Retrenchment 101: Rights and Obligations (Part 1)

In the past few months, there has been an underlying uncertainty for many employers as a result of the COVID-19 pandemic. The economic impact of the pandemic has caused concerns to employers from multinational corporations to SMEs. This has resulted in many employers considering the difficult question if there is a need to undergo a retrenchment exercise to better financially realign themselves during this difficult period.

In this 2-part article, I will be discussing the rights of employer and employees when facing retrenchment, obligations which have to be complied with, as well as certain considerations which the Courts have previously taken into account when dealing with retrenchment.

Retrenchment

A commonly accepted description of ‘retrenchment’ by the Courts is found in the Court of Appeal case of William Jacks & Co (M) Bhd v S Balasingam[1]. Here, it was held that ‘retrenchment’ occurs where there is a surplus of employees and the exercise of it is to discharge the said surplus. A surplus of employee is also generally known as ‘redundancy’.

Therefore, it is evident that a retrenchment should only take effect where there has been ‘genuine redundancy’. The test for ‘genuine redundancy’ is however not a straightforward one. The Courts have however accepted the position that ‘genuine redundancy’ arises for various reasons and so far as the reason for redundancy is bona fide (without ill intentions) it would be considered genuine. The High Court case of Stephen Bong v FCB (M) Sdn Bhd had even held that that a ‘genuine redundancy’ can arise where the business requires fewer employees.

The circumstances in which the Courts have recognised an employee has been made redundant, includes but are not limited to the following examples:

i. Loss of business;

ii. Reorganisation – Merging or Closing of Departments/Sections;

iii. Requirement for fewer workers;

iv. Reduced profits; and/or

v. Contracting out.

In the event the employer encounters the circumstances above, it has been well set out that an employer is usually in the best position to evaluate and determine the number of employees in which they would require at any material time. The High Court case of Chang How Weng v Yang Berhormat Menteri Sumber Manusia & Anor[2] had succintly held that it was for the management to decide on the number of staff necessary to facilitate its operations and that an employer has the right to reorganise its business for the purpose of economy or convenience.

Nonetheless, this right to reassess the number of employees and reorganise its business should not be abused under a false pretence to terminate the employees. Notably, the Courts have held that where there is an absence of ‘genuine redundancy’, the dismissal would be deemed to have been without just cause and excuse.

In the case of Saw Kong Beng v Avago Technologies (Malaysia) Sdn Bhd[3] the High Court took into account various factors such as the fact that 60% to 70% of the employee’s job functions were being performed by a newly employed Vice President and the Company’s premise for retrenching the employee was based on a temporary revenue drop. Here, the High Court held that the Company had acted mala fide (with ill intentions) by terminating the employee on a purported ground of redundancy.

Thus, it is must be emphasised that should a matter be referred to the Industrial Court, the burden would then be on the employer to show prove that there had been actual and genuine redundancy and that the retrenchment exercise was a result of it[4].

Employer’s Obligation

Where retrenchment is unavoidable, there are several legal and/or contractual obligations in which an employer has to carry out as part of the retrenchment exercise. The following are some of the common legal and/or contractual obligations which all employees should regard when undergoing this exercise. Failing to address them may result in the employee committing an offence under the Employment Act 1955 (“EA”) which could result in a fine of up to RM10,000-00[5]. Their obligations include, but are not limited to the following:

(a) Filing of the PK Form

(b) Notice Period/Payment in lieu of Notice

(c) Termination Benefits

It is however pertinent to note that different obligations apply to employees who are provided under the EA and those who are not. The First Schedule of the EA identifies the employees who are provided under the EA and employers therefore have a legal obligation to comply with the provisions contained within. (More information can also be found in my previous article here)

Filing of the PK Form

An employer has a duty under the Employment Retrenchment Notification 2004[6] to inform the Labour Office when the employer is seeking to undergo a retrenchment exercise. This can be done by way of filling up the PK Form which requires the employer to provide information in relation to the retrenchment exercise including amongst others, the number of employees affected, the number of foreign employees affected and particulars of benefits paid to the affected employees.

This obligation to inform the Labour Office by filing the PK Form should be done no less than 30 days before the retrenchment exercise takes effect, failing in which the employer would be deemed to have committed an offence under the EA.

Notice Period/Payment in lieu of Notice

In a normal employment contract, there is usually a termination clause which states that should any party seek to terminate the said contract, the party seeking to terminate must give a certain period of notice before effecting termination. Under a retrenchment exercise, it would be pertinent for employers to ensure that the said notice period stipulated is adhered to accordingly. Failing to do so could open the employer to a claim for breach of contract by the employee.

Conversely, for employees protected under the EA, they are entitled to notice periods as stipulated under Section 12. The notice period to be provided to the employees is summarised as follows:

Years of Service: Less than 2 Years

Notice Period: 4 weeks

Years of Service: 2 years or more but less than 5 years

Notice Period: 6 weeks

Years of Service: 5 years or more

Notice Period: 8 weeks

Where an employee is not provided under the EA and there is an absence of a notice period under their contract of employment, it is generally encouraged that the notice period stipulated under Section 12 of the EA above serves as a good guideline to be followed by employers.

In the event that an employer cannot comply with the notice periods required, the employer would then be required to pay wages in lieu of the notice owed to them. (i.e. 4 weeks’ pay for 4 weeks of notice). Under the EA, this is specifically provided under Section 13 while a similar provision would usually exist as part of the terms of an employment contract.

Termination Benefits

Under the Employment (Termination and Lay-off Benefits) Regulations 1980 (“The Regulations”), an employee under the EA is to be provided with termination benefits if they have been terminated. Similar to the above, the Regulation provides statutory termination benefits that must be paid by the employer in the event of a retrenchment, as follows[7]:

Years of Service: Less than 2 Years

Termination Benefits:

10 day’s wages for every year of employment under a continuous contract of service

Years of Service: 2 years or more but less than 5 years

Termination Benefits:

15 day’s wages for every year of employment under a continuous contract of service

Years of Service: 5 years or more

Termination Benefits:

20 day’s wages for every year of employment under a continuous contract of service

With regard to employees not provided under the EA, an employer is under no legal obligation to pay termination benefits to the retrenched employees. Unless , it is specifically provided under the terms of their contract of employment. Nonetheless, it would be generally encouraged that a certain amount of termination benefits could still be paid to the retrenched employees as a gesture of goodwill.

Conclusion

Amidst the worrying financial and economic concerns caused by COVID-19, employers are surely looking to better reposition themselves to weather this oncoming storm. While an employer has the inherent right to reorganise their business which may result in lesser workman, an employer should not abuse this prerogative as a façade to terminate their employees during this difficult time. Should there be a need to resort to retrenchment, it would be pertinent for employers to consider their underlying legal and/or contractual obligations and to ensure that employees are properly remunerated despite being retrenched.

Infographic

Here are some key takeaways from the article above.

Written by Yip Wei Jian

[1] [1997] 3 CLJ 235 [2] [2010] 1 LNS 155 [3] [2016] 8 CLJ 891 [4] [1999] 4 CLJ 155 [5] Section 99A of the Employment Act 1955 [6] Paragraph 4(3)(a) [7] Section 6 of the Regulations