Can an Employer Dismiss Employees Because of Business Restructuring in Malaysia?

Businesses change.

A company may automate part of its operations, merge departments, outsource certain functions or reduce costs because revenue has fallen. Sometimes, these changes mean that fewer employees are required.

But can an employer simply issue a termination letter stating “business restructuring” and dismiss an employee?

Under Malaysian employment law the short answer is yes, an employer may retrench employees as part of a genuine business restructuring but restructuring is not a free pass to dismiss anyone the employer chooses.

The employer must prove that the restructuring created a genuine redundancy and that the affected employees were selected fairly.

What Is Business Restructuring?

Business restructuring generally refers to changes in how a company organises or operates its business.

Examples include:

• merging two departments;
• closing a branch or business division;
• outsourcing certain functions;
• automating work previously performed by employees;
• reducing management layers;
• consolidating overlapping roles;
• reducing production;
• relocating operations; or
• reorganising the workforce to reduce costs.

Restructuring does not necessarily involve financial losses. A profitable company may reorganise its business to remain efficient or competitive.

However, restructuring only justifies dismissal where it results in a genuine redundancy.

What Is Redundancy?

Redundancy arises when the business no longer requires the same number of employees to perform work of a particular kind.

This may happen because:

• the employee’s work has disappeared;
• the workload has substantially reduced;
• several positions have been combined;
• technology has replaced part of the employee’s function;
• the work has been outsourced; or
• the business can operate with fewer employees.

In William Jacks & Co (M) Sdn Bhd v S Balasingam [2000] 7 MLJ 1, retrenchment was described as the discharge of surplus labour or staff otherwise than as punishment for disciplinary misconduct.

The Court recognised that an employer may organise its business in the manner it considers best. However, the restructuring and retrenchment must be carried out bona fide, or in good faith.

Restructuring Does Not Automatically Mean Redundancy

An employer cannot merely announce a “restructuring exercise” and assume that every resulting dismissal is lawful.

The employer should be able to show how the restructuring affected the employee’s work.

For example:

• Which department was reorganised?
• Which duties disappeared or reduced?
• How many positions were required before and after restructuring?
• Who took over the employee’s remaining responsibilities?
• Were similar employees retained?
• Was someone new recruited to perform substantially the same job?

In Bayer (M) Sdn Bhd v Ng Hong Pau [1999] 4 CLJ 155, the employer failed to provide convincing evidence that the employee’s functions had reduced to the extent that he became redundant. His work continued to be performed by other employees.

The important question is not simply whether the employee’s job title was removed. The Court will examine whether the employee’s services were genuinely no longer required.

Must the Company Be Losing Money?

No.

Financial losses may help explain why a company needs to reduce its workforce, but losses are not an essential requirement.

A company may restructure because:

• it wants to operate more efficiently;
• two roles substantially overlap;
• technological changes have reduced the need for manual work;
• a merger has created duplicate positions;
• a particular product or service is being discontinued; or
• fewer employees are required due to reduced demand.

The Industrial Court will not usually substitute its own commercial judgment for that of management.

However, the employer should still produce credible evidence explaining the business decision and how it resulted in redundancy. Simply saying that the company wanted to “reduce costs” may not be enough without supporting documents.

What Evidence Should the Employer Have?

An employer should document the restructuring before issuing termination letters.

Relevant evidence may include:

• management or board papers approving the restructuring;
• organisation charts before and after the exercise;
• financial statements or management accounts;
• evidence of reduced production or workload;
• details of departments being merged;
• records showing that functions were outsourced or automated;
• headcount comparisons;
• job descriptions;
• the selection criteria used; and
• evidence that alternatives to retrenchment were considered.

The documents should tell a consistent story.

If the termination letter refers to restructuring but the employer later argues that the employee was dismissed for poor performance, the Court may question whether redundancy was the genuine reason.

In Maritime Intelligence Sdn Bhd v Tan Ah Gek [2021] 4 MLJ 719, the Federal Court confirmed that the Industrial Court should examine the reason operating in the employer’s mind at the time of dismissal.

An employer generally cannot rely on a different reason later to repair a poorly supported retrenchment.

Can an Employer Retrench Only One Employee?

Yes. A restructuring does not have to involve a large group of employees.

A single position may genuinely become redundant.

However, where only one person is selected from a department containing several employees performing similar work, the employer should be able to explain:

• why that particular position became redundant;
• which employees were placed in the comparison group;
• what selection criteria were used; and
• why the selected employee was chosen over the others.

A one-person restructuring may attract closer scrutiny if the employee’s position continues to exist or another person is hired shortly afterwards to perform substantially the same work.

How Should Employees Be Selected?

The selection must be fair, objective and supported by evidence.

Possible criteria include:

• skills and qualifications;
• experience;
• versatility;
• documented performance;
• disciplinary records;
• operational requirements; and
• length of service.

The Code of Conduct for Industrial Harmony 1975 recommends the Last In, First Out, or LIFO, principle within the relevant category of employees.

Under LIFO, the employee most recently employed is ordinarily selected first.

However, LIFO is a guideline rather than an absolute legal rule. An employer may depart from it where there are legitimate and properly documented reasons. For example, where another employee has skills that remain essential after restructuring.

The employer should not use vague or subjective criteria designed to target a particular employee.

Must the Employer Consider Alternatives?

Where reasonably possible, the employer should consider whether retrenchment can be avoided or reduced.

Possible alternatives include:

• freezing recruitment;
• reducing overtime;
• not renewing temporary contracts;
• redeployment;
• retraining;
• voluntary separation schemes;
• temporary reduced working arrangements; or
• natural attrition.

Not every alternative will be commercially practical. An employer is also not necessarily required to create a new position for a redundant employee.

Nevertheless, evidence that reasonable alternatives were considered can help show that the restructuring was genuine and the retrenchment was a last resort rather than an attempt to remove selected employees.

Must the Employer Follow LIFO?

Not in every case.

LIFO should ordinarily be considered where several employees perform similar work within the same category.

An employer may use a different selection matrix, provided the criteria are objective, relevant and consistently applied.

For example, the employer may reasonably retain an employee with specialised qualifications needed for the restructured business, even if that employee joined later.

Where the employer departs from LIFO, it should record:

• why LIFO was unsuitable;
• the alternative criteria used;
• how each employee was assessed; and
• why the selected employee scored lower.

Without proper documentation, the selection may appear arbitrary or personally motivated.

Can Restructuring Be Used to Disguise Poor Performance?

It should not be.

Retrenchment concerns redundancy, not the employee’s fault. Poor performance concerns the employee’s ability to perform the job.

Warning signs that restructuring may be a disguise include:

• the employee had recently received performance warnings;
• the termination letter refers to restructuring, but management repeatedly complained about performance;
• only the employee under dispute was selected;
• the position remains unchanged;
• a replacement is recruited shortly after dismissal;
• no broader restructuring occurred; or
• the employee’s work continues at the same level.

If poor performance is the true reason, the employer should follow a genuine performance-management process.

Using restructuring to avoid warnings or a Performance Improvement Plan may result in the retrenchment being found to be without just cause or excuse.

Can an Employer Hire Someone After Retrenching an Employee?

Hiring after retrenchment is not automatically unlawful.

The new position may require different skills, carry different responsibilities or exist in another part of the business.

However, recruiting someone to perform substantially the same work shortly after declaring the original employee redundant may undermine the employer’s case.

The employer should be prepared to explain:

• how the new position differs;
• why the former employee was unsuitable for it;
• whether redeployment was considered; and
• why recruitment became necessary.

Changing the job title while preserving the same duties will not necessarily establish genuine redundancy.

Must Notice Be Given?

Yes.

Section 12(3) of the Employment Act 1955 provides minimum notice periods for termination arising wholly or mainly from business closure or a reduction in the requirement for employees to perform work of a particular kind.

The minimum notice is:

• four weeks for employment of less than two years;
• six weeks for employment of two years but less than five years; and
• eight weeks for employment of five years or more.

An employer may make payment in lieu of notice where legally permitted.

The employment contract or collective agreement should also be reviewed, particularly where it provides a longer notice period.

Are Retrenchment Benefits Payable?

Eligible employees may be entitled to termination benefits under the Employment (Termination and Lay-Off Benefits) Regulations 1980.

The minimum rates are:

• 10 days’ wages for each year of service where the employee has worked for less than two years;
• 15 days’ wages for each year where the employee has worked for two years but less than five years; and
• 20 days’ wages for each year where the employee has worked for five years or more.

The employee must generally have completed at least 12 months of continuous service.

Statutory eligibility depends on whether the employee falls within the categories covered by the relevant provisions of the Employment Act. Employees outside those categories may still be entitled to benefits under their employment contract, collective agreement or company policy.

The Labour Department’s retrenchment guidance provides the applicable minimum rates and further information.

Must the Employer Submit Borang PK?

Employers must notify the Labour Department of retrenchments arising from matters such as company reorganisation, closure, reduced production, mergers and technological changes.

Parts I to IV of Borang PK must generally be submitted at least 30 days before the retrenchment is implemented. Further portions must be submitted after the exercise within the applicable periods.

Failure to submit the notification may constitute an offence under section 63 of the Employment Act 1955.

The current notification requirements are available from the Department of Labour Peninsular Malaysia.

Submitting Borang PK does not, by itself, prove that a retrenchment was fair. It is an administrative requirement, while the employer must separately establish genuine redundancy and fair selection.

What About Foreign and Local Employees?

Section 60N of the Employment Act 1955 provides that where workforce reduction is required because of redundancy, an employer must not retrench a local employee unless foreign employees employed in a similar capacity have first been terminated.

The comparison is therefore not necessarily between every local and foreign employee in the company. It concerns employees working in a similar capacity.

The employer should identify the correct group of comparable employees before making its selection.

Can an Employee Challenge a Restructuring Dismissal?

Yes.

An employee who believes that the restructuring was not genuine or that they were unfairly selected may file a representation under section 20 of the Industrial Relations Act 1967.

The representation must generally be filed within 60 days of dismissal.

The Industrial Court may consider:

• whether a genuine restructuring occurred;
• whether the restructuring created actual redundancy;
• whether the employee’s services were genuinely surplus;
• whether the employer acted in good faith;
• whether fair selection criteria were used;
• whether LIFO was considered;
• whether alternatives were explored;
• whether someone else continued performing the same work; and
• whether restructuring was used to disguise another reason.

Employees should preserve the termination letter, employment contract, organisation charts, job advertisements, internal announcements, emails and evidence showing that their duties continued after dismissal.

Practical Checklist for Employers

Before dismissing employees because of restructuring, ask:

• What business change is being implemented?
• How does that change reduce the need for employees?
• Which positions are genuinely redundant?
• What evidence supports the decision?
• Have the correct groups of employees been compared?
• Are the selection criteria objective and documented?
• Has LIFO been considered?
• Are there valid reasons for departing from LIFO?
• Were reasonable alternatives considered?
• Have notice and termination benefits been calculated?
• Has Borang PK been submitted on time?
• Does the termination letter state the genuine reason?

A restructuring plan prepared only after a dispute begins is unlikely to be as convincing as documents created when the commercial decision was actually made.

Final Thoughts

An employer may restructure its business and retrench employees whose services have genuinely become redundant.

What the law does not permit is using “business restructuring” as a convenient label to remove an unwanted employee.

The employer should be able to demonstrate a genuine commercial reorganisation, actual redundancy and a fair selection process. Employees, meanwhile, should look beyond the wording of the termination letter and ask whether their work truly disappeared or simply continued under someone else.

If you need help planning a restructuring exercise, reviewing a retrenchment process or challenging a dismissal under Malaysian law, feel free to get in touch. You can also explore Employment Law Malaysia: The Complete Guide for Employees and Employers (2026) for practical articles covering workplace rights, retrenchment, termination and unfair dismissal claims.

This article provides general information and does not constitute legal advice. Each restructuring exercise depends on its commercial circumstances, employment documents and selection process.