Impact of COVID-19 Pandemic on Employment and Businesses

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Due to the recent outbreak of coronavirus disease (“COVID-19”), the Malaysian government has implemented a Movement Control Order (“MCO”) from 18 March 2020 until 14 April 2020 (“Restriction Period”) under the Prevention and Control of Infectious Diseases Act 1988 and Police Act 1967. As a result of the MCO and the impact of COVID-19 on society, many companies are facing financial constraints and operational standstill. This situation will only worsen as the outbreak is unlikely to die down anytime soon. To brace themselves for the effects of the COVID-19 pandemic, many companies and/or business owners, who are employers, are faced with the a difficult resort: retrenchment.

Are employees guaranteed employment? Under what circumstances, can employers retrench employees as a cost-cutting measure?

Section 13(3)(d) of the Industrial Relations Act 1967 (“IRA”) recognizes that the employer has the right to terminate the services of employees for reasons of redundancy or by reasons of reorganization of an employer’s profession, business, trade, work or criteria for such termination. In this respect, the company may reorganise or restructure its workforce by retrenchment.

Retrenchment simply means termination of the contract of service of an employee due to surplus of workforce or that the requirement of the job function of the employee has ceased or has greatly diminished to the extent that the job no longer exists, which in turn triggers a redundancy situation (Sistem Televisyen Malaysia Bhd & Anor v. Suzana Zakaria [2005] 1 ILR 853). This could be caused by various circumstances including reduction in production, merger, take-over and economic downturn.

The main question employers will need to answer is: was the retrenchment bona fide or not? (National Union of Commercial Workers v Lindeteves-Jacoberg (M) Sdn Bhd [1981] 1 MLJ 242, FC). In other words, the employer’s decision to retrench must not be capricious or with the motive of victimization and unfair labour practice (Chay Kian Sin v Measat Broadcast Network System Sdn Bhd [2012] 4 ILR 400). The burden of proving that the retrenchment was bona fide lies on the employer, and it is not on the employee to show that the retrenchment was unfair.

Does the COVID-19 Pandemic fall within such extenuating circumstances that allow an employer to retrench its employees?

Pursuant to the Ministry of Human Resources’ (“the Ministry”) second FAQ on the COVID-19 outbreak (“Second FAQ”) dated 24 March 2020, the Ministry has taken the position that retrenchment of employees is the prerogative of the employer. Nonetheless, there are three (3) basic requirements that employers should comply with:

  • There must be a genuine financial impact on the business;
  • Employers must exhaust other methods first before opting to retrench employees (eg. reduction of working hours, reducing or freezing new hirers, reducing or limiting overtime, reducing employees’ wages or temporarily laying-off their employees).
  • In the event that retrenchment of employees cannot be avoided, employers should terminate the services of foreign workers first before considering local employees. If retrenchment of local employees is to be resorted to, employers are encouraged to comply with “Last In First Out”.

However, it is of note that the Ministry has further stated that employers may depart from these principles if employers have “strong justifications” to do so.

This is in line with the Code of Conduct for Industrial Harmony 1975 (“the Code of Conduct”), which provides for matters concerning redundancy and retrenchment of workers. The Code of Conduct has then been given statutory recognition by section 30(5A) IRA.

The guiding principle is that the employee’s retrenchment must be conducted fairly and in accordance with the generally accepted norms of industrial relations practice as set out in the agreed practices (Mamut Copper Mining Sdn. Bhd. v Chan Fook Kong @ Leonard and Ors. (1997) ILR 625).

To summarize, if an employer is facing financial difficulties and/or losses due to an epidemic or a pandemic like the current COVID-19 outbreak, it has prima facie legitimate grounds to reduce its workforce and to retrench employees who are surplus provided that it has complied with the three (3) basic requirements and the principle above.

Alternative methods to mitigate employment disputes and reduce costs within the legal framework

Despite plethora of local cases and authorities that recognize the exercise of retrenchment, it ought to be treated as a last resort by the employer (Ong Yoke Peng v. Zuellig Pharma Sdn Bhd [2013] 2 LNS 1602). A number of practical measures have already been proposed by the Ministry in its Second FAQ. We shall discuss 2 options in more detail:-

  • Reduction of salary; and
  • Temporary laying off.

Agreement to Change the Terms of Employment

Terms such as salary, benefits and working hours will generally be an express term of an employee’s contract or, if not, may be implied by custom and practice or incorporated into agreements such as company policies. Unless provided for otherwise in the employment contract or under the terms of a collective agreement, any attempt by an employer to change contractual terms of employment, whether express or implied, will usually require employees’ or (if applicable) the union’s consent.

Failure to obtain consent prior to such variation equivalent to a unilateral and fundamental change to a term or condition of an employment contract, which may amount to constructive dismissal of an employee (Ranhill Bersekutu Sdn Bhd lwn Ng Chee Wan dan satu lagi [2012] 10 MLJ 435, HC; Section 20 of the IRA).

Generally, under the common law, if an employee is ready to perform his services during the period covered by his contract of employment, which provides for payment of wages at certain times, it is entitled to the wages, although the employer has no work for him (Viking Askim Sdn Bhd v National Union of Employees in Companies Manufacturing Rubber Products & Anor [1991] 2 MLJ 115, HC).

However, if the company is facing losses and is trying to fight off closure of its business or retrenchment of its employees, the company can appeal to the employees to ride through the rough times with it and take a salary cut, which can then be reinstated and increased when the business picks up again. This should be communicated clearly to the company’s employees in order to maintain industrial harmony (Lim Ban Leong v Gold Bridge Engineering & Construction & Construction Bhd [2017] 2 LNS 0370).

Temporary Layoff

The Ministry also referred to the Code of Conduct, which states temporary layoffs are permissible. While many individuals often equate the words “layoff” and “termination” with the same meaning, in law they are two very distinct concepts. A temporary layoff is when an employer temporarily cuts back or ceases an employee’s employment with the understanding that the employee will be recalled within a certain period of time. 

However, employers must ensure that the employees are paid accordingly. With regards to the reasonable quantum of the pay during the layoff period, we refer to the case of Viking Askim Sdn Bhd v National Union of Employees in Companies Manufacturing Rubber Products & Anor [1991] 2 MLJ 115, HC, for an example whereby Edgar Joseph JR J states as follows:-

“The Industrial Court held that although neither in the relevant collective agreement… nor under the law was there any provision for the payment of shutdown wages, thus giving rise to a lacuna situation, nevertheless, the company should compensate its employees during the periods of shutdown,… that a fair rate of compensation for periods of shutdown was half of the basic wages for weekdays and full wages for Sundays and public holidays and made an award accordingly.”


Whilst a pandemic like that of the COVID-19 would be reasonable grounds for an employer to consider retrenchment, it should be treated as a last resort. In the event that an employer has no alternative, it must submit a prescribed ‘Retrenchment Form’ (Borang Pemberhentian) to the nearest Labour Office at least 30 days before any action is implemented.