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  • Writer's pictureThomas W. L. Chin

Understanding Retrenchment and the Advantages of Voluntary Separation Schemes

Updated: Oct 5, 2023

Before undertaking a retrenchment exercise, employers must have a clear understanding of various legal aspects and considerations to ensure a fair and lawful process. This article explores the key elements employers should be aware of when contemplating retrenchment, including the Voluntary Separation Scheme (VSS), and the potential consequences of unfair dismissal in the Industrial Court.

I. Retrenchment Essentials:

1. Legal Definition of Retrenchment:

- Employers should comprehend the legal meaning of 'retrenchment,' which refers to the termination of employees for operational reasons.

2. Grounds for Retrenchment:

- Understanding the valid grounds for retrenchment, such as organizational restructuring or economic downturns, is crucial.

3. Genuine Commercial Justification:

- Employers must establish a genuine commercial justification for organizational restructuring or retrenchment.

4. Selection Criteria:

- The process of selecting which employees to retrench should be fair and transparent.

5. Notification to Labour Office:

- Employers need to know when and how to notify the Labour Office about the retrenchment exercise.

6. Termination Benefits:

- Identifying which employees are entitled to termination benefits and calculating the appropriate amount is essential.

7. Notice Period:

- Understanding the required notice period for termination is crucial.

8. Retrenchment Prevention Guidelines:

- Employers must comply with retrenchment prevention guidelines, where applicable.

9. Necessity of Retrenchment:

- Knowing what measures to take if retrenchment becomes necessary is essential.

II. Voluntary Separation Scheme (VSS):


- VSS is an employer-initiated scheme offered to selected employees, inviting them to voluntarily resign in exchange for fair compensation.

Advantages of VSS:

1. Discretionary Acceptance:

- Employers are not obligated to accept every VSS application, granting flexibility in managing workforce reductions.

2. Reduced Risk of Unfair Dismissal Claims:

- Implementing VSS reduces the risk of employees claiming unfair dismissal in the Industrial Court.

III. Employer's Maximum Exposure in Unfair Dismissal Cases:

In cases where an employee is found unfairly dismissed in the Industrial Court, the maximum compensation exposure for the employer can be substantial. Here's an illustration:

- 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

Additionally, legal costs for such cases can vary significantly, ranging from RM10,000 upwards and potentially exceeding RM100,000. Factors affecting legal costs include the amount involved, case complexity, document volume, trial duration, and more.


Retrenchment is a complex process that requires careful consideration of legal obligations and fairness. Employers should understand the legal aspects of retrenchment, including valid grounds, selection criteria, and notification procedures. The Voluntary Separation Scheme (VSS) can provide a controlled approach to reducing the workforce. Employers must be aware of the potential financial implications of unfair dismissal claims in the Industrial Court, emphasizing the importance of fair and legal retrenchment practices.

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