Highlights

  1. Retrenchment is the termination of contract of employment in a redundancy situation.
  2. Redundancy also known as surplus of labour. It is a pre-condition for the exercise of retrenchment.
  3. Common reasons which cause redundancy:-
      • The company experiencing financial difficulties
      • A reorganization of workforce to increase efficiency or cut costs
      • The shutting down or termination of products or services which are unprofitable
      • A surplus of employees following a merger due to employees from each entity performing similar tasks
      • A decision to outsource certain tasks or entire departments to external service providers
  4. Employer can retrench its employees provided that the dismissal of the employees and/or the retrenchment is bona fide. It has to be noted that the burden of proving that the retrenchment was bona fide lies on the Employer, not the employees.
  5. The Employer has the right to terminate the service of the employees as provided under Section 13(3) of the Industrial Relations Act 1967 and Section 12(3) of the Employment Act 1955.
  6. The Code of Conduct for Industrial Harmony provides guideline on the best practice for retrenchment exercises. The Employer should follow the Code when selecting employees to retrench.
  7. In a retrenchment exercise, the Employer is required to give the affected employees a Notice of Retrenchment as provided under Section 12(2) of the Employment Act 1955 or Notice of Termination according to the period of termination notice stated in the contract of service.
  8. To exercise retrenchment, the Employer need to make a report on the intended retrenchment to the relevant authorities, i.e. Labour Department office within 30 days before the retrenchment exercise. Failure to do so would constitute an offence under Section 99A of the Employment Act 1955 and is punishable with a fine of RM10,000.00.
  9. Regulations 3, 4 and 6 of the Employment (Termination and Lay-Off Benefits) Regulations 1990 provides for entitlement of retrenchment and/or termination benefits to the employees (who has been employed for at least 12 months).
  10. The Employer need to pay the retrenchment benefits in one lump sum not later than 7 days from the date of the termination (as a result of retrenchment)
Employee Being Retrenched Due to Covid-19 Pandemic, What Would Be The Employer’s Liability in Terms of Retrenchment Benefit, Compensation, and Damages?

 

Q1. What does it mean by “retrenchment”?

Answer:

Retrenchment means the termination of the contract of employment in a redundancy situation1.

Q2. What is the redundancy of employment?

Answer:
Redundancy is a surplus of labour and is normally the result of a reorganization of the business of an Employer and its usual consequence is retrenchment, i.e. the termination by the Employer of those employees found to be surplus to his requirements after the reorganization.  Thus, there must be redundancy or surplus of labour before there can be retrenchment or termination of the surplus2.

Q3. So, what is the difference and relationship between retrenchment and redundancy?

Answer:

Redundancy is a situation where the employee or position is no longer required, and retrenchment is the action taken to terminate the employment relationship in the event of redundancy. Proof of redundancy, i.e. surplus of labour is required for a retrenchment exercise to be valid.

In other words, redundancy or surplus of labour is a precondition for the exercise of retrenchment.

Q4. What are the common reasons which cause redundancies to occur?

Answer:

  • The company experiencing financial difficulties
  • A reorganization of the workforce to increase efficiency or cut costs
  • The shutting down or termination of products or services which are unprofitable
  • A surplus of employees following a merger due to employees from each entity performing similar tasks
  • A decision to outsource certain tasks or entire departments to external service providers

Q5. Does the management have the right to decide on reorganization?

Answer:

Yes, Malaysian courts have taken the clear and settled position that it is the prerogative of the management to decide on the reorganization of its business.

Reorganization means the rights to reorganize the business for the reasons of a better economy that are found to be redundant by an Employer3. Right to reorganize business is an inherent right vested in every Employer provided that the Employer acts bona fide when it affects employees. It is a right to maximize factors of production in the interest of profitability of a business.

However, the court will intervene if it is shown that the Employer’s decision was not genuine, such as it was termination disguised as redundancy or where the affected employees were victimized or selected to be retrenched for unfair reasons.

Q6. In what situation that allows the Employer to retrench its employee?

Answer:

Employers and/or companies are generally at liberty to organize their business in a manner that best achieves their objective of maximizing profit, so long as the exercise is bona fide. As employees’ livelihoods are affected by the exercise, courts have been willing to interfere where it can be shown that the decision to reorganize is capricious, without reason actuated by unfair labour practice.

Employers that are suffering losses may decide on a business strategy to minimize the impact of poor economic conditions, by for example terminating some employees and outsourcing those job functions to third parties in order to reduce costs. This reduced turnover and decision to outsource job functions are some of the justifications that have been accepted by courts as being bona fide and beyond the purview of courts’ intervention. That being said the courts will still examine the entire factual circumstances surrounding the employees’ dismissal before coming to a conclusion as to whether the dismissal was fair.

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. In 2012, in quoting a decision of the Court of Appeal, the Federal Court held that it is insufficient for an Employer to merely show evidence of a reorganization or reduced sales. The Employer had a duty to prove that the circumstances were such that employees’ functions were reduced to such an extent that they are considered redundant.

Q7. What law governing retrenchment?

Answer:

Section 13(3) of the Industrial Relations Act 1967 recognizes that the Employer has the right to terminate the services of employees for reasons of redundancy or by reasons of the reorganization of an employer’s profession, business, trade or works or criteria for such termination.

Section 12(3) of the Employment Act 1955 also empowers Employer the right to terminate the service of the employees in the following circumstances:-

a. The Employer has ceased or intends to cease to carry on the business for the purpose of which the employee was employed;

b. The Employer has ceased or intend to cease to carry on the business in the place of which the employee was contracted to work;

c. The requirements of that business for the employee to carry our work of a particular kind have ceased or diminished or are expected to cease or diminish;

d. The requirements of that business for the employee to carry our work of a particular kind in the place at which he was contracted to work have ceased or diminished or are expected to cease or diminish.

Q8. What measures should be taken by Employers to avoid retrenchment?

Answer:

Guidelines in relation to redundancy are provided under Guidelines on the Implementation of Retrenchment as contained in the Code of Conduct for Industrial Harmony issued by the Ministry of Human Resource.

Where there is a need for redundancy, an Employer should take positive steps to avert and minimize the workforce beforehand by adopting the appropriate measures such as limiting recruitment of employees, placing restrictions on overtime work, reducing the number of shifts or days worked by employees in a week, reducing working hours and re-training and/or transferring employees to other departments/work.

Q9. What are the responsibilities of Employers if retrenchment has to be carried out?

Answer:

If retrenchment is unavoidable despite the implementation of possible measures, the Employer should carry out the steps in accordance with good and fair labour practices in order to minimize the negative effects on the workers involved as follows:-

    • Inform and conduct a discussion with their workers or their unions as soon as possible on the retrenchment exercise;
    • Offer a voluntary termination or separation scheme with the best compensation package possible;
    • Retire workers who are over the normal age of retirement;
    • Assist workers in finding alternative employment before the retrenchment exercise in stages and stagger it over a long period;
    • Retrench foreign workers before retrenching local workers of the same category;
    • If the retrenchment involves local workers, the Employer should practice the last in first out (LIFO) principle;
    • Establish clear and objective criteria in retrenchment (e.g.: ability, experience, skill, occupational qualifications, length of service, age and family situation)
    • Ensuring that no such announcement is made before the workers and their representatives or trade union has been informed.

Q10. How long is the notice of retrenchment required to be given?

Answer:

The Employer should give a notice of retrenchment/ termination of a contract of service to the retrenched employees as stipulated under the Employment Act 1955 as follows:-

i. 4 weeks’ notice if the worker has been employed for less than 2 years;

ii. 6 weeks’ notice if the worker has been employed for 2 years but less than 5 years; or

iii. 8 weeks’ notice if the worker has been employed for 5 years or more.

OR

According to the period of termination notice stated in the contract of service, whichever is better.

Q11. What is the procedure to retrench?

Answer:

i. The Employers must report the intended retrenchment process to the nearest Labour Department office within thirty (30) days before the retrenchment is to be done.

ii. The Employers are required to complete the Termination Form (Form PK) which is available free of charge at any Labour Department office or download it from the website at http/jtksm.mohr.gov.my before taking any of the following actions, such as retrenchment, voluntary separation, lay-off and/or pay-cut.

iii. Employers are required to disclose information such as the reasons for the retrenchment, number of workforce, number of workers involved in voluntary separation scheme, etc.

iv. Form PK is filed in parts and in stages, the first taking place 30 days before the actual retrenchment and the rest to be filed within 14 days and 30 days after the date of retrenchment.

v. Form PK is a notification requirement and is not a request for approval. As such, Employers do not need approval from the labour office before they can conduct retrenchment exercises.

vi. However, any Employers who fail to comply with this matter is committing an offence according to Section 63 of the Employment Act 1955 and shall be liable on conviction to a fine not exceeding RM10,000 for each offence.

Q12. Is there a statutory requirement to pay at least a minimum amount of severance/termination pay upon terminating an employee?

Answer:

In Malaysia, employees who have been retrenched or whose service has been terminated as the result of redundancy, and who have been employed for at least 12 months prior to the date of termination, are entitled to payment of minimum termination benefits as prescribed by the Employment (Termination and Lay-Off Benefits) Regulations 1980 (“Regulations”).

However, the termination benefits under the Regulations only cover employees who fall under the purview of the Employment Act. Any employee falling outside the scope of the Employment Act will not be expressly entitled to payment of termination benefits unless they are provided for in their contract of employment or in any collective agreement applicable to them.

Nevertheless, in practice, termination benefits are often made to such employees in a redundancy situation, to mitigate the risks of a claim of dismissal ‘without just cause and excuse’.

Q13. What are the retrenchment benefits under the law?

Answer:

The right of an employee to a termination benefit upon retrenchment depends whether or not he is covered under the Employment Act 1955 (“EA 1955”). The relevant provisions are found in regulations 3, 4 and 6 of the Employment (Termination and Lay-Off Benefits) Regulations 1990. These provisions are only applicable to employees coming within the scope of the EA 1955, e.g. employees whose monthly salary is RM2,000 and below or who are engaged in manual labour. An employee who falls within the scope of EA 1955 is entitled to termination benefits if he has been employed for at least 12 months, which are as follows:-

    • 10 days’ wages for every year of employment if he has been employed for less than 2 years;
    • 15 days’ wages for every year of employment if he has been employed for 2 years but less than 5 years; or
    • 20 days’ wages for every year of employment if he has been employed for 5 years or more.

An employee who is not covered by the EA 1955 is only entitled to termination benefits if it is provided in his employment contract.

Q14. Does the retrenchment benefit have to be paid in a lump sum on the date of termination, or can it be paid over time on the Employer’s regular payroll payment schedule?

Answer:

The termination benefit must be paid in one lump sum not later than seven (7) days from the date the employee’s contract is terminated as a result of retrenchment or redundancy.

Q15. Is the retrenchment part of the prerogative of the management?

Answer:

Although the law recognizes that retrenchment exercise is part of the management prerogative, the burden of proof always lies with the Employer to prove that the retrenchment exercise is bona fide (in good faith) and not capricious or motivated by victimization or unfair labour practice. The Employer must always comply with the existing statutory provisions and the provisions in the collective agreement (where applicable).

FOOTNOTES 

[1] Guidelines on Retrenchment Management Booklet by Jabatan Tenaga Kerja, Kementerian Sumber Manusia

[2] In the Court of Appeal case of Woo Vain Chan v. Malayawata Steel Sdn Bhd [2016] 2 MLJ 848, paragraph 16

[3] East Asiatic Company (M) Bhd v. Valen Noel Yap [1987] 1 ILR 363 and Harris Solid State (M) Sdn Bhd & Ors v. Bruno Gentil s/o Pereira & Others [1996] 4 CLJ 747

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