RETRENCHMENT – ARE THEY BONA FIDE? CAN YOU CHALLENGE THEM?

The Government of Malaysia announced yesterday (7.6.2020) the extension of Movement Control Order to 31 August 2020, albeit in a more relaxed environment. More of the economic sectors are allowed to operate except for several prohibited industries which include entertainment outlets, theme parks.

This essentially means the business relating to the prohibited activities will continue to shut. Those industries will be hit hard and it will be interesting to see how they regain their footing come September 2020.

The effects of the MCO are widespread. It has caused much disruption to business, supply chains and the government is predicting a recession to the Malaysian economy and unemployment rates have also risen.

During these difficult times, we see a surge in retrenchment. Economic downturn is one of the main reason used by employers to justify the act of retrenchment. But are they genuine? Can you challenge the retrenchment in court?

What is retrenchment?

Retrenchment is done when there is redundancy. A quick run on google search on the meaning of “Redundancy” generate results like: the state of being not or no longer needed or useful or “the state of being no longer in employment because there is no more work available“.

Among other reasons for justifying a redundancy are closure of business, acquisition of a company, company re-organisation, cutting cost measures.

Rights of Employer

The Malaysian law recognises the right of every employer to organise and re-organise its business. This includes the right to retrench employees who are no longer in need. This right however must be exercised in good faith and employers ought not to abuse it.

What is a genuine retrenchment and what is not?

A retrenchment exercise, albeit a right accorded to the employer must be bona fide. They depend on each set of facts and surrounding circumstances. Examples of retrenchment not being bona fide include:

  1. The job scope continued to exist (after retrenchment);
  2. The retrenchment exercises did not adhere to the Last in First Out (LIFO) principle;
  3. The selection of employees to be retrenched are random and/or discriminatory;
  4. Foreign employees who share similar job scope were still retained;
  5. The retrenchment has elements of victimization;
  6. No prior notice was given and information or announcement made was inconsistent or the exact opposite;
  7. The Employer did not adhere to the Code of Conduct for Industrial Harmony.

Example of a bona fide retrenchment

Example of a bona fide retrenchment can be seen in the case of Nasha’At M Mahmud v Flyfirefly Sdn Bhd (Award No. 332 of 2015) [2015] 2 LNS 0332 where it involves a pilot of an Iraqi national who challenged the retrenchment exercise taken by the Employer (Firefly) on ground of unfair labour practice. The Claimant also claimed biased in the decision to terminate and did not consider him for transfer to other operations.

In that case, the Industrial Court finds that the retrenchment a genuine one since the Claimant is only qualified to operate a jet aircraft of Boieng 737 but the Employer has on 30.4.2012 ceased all jet operations and only operated turboprop aircraft of ATR 72 type based in Subang Airport.

The Employer further proves to the Court through its witness that it did not provide the Claimant the type rating for ATR because it involves 13 sessions of flight simulator training, 2 weeks of ground school and up to a maximum of 100 sectors of line flying training. This will also cost the Employer a further RM200,000.00 and did not make sense to type rate the Claimant for a job it did not have.

What is the Code of Conduct for Industrial Harmony

The Code of Conduct for Industrial Harmony introduced in 1975 aims to promote industrial harmony among employers, employees and unions. It has no force of law but the principles and guidelines laid down are important factors to be considered by the Industrial Relations Court when determining the issue of redundancy and retrenchment.

The Guideline provides that an Employer should take positive steps to avert or minimise reductions of workforce by the adoption of measures such as:

(a) Limitation on recruitment;

(b) Restriction of overtime work;

(c) Restriction of work on weekly day of rest;

(d) Reduction in number of shifts or days worked a week;

(e) Reduction in the number of hours of work;

(f) Re-training and/or transfer to other department/work

A copy of the Code of Conduct can be downloaded below:

What can a retrenched employee do?

If the retrenchment conducted did not adhere to the prescribed procedures or in line with the requirements of labour law and decided cases, the retrenched employees can file an action against the employer for wrongful dismissal by virtue of Section 20 of the Industrial Relations Act 1967, of which the court will re-look at the circumstances leading to the retrenchment and if a claim is successful, the court may order the employer to reinstate the employee or to pay compensation in lieu of reinstatement and back wages (a maximum of 24 months).

Burden of Proof

The burden of proof is on the Employer to show that the actual redundancy on which the retrenchment grounded was bona fide and failure to do so will result in an award made in favour of the Employee.

What are the Termination Benefits payable upon retrenchment?

An Employee who falls within the scope of the Employment Act is entitled to termination benefits (Regulation 3(1) of the Employment (Termination and Lay-off Benefits) Regulations 1980 expressly provides that compensation be given and Regulation 6 set out the amount of termination payable) as below:

(a) 10 days’ wages for every year of employment if he has been employed for less than two years;

(b) 15 days’ wages for every year of employment if he has been employed for two years or more but less than five years; or

(c) 20 days’ wages for every year of employment if he has been employed for five years or more.

An employee who is not within the scope of Employment Act is entitled to termination benefits based on the contract of service. In the absence of which, the Court may refer to the compensation above as the benchmark in determining compensation in favour of an Employee.

What is the notice period to be given?

The Employment Act also requires the Employer to give adequate notice prior to retrenchment. For an employee within the scope of Employment Act, the minimum statutory notice to be given pursuant to Section 12 of the Employment Act 1988 is as follows:

(a) 4 weeks’ notice if the employee has been so employed for less than 2 years on the date on which the notice is given;

(b) 6 weeks’ notice if he has been so employed for 2 years or more but less than 5 years on such date;

(c) 8 weeks’ notice if he has been so employed for 5 years or more on such date.

Payment in lieu of notice is not to be confused over the retrenchment benefits. If an Employer wishes to cut short the notice period, payment in lieu is to be paid in addition to the retrenchment benefits.

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For employees not within the Employment Act, the Employer should comply with the terms and conditions set out in the contract of service. The statutory notice period however will be used as a benchmark by the Courts.

This article is written by Lee Yoke Shan, an Associate of Messrs Chee Hoe & Associates, Advocates & Solicitors, a legal firm in Kuala Lumpur, Malaysia. She practices in the area of employment law and handle industrial relations disputes. You can contact her if you have a question.

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Disclaimer: The content provided on this website does not constitute legal advice but are for general informational purposes only. It may not be the most up-to-date legal information after the published date. To seek professional legal advice, please check with your lawyer.
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