Laws on retrenchment and HR implications

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  • 1. 03-ILJA Vol2.fm Page liv Tuesday, December 14, 2010 3:28 PM liv Industrial Law Journal [2010] 2 ILJ THE LAWS ON RETRENCHMENT AND ITS IMPLICATION TO HUMAN RESOURCE MANAGEMENT PRACTICES IN MALAYSIA BALAKRISHNAN MUNIAPAN1 School of Business & Design Swinburne University of Technology (Sarawak Campus) Abstract This paper explores the legal right to retrench employees and its implication to human resource management in Malaysia. The paper is based on the analysis of the relevant statutes on retrenchment such the Employment Act 1955, The Industrial Relations Act 1967, the Employment (Termination and Lay-Off Benefits) Regulations 1980 and the Code of Conduct for Industry Harmony 1975. The author has also used criterion based sampling of the Industrial Court and superior court awards on retrenchment to provide recommendations to human resource practitioners. Findings from these cases reveal that many of the retrenchment awards were made against the employers due to poor selection of workforce for retrenchment, and the handling of the retrenchment exercise itself which violated the relevant statutes and the established procedures. The author suggests that retrenchment should not be viewed as a reactive but a proactive exercise, which begins with effective human resource planning aligned with the organisational strategic plan. The retrenchment exercise should also be seen as a last resort when limiting recruitment, reducing working hours, helping employees (workmen) find alternative employment, encouraging early retirement, offering voluntary separation scheme (‘VSS’) and other measures have been 1 Balakrishnan Muniapan is a Senior Lecturer in HRM at the School of Business & Design, Swinburne University of Technology, Sarawak Campus, in Kuching (Malaysia). He had previously taught HRM at Curtin University of Technology, Sarawak Campus in Miri, Hertfordshire University program at BIMC in Beijing (China) and Economics for British and Australian universities program in Penang. He has more than 45 publications which include journal articles, book chapters and conference proceedings (refereed and non-refereed). He has also presented HRM papers at academic conferences in several countries within Asia, Australia and Europe. He can be contacted at mbalakrsna@yahoo.com.
  • 2. 03-ILJA Vol2.fm Page lv Tuesday, December 14, 2010 3:28 PM [2010] 2 ILJ The Laws on Retrenchment and its Implication to Human Resource Management Practices in Malaysia lv exhausted. The author hopes that with many proactive measures taken by employers in the management of retrenchment, the number of unfair retrenchment claims made to the Industrial Relations Department will be reduced. This will eventually improve or maintain harmonious employment relations. INTRODUCTION Retrenchment means the termination of the contract of service of employees2 (workmen)3 in a redundancy situation which arises from several factors such as restructuring, reduction in production, mergers, technological changes, business takeover, economic downturn and others. Retrenchment is the legal expression used to describe an exercise where a business entity terminates the services of employees that it considers as surplus to its business requirements. It is pertinent to note that a retrenchment exercise is distinguishable from an exercise involving a closure of business as in a business closure where all employees are discharged as result of a cessation of operation. Therefore, a closure of business is separate and distinct from a retrenchment (Thavarajah and Low, 2001). This distinction was drawn by the Supreme Court (now Federal Court) in Hotel Jaya Puri Bhd v National Union of Hotel, Bar & Restaurant Workers & Anor (1980). In that case, the court accepted the following observation: Retrenchment connotes in its ordinary acceptation that the business itself is being continued but that portion of the staff or labor force is discharged as surplus-age.The termination of services of all the workmen as a result of the closure of the business cannot, therefore, be properly described as retrenchment. Though there is discharge of workmen both when there is retrenchment and closure of business, the compensation is awarded under 2 3 Employee as defined in the Employment Act 1955, s 2(1) — any person, irrespective of his occupation, who has entered into a contract of service with an employer under which such person’s wages do not exceed Ringgit Malaysia one thousand and five hundred (RM1,500). The term workman is different from the term ‘employee’ as defined in the Employment Act 1955. In the Industrial Relations Act 1967, the term ‘workman’ is defined as ‘any person, including an apprentice, employed by an employer under a contract of employment to work for hire or reward and for the purposes of any proceedings in relation to a trade dispute …’. In this paper, both the term ‘employee’ and also ‘workman’ are used interchangeably depending on the context of the Employment Act 1955 and also the Industrial Relations Act 1967.
  • 3. 03-ILJA Vol2.fm Page lvi Tuesday, December 14, 2010 3:28 PM lvi Industrial Law Journal [2010] 2 ILJ the law, not for discharge as such but for discharge on retrenchment, and, as retrenchment means in ordinary parlance, discharge of the surplus, it cannot include discharge on the closure of business. The term ‘retrenchment’ has also been explicitly explained by His Lordship Datuk Gopal Sri Ram JCA in William Jacks and Co (M) Bhd v S Balasingham (1997) as follows: Retrenchment means the discharge of surplus labor or staff by an employer for any reasons whatsoever otherwise than as a punishment inflicted by way of disciplinary action. Whether the retrenchment exercise in a particular case is bona fide or otherwise is a question of fact and degree depending on the peculiar circumstances of the case. It is well settled that the employer is entitled to organise his business in the manner he considers best. So long as the managerial power is exercised bona fide, the decision is immune from examination even by the Industrial Court. However, the Industrial Court is empowered and indeed duty-bound to investigate the facts and circumstances of the case to determine whether the exercise of power is in fact bona fide. In the Indian context, s 2 of the Indian Industrial Disputes Act 1947 defines ‘retrenchment’ (cited in Pathmanathan, et al, 2003 at pp 129) as: the termination by the employer of the service of a workman for any reason whatsoever, otherwise than punishment inflicted by way of disciplinary action, but does not include: (a) voluntary retirement of the workman; or (b) retirement of the workman on reaching the age of superannuation if the contract of employment between the employer and the workman concerned contains a stipulation in that behalf; or (c) termination of service of a workman on the ground of continued illhealth. An organisation may have surplus employees due to a downturn in business, installation of new labour saving machinery or device or standardisation or improvement of plant or technique which may result in retrenchment. Recently, The Star (2 February 2009) reported that the Seagate Technology in Penang will be cutting a few hundred jobs in its Penang plant. The job loss, which is part of Seagate’s plan to reduce its global workforce by 6%, will be incurred through the introduction of the voluntary separation scheme (‘VSS’).4 The Star (5 February 2009) also reported that 12,000 workers of Bumiputra 4 For details, see http://skorcareer.com.my/blog/seagate-penang-to-cut200-jobs/2009/02/15/.
  • 4. 03-ILJA Vol2.fm Page lvii Tuesday, December 14, 2010 3:28 PM [2010] 2 ILJ The Laws on Retrenchment and its Implication to Human Resource Management Practices in Malaysia lvii Commerce Bank (‘BCB’) have been asked to decide if they want to stay with the company or opt for a mutual separation scheme (‘MSS’) which allows them to discontinue their service with the banking group. The MSS, unlike the more familiar VSS, is where employees are given less than a month to decide on whether to quit their service or to stay on with their organisation5. Redundancy occurs when an organisation has excessive workers but with little work to do. This will result in the reorganisation of the employers’ undertaking and consequently some employees may be found redundant, and therefore retrenched. In Baxter Healthcare SA (Malaysian Operations) v Mazlina Abu Bakar (1992), the Industrial Court held that retrenchment is a necessary incidence of running an industry, but retrenchment is justified only when the reason behind it is due to the shortage of work, whether permanently or for an indefinite period, there has arisen a surplus in the number of workmen in the employment of a company or redundancy. In the English law, under the Employment Protection (Consolidation) Act 1978, redundancy is defined in s 81(2) of the Act to cover a dismissal attributable wholly or mainly to: (i) the fact that the employer has ceased, or intends to cease, to carry on the business for the purpose for which the employees was employed by him; or (ii) the fact that he has ceased, or intend to cease, to carry on that business in the place where the employee was so employed; or (iii) the fact that the requirements of the business for employees to carry on out work of a particular kind in the place where the dismissed employee was so employed, have ceased or diminished or are expected to cease or diminish. There are various reasons given by employers in proving redundancy, thus justifying them to retrench such excess employees. Nevertheless, the employer ought to be able to produce evidence in court to show that redundancy was the real reason for retrenchment. If an employer fails to establish that the principle reason for the dismissal was due to redundancy, the dismissal will be unfair and it is the duty of the court to protect the employees from unfair redundancy (Rozanah, 1998). Retrenchment seems to be a popular measure taken by many employers during the economic down. This is evident in the context of Malaysia during the economic downturn in the mid 1980s, the 5 For details, see http://thestar.com.my/news/story.asp?file=/2006/2/5/ nation/13275387&sec=nation.
  • 5. 03-ILJA Vol2.fm Page lviii Tuesday, December 14, 2010 3:28 PM lviii Industrial Law Journal [2010] 2 ILJ economic and the financial crisis in the late 1990s and also the recent worldwide economic downturn. Sometimes, it may not be due to an economic downturn but cases of retrenchment still arise due to a reorganisation, reallocation of duties, restructuring exercises, reduction in the requirements for employees, reduction in work or due to the changes of the company policy. In Malaysia, s 13(3) of the Industrial Relations Act 1967 (‘IRA 1967’), recognises the right to terminate an employment contract by an employer of any workman by reason of redundancy or by reason of the reorganisation of an employer’s profession, business, trade or work or the criteria for such termination. Besides the termination of the employment contract due to redundancy or reorganisation, the section also recognises five other prerogatives of employers, which includes: (a) The right to promote by an employer of any workman from lower grade or category to a higher grade or category; (b) The right to transfer by an employer of a workmen within the organisation of an employer’s profession, business, trade or work, provided that such transfer does not entail a change to the detriment of a workman in regard to his terms of employment; (c) The right to employ by an employer of any person that he may appoint in the event of a vacancy arising in his establishment; (d) The right to dismiss and reinstatement of a workman by an employer; and (e) The right to assign or allocate by an employer of duties or specific tasks to a workman that is consistent or compatible with the terms of his employment. In employment law, employers are required to have a reasonable reason to terminate a contract of employment via retrenchment as s 206 of the IRA 1967 provides remedies to employees for dismissal without just cause or excuse. In this context, whether a workman is a member of a trade union or not, he can file a representation to the Director General of Industrial Relations (‘DGIR’) in writing within 6 Section 20(1) of the Industrial Relations Act 1967 states: ‘Where a workman, irrespective of whether he is a member of a trade union of workmen or otherwise, considers that he has been dismissed without just cause or excuse by his employer, he may make representations in writing to the Director General to be reinstated in his former employment; the representation may be filed at the office of the Director General nearest to the place of employment from which the workman was dismissed.’
  • 6. 03-ILJA Vol2.fm Page lix Tuesday, December 14, 2010 3:28 PM [2010] 2 ILJ The Laws on Retrenchment and its Implication to Human Resource Management Practices in Malaysia lix 60 days of his dismissal seeking for reinstatement to his former employment if he considers that he was dismissed without just cause or excuse. Upon receipt of the representation, the DGIR will take steps as necessary or expedient for a settlement. The DGIR will try to resolve the case through conciliation. If there is a failure to do so through conciliation, the DGIR will refer the case to the Minister, who may, if he thinks fit, refer the matter to the Industrial Court for an award. Thus from the above process, it is clear that a dismissed workman cannot bring his case directly to the Industrial Court as only the Minister of Human Resources can refer his case to the Industrial Court. An award, decision or order of the court is final and conclusive and cannot be challenged, appealed against, reviewed, quashed or called in question in any court. Although the award or decision made by the Industrial Court is final, however it can be challenged in the High Court by way of certiorari on the ground of error of law or excess of jurisdiction. The Industrial Court statistics over the last three years (2006– 2009) has shown an increase in termination cases due to retrenchment. Other cases which have also seen an increase over the years are unfair dismissal (termination) due to misconduct and constructive dismissal. In most of the unfair dismissal cases, the awards were made against the employers who were not able to provide evidence or the reasonableness of the reason for dismissing the workmen. Similarly, in most retrenchment cases, awards were made against the employers due to the poor selection of workforce for retrenchment, and for handling the retrenchment exercise itself which violated the relevant statutes and the Malaysian Code of Conduct for Industry Harmony 1975. Analysis of Awards of Termination Cases (2001–2009) Types of Termination 2001 2002 2003 2004 2005 2006 2007 2008 2009 Constructive 26 35 40 34 22 42 97 126 140 Misconduct 726 810 763 878 613 Retrenchment 41 52 61 61 16 32 422 155 114 Others – – – – – – 402 573 328 Total 793 897 864 1638 2144 2051 1200 1733 2182 2125 2121 1732 1195 Source: Malaysia Industrial Court, http://www.mp.gov.my/
  • 7. 03-ILJA Vol2.fm Page lx Tuesday, December 14, 2010 3:28 PM lx Industrial Law Journal [2010] 2 ILJ Employers are still ignorant of the relevant statutes, the required procedures for retrenchment and the code of conduct itself. Therefore, this paper will be useful to employers and human resource practitioners in managing retrenchment. The management of retrenchment should not be viewed as a reactive but a proactive exercise, which begins with effective human resource planning aligned with the organisational strategic plan. The retrenchment exercise should also be seen as a last resort when limiting recruitment, reducing working hours, helping employees (workmen) find alternative employment, encouraging early retirement, offering voluntary separation scheme (‘VSS’) and other measures have been exhausted. METHODOLOGY Research in employment law is qualitative in nature and involves the analysis of both statutes and case laws. Statutes are primary while the case laws are secondary. Thus, this paper is based on the analysis of the relevant statutes on retrenchment such as the Employment Act 1955 (‘EA 1955’), the IRA 1967 and the Employment (Termination and Lay-Off Benefits) Regulations 1980. The Malaysian Code of Conduct for Industry Harmony 1975 was also analysed for this purpose. Besides case analysis based on criterion based sampling of the Industrial Court awards on retrenchment, the implications of the awards to human resource management practice were also made. The inputs for this paper are also based on the author’s experience from conducting several trainings for managers in employment law, which includes retrenchment and various discussions on retrenchment issues with several human resource management practitioners. The author is also familiar and has been involved in the field of human resource management and employment law as a lecturer, consultant, trainer and speaker for more than 12 years, and is also familiar with the employment laws and cases in Malaysia. LITERATURE REVIEW Academic studies in the area of employment law in Malaysia are limited but there has been a growth over the years. Over the last two decades, some of the authors who have written about Malaysian employment laws are Ayadurai (1996), Anantaraman (1997; 2005), Rozanah (1998), C’ruz (1999), Idid (1993), Rajkumar (1999), Gomez (1997), Wu (1995), Amminudin (2003), Ramasamy (2006), Pathmanathan et al (2003), Thavarajah and Low (2001), Hew (2002), Muniapan (2006; 2007), Muniapan and Parasuraman, (2007),
  • 8. 03-ILJA Vol2.fm Page lxi Tuesday, December 14, 2010 3:28 PM [2010] 2 ILJ The Laws on Retrenchment and its Implication to Human Resource Management Practices in Malaysia lxi Parasuraman (2004), and Chen (2007). Although there are many articles, write ups and coverage on the topic of retrenchment written in the context of Malaysia, specific academic studies in this area are limited. One of the most recent studies on retrenchment in Malaysia was done by Marsono and Yussof (2008) from the perspectives of the employers’ legal right to retrench. As there has not been any further study done recently on retrenchment law and its implications to human resource management, this paper aims to fill the gap in the Malaysian retrenchment literature. THE MALAYSIAN EMPLOYMENT LAWS ON RETRENCHMENT In carrying out a retrenchment exercise, employers must base it on the legal requirement and justification to carry out the reorganisation and restructuring. In the Malaysian context, besides s 13(3) of the IRA 1967, which recognises the right to terminate a contract of employment due to redundancy or reorganisation, s 12(3) of the Employment Act 1955 also provides the following: Notwithstanding anything contained in sub-s (2), where the termination of service of an employee is attributable wholly or mainly to the fact that: (a) 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 intends to cease to carry on the business in the place at which the employee was contracted to work; (c) the requirements of that business for the employee to carry out 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 out 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; Another legislation, which is the Employment (Termination and LayOff Benefits) Regulations 1980, provides the amount of termination or lay-off benefits payment as follows: Regulation 6 Amount of termination or lay-off benefits payment (1) Subject to the provisions of these Regulations, the amount of termination or lay-off benefits payment to which an employee is entitled in any case shall not be less than— (a) ten day’s wages for every year of employment under a continuous contract of service with the employer if he has been employed by that employer for a period of less than two years; or
  • 9. 03-ILJA Vol2.fm Page lxii Tuesday, December 14, 2010 3:28 PM lxii Industrial Law Journal [2010] 2 ILJ (b) fifteen days’ wages for every year of employment under a continuous contract of service with the employer if he has been employed by that employer for two years or more but less than five years; or (c) twenty days’ wages for every year of employment under a continuous contract of service with the employer if he has been employed by that employer for five years or more, and pro-rata as respect an incomplete year, calculated to the nearest month. (2) For the purposes of this regulation ‘wages’ shall have the meaning assigned thereto under section 2(1) of the Act and ‘a day’s wages’ shall be computed in such manner so as to give the employee his average true day’s wages calculated over the period of twelve completed months’ service immediately proceeding the relevant date. (3) For purposes of this regulation, the period of employment under a continuous contract of service shall include any such employment prior to the date on which these Regulations come into force. (4) The termination or lay-off benefits payment to which an employee is entitled under this regulation shall be in addition to any payment to which he may be entitled under section 13 of the Act. The Employment (Termination and Lay-Off Benefits) Regulations 1980 also provides for retrenchment due to a change of ownership of business which is as follows: Regulation 8 Change of ownership of business (1) Where a change occurs (whether by virtue of a sale or other disposition of by operation of law) in the ownership of a business for the purposes of which an employee is employed or of part of such business, the employee shall not be entitled to any termination benefits payable under these Regulations, if within seven days of the change of ownership, the person by whom the business is to be taken over immediately after the change occurs, offers to continue to employ the employee under terms and conditions of employment not less favorable than those under which the employee was employed before the change occurs and the employee unreasonably refuses the offer. (2) If the person by whom the business is to be taken over immediately after the change occurs does not offer to continue to employ the employee in accordance with paragraph (1), the contract of service of the employee shall be deemed to have been terminated, and consequently, the person by whom the employee was employed immediately before the change in ownership occurs and the person by whom the business is taken over immediately after the change occurs shall be jointly and severally liable for the payment of all termination benefits payable under these Regulations. (3) Where an offer by the person by whom the business is taken over immediately after the change occurs to continue to employ the
  • 10. 03-ILJA Vol2.fm Page lxiii Tuesday, December 14, 2010 3:28 PM [2010] 2 ILJ The Laws on Retrenchment and its Implication to Human Resource Management Practices in Malaysia lxiii employee is accepted by such employee the period of employment of the employee under the person by whom the employee was employed immediately before the change occurs, shall, for the purposes of these Regulations, be deemed to be a period of employment under the person by whom the business is taken over, and the change of employer shall not constitute a break in the continuity of the period of his employment. REASONS FOR RETRENCHMENT The right of an employer to close down the whole or a part of his business has been recognised by the Industrial Court and the superior courts. In Siemens Malaysia Sdn Bhd v Cheong Kok Leng (2004), the Industrial Court highlighted the employer’s right to retrench in industrial jurisprudence is well settled as can be seen from existing case law and textbook authorities. The court will not intervene as long as the reason is bona fide. However, when an employer terminates the employment contract of an employee based on reasons other the employees participation in lawful activities of trade union, it is called victimisation. There are several reasons for retrenchment which can be classified as both external and internal reasons. The major external reason or factor is economic crisis; recently in Malaysia, many employers suffered great financial losses and were forced to retrench many of their employees. Market failure and unexpected competition in the business also lead to retrenchment. Some of the internal factors that lead to retrenchment are as follows: (1) Drop in the product market. This will affect the organisation’s financial status as the products that are being sold in the market does not make enough profit to cover the production cost. Thus, the company will try to reduce labour cost by retrenching some of its employees. (2) High production cost. In this case, the employees are victims of cost cutting. The employers would want to reduce labour costs and free resources by removing unwanted employees. (3) Part of the operation shifted to different location. The number of employees needed at the operation workplace will decrease as there is not much work to be done. (4) No demand for products or services. When there is no demand for the products or services, the employees are no longer needed. Keeping them will result in a financial loss for the company.
  • 11. 03-ILJA Vol2.fm Page lxiv Tuesday, December 14, 2010 3:28 PM lxiv Industrial Law Journal [2010] 2 ILJ (5) Outsourcing of production or part of its service. This is usually done when the company is able to get cheaper labour cost by outsourcing. (6) Outsourcing helps a company to maximise profits and reduce production costs simultaneously. (7) Shift to automated system. The use of new technology reduces the need for human resources as most of the work is being done by machineries especially in the manufacturing sector. (8) Sale of company. This happens when a company is being taken over by another company or combined with another company; this would result in a major restructure in the company. Some of the employees may no longer be needed and may be retrenched. This situation can be seen on the issue of our local television station, ntv7 which was taken over by Media Prima Bhd by the end of 2005.7 (9) Business closure. This happens when an organisation loses money and is declared bankrupt which results in the employees losing their job. This issue occured recently at Prai, Penang, where 950 employees of Nikko Electronics Bhd were retrenched after the company closed down its factory.8 In the past, the Industrial Court handed down an abundance of awards involving retrenchment. Employers intending to carry out a genuine retrenchment exercise should be prepared to reveal to the court their reasons for the exercise and the steps that they have taken to reduce costs. Most of the awards acknowledged the principle that the retrenchment due to the reorganisation of a business is a function within the power and the prerogative of the management and no arbitrator should intervene with the bona fide exercise of the power (Chen, 2007). However in Nepta Holdings Sdn v Tan Sin Eoh (2001), the Industrial Court held that the retrenchment of an employee was unfair as the company had not 7 8 After the take over by Media Prima Bhd, ntv7 has started a downsizing exercise with contract employees being the first to be let off. ntv7 has also targeted 200 staff members who applied for the VSS in the retrenchment exercise. Available at http://groups.yahoo.com/group/ alternatif-net/. For further details, please see Combating Global Financial Crisis: Proposals to Revive Penang’s Economy, prepared by Penang Joint Chamber of Commerce, 26 April 2009, which is available at http:// www.pccc.org.my/supplier/images/1/English%20Final%20Combating% 20Global%20Financial%20Crisis%2009.pdf.
  • 12. 03-ILJA Vol2.fm Page lxv Tuesday, December 14, 2010 3:28 PM [2010] 2 ILJ The Laws on Retrenchment and its Implication to Human Resource Management Practices in Malaysia lxv adduced sufficient evidence to support its cost saving measures, such as whether there were other employees termination exercise and if such amount made a substantial difference to its survival or closure and its accounts of alleged projected loss. CONDITIONS PRECEDENT TO RETRENCHMENT If redundancy is real, the employers will have to adhere very strictly to the provisions relating to redundancy and retrenchment in the Code of Conduct for Industrial Harmony (‘Code’). The signatories to this Code on 9 February 1975 were the Ministry of Labour and Manpower (now known as the Ministry of Human Resources), the Malaysian Trade Union Congress (‘MTUC’) and the Malaysian Employers Federation (‘MEF’), then known as the Malaysian Council of Employers’ Organisations. The underlying rationale for this Code was to lay down principles and guidelines to employers and employees on the practice of industrial relations for achieving industrial harmony. Where redundancy is imminent, the conditions precedent to retrenchment is that the employer should, in consultation with the employers’ representatives or their trade union and in consultation with the Ministry of Human Resources, take positive steps to minimise reductions of the workforce by adopting appropriate measures such as: (1) Limitation on recruitment — hire employees only where it is absolutely necessary and when there is loss of employees through natural wastage or attrition. No hiring should be undertaken and existing jobs should be redesigned through job rotation, job enlargement job enrichment including formation of autonomous work groups or self directed work teams; (2) Restriction of overtime work — spillover of work should be undertaken by employees who are under utilised; (3) Restriction of work on day of rest — work on rest days should not be encouraged unless it is deemed absolutely necessary as it can be costly; (4) Reduction in the number of shifts or working days in a week — this would reduce maintenance costs of plant and machinery including utilities during off peak periods; however, employees cannot be compelled to use their annual leave for this purpose unless it is by mutual consent or it is provided for in the collective agreement; (5) Reduction in the number of hours of work — although the EA 1955 sets out the maximum number of hours an employee is
  • 13. 03-ILJA Vol2.fm Page lxvi Tuesday, December 14, 2010 3:28 PM lxvi Industrial Law Journal [2010] 2 ILJ allowed to work in a day, there is a provision for the employer to seek the permission of the Director General of Labour to exceed the limits especially when the employer reduces the working hours for certain days in a week and makes up for the loss over the remaining days in the week by allowing employees to work beyond eight hours daily subject to a maximum of 48 hours of work in each week; (6) Retraining which may include transfer to other departments or reassignment of duties — employees must be allowed to undertake systematic and planned training before embarking on a new job and training in anticipation of jobs to be created in the future. PROCEDURE OF RETRENCHMENT A retrenchment exercise is subject to some governing procedures based on the Code. The employer, after having taken the foregoing appropriate measures which, inter alia, includes cost containment or cost control measures, and retrenchment becomes a ‘necessary evil’ then certain measures have to be undertaken. In Antah Drilling Sdn v Boey Sow Fong (1997), the issue was on whether there was redundancy in the company, whether the company was entitled to retrench the claimant pursuant to the redundancy situation and whether the retrenchment was bona fide. The test was held to decide on whether there had been redundancy and simply whether there had been a cessation of, or diminution in the requirement of the kind of work in which the claimant had been engaged with. The facts in this case established that the requirement for the claimant’s services had diminished following the completion of the contract in February 1994. In law therefore, there was a redundancy and the company was entitled to economise by reducing labour costs. If the company did so fairly, the court would not interfere with the company’s prerogatives (Rozanah, 1998). In an earlier case of Food Specialties (M) Sdn Bhd v Esa bin Hj Mohamad (1989) regarding on whether the redundancy situation and retrenchment by the employer was a colorable exercise to get rid of the employee, the learned chairman of the Industrial Court said: The company must come to court with concrete proof of redundancy, for the burden is on it to prove that there was actual redundancy on which the dismissal was justifiably grounded. Were it not so, any employer could use the exercise of reorganisation and purported redundancy to dismiss particular workmen with impunity.
  • 14. 03-ILJA Vol2.fm Page lxvii Tuesday, December 14, 2010 3:28 PM [2010] 2 ILJ The Laws on Retrenchment and its Implication to Human Resource Management Practices in Malaysia lxvii Similarly in Aluminum Company of Malaysia v Jaspal Singh (1987), the Industrial Court held: In the law of redundancy it is important to note that it is the service of the employee which must be made redundant, not his position or title. Therefore, in that case, it was clear that there was no redundancy as claimed by the company. The company continued to exist. It also made profit in the year 1991, although the company claimed that the company’s margin was reduced. It was also clear that the company’s loss of profit was not because the business was doing badly but firstly because the company ordered new equipment for itself and secondly because the company showed a loss in the year ending 1990/1991. These losses were mainly due to the depreciation in value of its fixed assets, which amounted to a loss in the profit margin of the company. Therefore, the claimant’s termination was unfair labour practice and also a dismissal without just cause or excuse since there was no redundancy (Hew, 2002). According to Marsono and Yussof (2008), if the retrenchment exercise is done in accordance with the relevant procedures, then there is very little chance for the employee to win his case in court. This can be evidenced by looking at the Industrial Court’s decision in Plusnet Communication Sdn Bhd & Ors v Leong Lai Peng (2005) where it was held that a redundancy situation did exist in this case as a result of a reorganisation and downsizing exercise made by the company to minimise its losses. In the event that the issue of retrenchment is referred to the Industrial Court, the court will generally look at the following issues: (1) whether the retrenchment was justified, that is by looking at the circumstances of the case; (2) whether the employer is in a position to give the true grounds for the retrenchment; and (3) whether the retrenchment is made bona fide. The Industrial Court in Rocon Equipment Sdn Bhd & Anor v Zainuddin Muhamad Salleh & Anor (2005) emphasised that even if redundancy did exist, the retrenchment must be done in accordance with the accepted standards of procedure. In this context, cl 22(a) of the Code of Conduct for Industrial Harmony 1975 provides the following measures to be taken by the employer: (1) to give as early a warning as practicable to the workers concerned; (2) to introduce schemes for voluntary retrenchment and retirement and for payment of redundancy and retirement benefits;
  • 15. 03-ILJA Vol2.fm Page lxviii Tuesday, December 14, 2010 3:28 PM lxviii [2010] 2 ILJ Industrial Law Journal (3) retiring workers who are beyond their normal retiring age; (4) to cooperate with the Ministry of Labour and Manpower to help his or her workers to find work outside the company’s undertaking; (5) to spread the termination of employment over a longer period; and (6) to ensure that no such announcement is made before the employer’s workers and their representatives or trade union have been informed. The Code is not a legally enforceable document; however employers have a moral obligation to adopt the guidelines as set out in the Code. The importance of the Code was emphasised by the Federal Court in Said Dharmalingam Abdullah v Malayan Breweries (Malaya) Sdn Bhd (1997), which stated: The reasonableness of the dismissal may well depend on the procedure followed. It is pertinent to point out that article of the Code of Conduct for Industrial Harmony, jointly agreed on 9 February 1975, by the Malaysian Council of Employers’ Organisation and the Malaysian Trade Union Congress with the Minister for Labour, provides, inter alia, for pre-dismissal inquiry … The Government also introduced a new sub-s 30(5A) to the Industrial Relations Act 1967 to give the Code the desired ‘teeth’ in 1980, which stipulates that in making the award, the Industrial Court may take into consideration any such code or agreement relating to employment practices. Although the provision under s 30(5A) is only discretionary and not mandatory, the Industrial Court has been consistent hitherto in being guided by the Code in arriving at decisions in retrenchment cases. The time is right for the government to legislate the Code to make it mandatory for employers to adhere to, in the interest of enhancing social justice and security of tenure of employment. RETRENCHMENT PRINCIPLES INDUSTRIAL COURT ENUNCIATED BY THE The Industrial Court in Cycle & Carriage Bintang Bhd v Cheah Hian Lim (1992) laid down the salient points of general principles on retrenchment as follows: (i) It is for management to decide on the strength of the staff which it considers necessary for efficiency in its undertaking. When the management decides that its workmen are surplus and that there is
  • 16. 03-ILJA Vol2.fm Page lxix Tuesday, December 14, 2010 3:28 PM [2010] 2 ILJ The Laws on Retrenchment and its Implication to Human Resource Management Practices in Malaysia lxix therefore a need for retrenchment, an arbitration tribunal will not intervene unless it is shown that the decision was capricious or made without reason, mala fide, or actuated by victimisation or unfair labour practice. (ii) It is the right of every employer to reorganise his business in any manner for the purposes of economy or convenience, provided that he acts bona fide. (iii) An employer has the right to determine the volume of his staff consistent with his business and if, by the implementation of a reorganisation scheme adopted for reasons of economy and better management, the services of some employees become in excess to its requirements, the employer is entitled to discharge such excess. (iv) In the absence of any agreement on the point, an employer is not obliged to find suitable employment for redundant workers. (v) In effecting retrenchment, the employer should comply with the industrial law principle of last in first out (‘LIFO’) unless there are sound and valid reasons for the departure from the principle.Thus, an employer is not entirely denied the freedom to depart from this principle. (vi) The retrenchment of an employee can be justified if it was carried out for the profitability, economy or convenience of the employer’s business. The services of an employee may well become a surplus if there was a reduction, diminution or cessation of the type of work the employee was performing. It has been established in employment law that in effecting retrenchment, an employer should comply with the industrial principles of LIFO. The principle of LIFO has to be adhered to by the employer in retrenchment exercises very strictly unless there are valid, acceptable and sufficient reasons for departure from the said principle. The LIFO principle is subject to two limitations: first, the rule operates only within the establishment in which the retrenchment is to be made, and second, the rule applies only to the category to which the retrenched workmen belong. Establishment, or industrial establishment, means the place at which the workmen are employed. Consequently, it would not include the several branches of a company situated in different locations in the country. Category means a class or trade such as a turner, a motor mechanic, an electrician and the like. As the principle of LIFO is not provided for by statutory law and is only one of the objective criteria in the Code, this principle should always be considered as an important feature in the selection of employees for retrenchment.
  • 17. 03-ILJA Vol2.fm Page lxx Tuesday, December 14, 2010 3:28 PM lxx Industrial Law Journal [2010] 2 ILJ It must be emphasised that the employer is not denied the freedom to depart from the LIFO principle, if, after taking into consideration the objective criteria and special circumstances, the employer has sufficient and valid reasons to do so. In Maybank Discount Bhd v Nooraini binti Mohd Ishak (1994), the Industrial Court asserted that the LIFO principle is not applicable where there is only one workman in the particular job category. Some of the other reasons for the departure from the LIFO principle are, that: (1) The employer may take into account the efficiency and trust worthiness of the employees, and if he is satisfied that a person with long service is inefficient or unreliable in the discharge of his duties, it would be open to the employer to retrench him, while retaining in employment another who may be junior to him in service. However, there should be substantive and reliable evidence (recorded history) showing the inefficiency or unreliability of the employee. If poor performance is to be asserted, then it is vital for the employer to maintain a proper and transparent appraisal system. (2) An employee who is less productive due to long absences through medical leave may be selected for retrenchment in the interest of operational efficiency. (3) Staff members possessing special qualification in the interest of the business may be retained over a senior employee with longer years of service. In any analysis of the Industrial Court cases on retrenchment, it would become apparent that the allegation would invariably be that the employer had not followed the LIFO procedure in selecting employees for retrenchment. The fact that the LIFO principle may be departed from gives rise to complaints of abuse of the procedure by the employer, and their subsequent justification, in some cases by the Industrial Court, could give rise to questions of fairness of its awards. The Industrial Court seems to argue that so long as the selection of employees for retrenchment is on the basis of objective criteria as perceived by the employer and acquiesced by the court, any violation of the LIFO principle it may incidentally entail, is justifiable in the interest of the efficiency of the enterprise. In other words, the selection of employees to be retrenched on the basis of such objective criteria may acceptably result in some seniors being retrenched in preference to their juniors who, according to these criteria are retained. Retrenchment must therefore be conducted fairly and not tainted by any unfair legal practice. Thus, while retrenchment is permissible, a justifiable retrenchment exercise could be declared invalid simply
  • 18. 03-ILJA Vol2.fm Page lxxi Tuesday, December 14, 2010 3:28 PM [2010] 2 ILJ The Laws on Retrenchment and its Implication to Human Resource Management Practices in Malaysia lxxi because the selection of the employees for retrenchment is not in accordance LIFO (Anantaraman, 2005). The violation of the LIFO principle it may incidentally entail, is justifiable in the interest of the efficiency of the enterprise. In other words, selection of employees to be retrenched on the basis of such objective criteria may acceptably result in some seniors being retrenched in preference to their juniors who according these criteria are retained. In the case of Malaysian Shipyard and Engineering Company v Mukhtiar Singh & 16 Ors (1991), the selection of employees to be retrenched was based on selection criteria drawn up by the company unilaterally. Nevertheless, the company claimed that the selection was based on a point system embodying the objective criteria as stipulated in the Code guidelines such as age, in the terms of physical fitness and endurance (as ascertained from the claimant’s medical record), ability (as assessed from the claimant’s performance record over a three year period) and the claimant’s conduct from his disciplinary record over a five year period. The way the Industrial Court, in this case, sought to justify the employer’s retrenchment exercise makes one wonder whether the court indeed acted according to equity and good conscience as it ought to do. For example, the Industrial Court exonerated the employer for not consulting the union on the ground that there was no legal obligation on the part of the company to consult or warn its employees before retrenchment; the court averred that in employment law, the burden of proof is on the employer to show that the factors that he had relied on in selecting an employee for retrenchment are such as to prove that he had acted reasonably in his determination of the issue (Anantaraman, 2005). Apart from the principle of LIFO, there is a requirement that mandates all employers to comply with s 60N of the EA 1955 when carrying out a retrenchment exercise. With effect from 1998, where an employer is required to reduce his workforce by reason of redundancy, the employer shall not terminate the services of a local employee unless he has terminated the services of all foreign employees employed by him in a capacity similar to that of a local employee. IMPLICATIONS TO HUMAN RESOURCE MANAGEMENT Retrenchment can bring diverse impacts to all parties concerned including employers, employees and the organisation. It also affects the harmonious working relationship in any organisation. Exercising retrenchment without just reason or failing to abide by procedures may affect the operations in an organisation. This is because some
  • 19. 03-ILJA Vol2.fm Page lxxii Tuesday, December 14, 2010 3:28 PM lxxii Industrial Law Journal [2010] 2 ILJ retrenched workers may claim that the retrenchment was a wrongful dismissal and demand that the organisation either reinstate them or offer them equivalent retrenchment benefits. They may also file a report claiming that they have been wrongfully dismissed by their former employers and claim for either a reinstatement or for compensation in the labour department. The organisations concerned would then have to spend additional time to handle the issue in the Industrial Court. They would need to provide adequate evidence to prove that the retrenchment was necessary and that they exercised it according to lawful procedures. Such claims can affect the smoothness of operations in the organisation. Human resource practitioners must remember that the Code of Conduct places the burden on them to provide advanced warning of any impending retrenchment to its employees and to take other measures to lessen the impact for the retrenched employee. If the Code was not observed and the matter goes to the Industrial Court and if it is proven that the company had not been fair to the retrenched workman, the court may order the company to reinstate the workman or pay compensation in lieu. Retrenchment can decrease employees’ loyalty to the organisation. The remaining employees may be dissatisfied with the organisation for retrenched workers to save its business. Their willingness to put in the effort and to invest their time in accomplishing tasks assigned to them may also decrease. Hence, their work productivity also decreases and affects the organisation’s profitability. The remaining employees may also feel less secure towards their job. These reactions easily threaten the organisation’s performance. Retrenchment also causes the loss of talented employees. Organisations invest time, money and resources to train their employees to perform their jobs effectively. As soon as these employees are retrenched, the company loses its investment in them. The situation will worsen if the retrenched employees are employed by the organisation’s competitors. The competitiveness of the organisation in the industry can be threatened since the retrenched workers may reveal its strategy to the competitors. An effective human resource planning in getting the right number of the right employees for the right jobs at the right wage and at the right time is a proactive approach in managing retrenchment. In fact, retrenchment will not even take place with a good human resource planning aligned with the organisational strategic plan. However, if retrenchment is inevitable and does takes place, the human resource practitioners play a major role in helping the employees and
  • 20. 03-ILJA Vol2.fm Page lxxiii Tuesday, December 14, 2010 3:28 PM [2010] 2 ILJ The Laws on Retrenchment and its Implication to Human Resource Management lxxiii Practices in Malaysia management cope and manage the retrenchment exercise. They should start discussing with their employees and unions on the possibility of retrenchment due to the financial situation of the company. Close communication and consultation with employees and unions at each step of the way prior to the actual retrenchment taking place, goes a long way to reduce the impact of a surprise to its employees and provides the opportunity for the employer to explain the reasons for the need for retrenchment They can spread the retrenchment period over a longer period of time and a implement a specific formula which is equitable and fair to select employees for retrenchment, applying the LIFO principle as closely as possible. Human resource management can introduce a fair and reasonable voluntary retrenchment scheme (‘VSS’). If the VSS is attractive enough in terms of the years of service and actual graduated rates of benefits in terms of per year of service, naturally, it would be to the employee’s advantage to accept such a ‘golden handshake’. The management can also assist employees who have been chosen to be retrenched to find alternative jobs. They can also advise the employees concerned to register with employment exchanges (operated by the Ministry of Human Resource) or send their resumes to reputable recruitment search consultants. CONCLUSION The employer has a right to reorganise his business for reasons of economy or convenience and this will lead to the discharge of some employees which is permissible. However, the retrenchment must be bona fide and not for the purpose of victimising the employees in order to get rid of their services. In Malaysia, there are several employers with poor understanding of the legal requirement and the procedures for retrenchment termination due to redundancy and reorganisation. As far as possible, retrenchment should be avoided and seen as a last resort. However, when the need to retrench arises, it must be done without violating the relevant statutes and the code and it must be based on the established procedures. Before embarking on the retrenchment of employees, the employer must take into consideration other alternatives such as the adoption of the appropriate measures as outlined in the Code of Conduct, such as restricted hiring, reduction in overtime work, shorter working days, etc. When effecting retrenchment, the employer must comply with the principle of LIFO unless there are sound and valid reasons for departure. The management of retrenchment should not be viewed as a reactive but a proactive exercise. A good management of a
  • 21. 03-ILJA Vol2.fm Page lxxiv Tuesday, December 14, 2010 3:28 PM lxxiv Industrial Law Journal [2010] 2 ILJ retrenchment exercise will help reduce the number of retrenchment cases and claims made to the Industrial Relations Department, as well as create harmonious working relations. REFERENCES Aluminium Company of Malaysia v Jaspal Singh, (Industrial Court Award No 362 of 1987). Amminuddin, M, (2003), Malaysian Industrial Relations and Employment, 4th Ed, McGraw Hill: Singapore. Anantaraman, V, (1997), Malaysian Industrial Relations: Law and Practice, UPM Press: Kuala Lumpur. Anantaraman, V, (2005), Relief for Unfair Dismissals: Law and Practice in Malaysia, [2005] 5 MLJ li at pp ii–ix. Antah Drilling Sdn v Boey Sow Fong [1997] 1 ILR 243. Ayadurai, D, (1996), Industrial Relations in Malaysia: Law and Practice, Malaysian Law Journal: Kuala Lumpur. Baxter Healthcare SA (Malaysian Operations) v Mazlina Abu Bakar, (Industrial Award No 227 of 1992). Chen, VS, (2007), Industrial Relations Skills for Managers, CCH Asia Pte Limited: Singapore. Cycle & Carriage Bintang Bhd v Cheah Hian Lim [1992] 2 ILR 400. D’Cruz, MN, (1999), Current Malaysian Labour Laws, Leeds Publication: Kuala Lumpur. Food Specialties (M) Sdn Bhd v Esa bin Hj Mohamad, (Industrial Court Award No 74 of 1989). Gomez, AB, (1997), Malaysian Industrial Court Precedent, AB Gomez: Petaling Jaya. Hew, SK, (2002), Dismissal: Salient Points to Ponder Before Industrial Court Proceedings in Malaysia, Leeds Publication: Kuala Lumpur. Hotel Jaya Puri Bhd v National Union of Hotel, Bar & Restaurant Workers & Anor [1980] 1 MLJ 109. Idid, SA, (1993), The Law of Domestic Inquires and Dismissals, Pelanduk Publications: Kuala Lumpur. Malayan Shipyard and Engineering Sdn Bhd Johor Bahru v Mukhtiar Singh and 16 Ors (Industrial Court Award No 165 of 1991). Marsono, H, and Yussof, HJ, (2008), Retrenchment in Malaysia: Employer’s Right?, Journal of Politics and Law, Vol 1, No 4 at pp 22–28.
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