably expected that employers and employees will continue to feel the ripple effects of the pandemic in the long-run. It is therefore important for employers to abide by proper labour practices if and when the need for retrenchment exercise arises. It is equally pertinent for employees to know their rights with regard to retrenchment exercises.

Retrenchment and Redundancy 

3. It is the employer’s prerogative to manage their business in a manner they deem fit, in order to stay afloat. This includes resorting to layoffs and retrenchment of their employees. However, an employer cannot do so with impunity.

4. Employers must be able to justify the retrenchment exercises that are being carried out. In this regard, retrenchment may be justified when there is redundancy in a company. Based on precedent, redundancy arises when:-
a) there has been a significant reduction in business, resulting in a surplus of labour; or
b) the employer’s business requires fewer employees of whatever kind due to a restructuring exercise or other legitimate reasons; or
c) the job functions of the employee have ceased or greatly diminished to the extent that the job no longer exists.

Principles of Retrenchment 

5. Employers must be mindful that they cannot retrench employees merely because of an economic downturn caused by the pandemic. Employers must prove that they have cogent and convincing evidence for retrenching an employee, and that their decision to retrench was exercised fairly and in good faith.

6. An employee may challenge his dismissal by filing a representation under Section 20(1) of the Industrial Relations Act 1967 (“the Act”) for unfair dismissal against the Company with the Industrial Relations Department within 60 days from the date of his dismissal. When the representation is eventually referred to the Industrial Court, the Industrial Court is empowered to scrutinise retrenchment exercises carried out by employers to determine whether an employee’s dismissal was done with just cause.

7. Employers should also take note of the following general guidelines concerning retrenchment exercises:-
(i) the Malaysian Code of Conduct for Industrial Harmony on Retrenchment (“the Code”); and
(ii) the Last In First Out (“LIFO”) principle.

Preliminary Steps Prior to Retrenchment Exercises

8. Retrenchment should be regarded as a last resort. Employers are expected to undertake all possible measures to avoid retrenching employees. The Code provides that before deciding on retrenching employees, employers must first take steps to reduce its workforce. For instance, by reducing employees’ working hours and/or overtime, freezing new recruitment, exploring alternative employment for the affected employees within the company, and/or eliminating unnecessary overheads.

Principles of Retrenchment – The Code 

9. If retrenchment becomes necessary, the Code requires employers to act in consultation with employees’ trade union representatives or the Ministry of Human Resources (“MOHR”) such as to:-
(i) give early warning to the employees concerned;
(ii) explore alternative measures within the organisation; and
(iii) offer a voluntary separation scheme to the affected workers.

Principles of Retrenchment – LIFO 

10. The Code also provides that an employer should abide by the LIFO principle when carrying out retrenchment exercises. The LIFO principle requires that the most junior employee to be retrenched before the more senior ones in the same category and/or department. However, as the LIFO principle is merely persuasive, a departure from the same may be acceptable for valid reasons.


In February 2020, Parliament enacted the Industrial Relations (Amendment) Act 2020 (“the Amendment Act”) which seeks to bring about significant changes to the Industrial Relations Act 1967:-

Representation under Section 20 of the Act 

a) Representation during the conciliatory proceedings at the Industrial Relations Department is widened.

- The Amendment Act seeks to allow any authorised person (except an Advocate and Solicitor) to represent employers and employees (apart from trade union representatives), subject to the permission of the Director General of the Industrial Relations (“DGIR”).

b) Automatic referral to the Industrial Court.

- The Minister of the MOHR no longer has the discretion to decide which representation is to be referred to the Industrial Court.

- Instead, where the DGIR is satisfied that parties could not reach an amicable settlement, the matter shall be referred to the Industrial Court for an award.

c) Additional Powers Granted to the Industrial Court.

- The Industrial Court can continue the conduct of proceedings notwithstanding the death of the employee who made the representation (“the Claimant”).

- The Industrial Court can impose an interest up to 8% on the monetary award in the Award.

- The Industrial Court can order for the back wages and compensation in lieu of reinstatement to be paid to the Claimant’s next of kin.

d) Appeal to the High Court

- The Amendment Act allows a challenge to an Industrial Court award to be made by way of an appeal to the High Court within 14 days from the date of receipt of the award, as opposed to the present mode of a judicial review application.

e) Increase of penalties for non-compliance with the Award and/or Collective Agreement

- The fine imposed upon parties who fail to comply with an Industrial Court Award has been increased from RM2,000 to RM50,000.

It must be noted that the Amendment Act is yet to be in force at the time of this article.


In May 2020, the Federal Court in the case of Ahmad Zahri bin Mirza Abdul Hamid v AIMS Cyberjaya Sdn Bhd [2020] 5 MLJ 58*, had delivered a landmark decision which effectively changed the industrial legal jurisprudence in relation to fixed-term employment contracts in Malaysia.

The question before the Federal Court was whether the Appellant, who is a foreign national, was a “permanent employee” of the Respondent, or employed on a fixed-term contract. In concluding that the Appellant was a permanent employee, the Federal Court found that the Appellant had a continuous employment, albeit with a group of companies, as he had worked with them as one enterprise. The nature of his employment being not one off and/or seasonal was also considered in favour of the employee. In this regard, the Federal Court also held that an employee’s nationality is immaterial to the determination of the dispute.

Effectively, the Federal Court held that a non-Malaysian may have permanent employment, despite several previous cases that showed a preference to holding that the fact that an employee was not a Malaysian was a factor showing that the employee was on a fixed-term contract and not a permanent employee.

* Messrs Bodipalar Ponnudurai De Silva acted for the Appellant.