Laws on retrenchment and HR implications

liv

Industrial Law Journal

[2010] 2 ILJ

THE LAWS ON RETRENCHMENT AND ITS IMPLICATION TO HUMAN RESOURCE MANAGEMENT

PRACTICES IN MALAYSIA

B

ALAKRISHNAN

M

UNIAPAN

1

School of Business & DesignSwinburne University of Technology (Sarawak Campus)

Abstract

This paper explores the legal right to retrench employees and itsimplication to human resource management in Malaysia. Thepaper is based on the analysis of the relevant statutes onretrenchment such the Employment Act 1955, The IndustrialRelations Act 1967, the Employment (Termination and Lay-OffBenefits) Regulations 1980 and the Code of Conduct for IndustryHarmony 1975. The author has also used criterion based samplingof the Industrial Court and superior court awards on retrenchmentto provide recommendations to human resource practitioners.Findings from these cases reveal that many of the retrenchmentawards were made against the employers due to poor selection ofworkforce for retrenchment, and the handling of the retrenchmentexercise itself which violated the relevant statutes and theestablished procedures. The author suggests that retrenchmentshould not be viewed as a reactive but a proactive exercise, whichbegins with effective human resource planning aligned with theorganisational strategic plan. The retrenchment exercise shouldalso be seen as a last resort when limiting recruitment, reducingworking hours, helping employees (workmen) find alternativeemployment, encouraging early retirement, offering voluntaryseparation scheme (‘VSS’) and other measures have been

1 Balakrishnan Muniapan is a Senior Lecturer in HRM at the School ofBusiness & Design, Swinburne University of Technology, SarawakCampus, in Kuching (Malaysia). He had previously taught HRM at CurtinUniversity of Technology, Sarawak Campus in Miri, HertfordshireUniversity program at BIMC in Beijing (China) and Economics forBritish and Australian universities program in Penang. He has more than45 publications which include journal articles, book chapters andconference proceedings (refereed and non-refereed). He has alsopresented HRM papers at academic conferences in several countrieswithin Asia, Australia and Europe. He can be contacted [email protected].

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The Laws on Retrenchment and its Implication to Human Resource Management

Practices in Malaysia

exhausted. The author hopes that with many proactive measurestaken by employers in the management of retrenchment, thenumber of unfair retrenchment claims made to the IndustrialRelations Department will be reduced. This will eventually improveor maintain harmonious employment relations.

INTRODUCTION

Retrenchment means the termination of the contract of service ofemployees

2

(workmen)

3

in a redundancy situation which arises fromseveral factors such as restructuring, reduction in production,mergers, technological changes, business takeover, economicdownturn and others.

Retrenchment is the legal expression used to describe an exercisewhere a business entity terminates the services of employees that itconsiders as surplus to its business requirements. It is pertinent tonote that a retrenchment exercise is distinguishable from an exerciseinvolving a closure of business as in a business closure where allemployees are discharged as result of a cessation of operation.Therefore, a closure of business is separate and distinct from aretrenchment (Thavarajah and Low, 2001).

This distinction was drawn by the Supreme Court (now FederalCourt) in

Hotel Jaya Puri Bhd v National Union of Hotel, Bar &Restaurant Workers & Anor

(1980). In that case, the court acceptedthe following observation:

Retrenchment connotes in its ordinary acceptation that the business itselfis being continued but that portion of the staff or labor force is dischargedas surplus-age. The termination of services of all the workmen as a result ofthe closure of the business cannot, therefore, be properly described asretrenchment. Though there is discharge of workmen both when there isretrenchment and closure of business, the compensation is awarded under

2 Employee as defined in the Employment Act 1955, s 2(1) — any person,irrespective of his occupation, who has entered into a contract ofservice with an employer under which such person’s wages do notexceed Ringgit Malaysia one thousand and five hundred (RM1,500).

3 The term workman is different from the term ‘employee’ as defined inthe Employment Act 1955. In the Industrial Relations Act 1967, the term‘workman’ is defined as ‘any person, including an apprentice, employedby an employer under a contract of employment to work for hire orreward and for the purposes of any proceedings in relation to a tradedispute …’. In this paper, both the term ‘employee’ and also ‘workman’are used interchangeably depending on the context of the EmploymentAct 1955 and also the Industrial Relations Act 1967.

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the law, not for discharge as such but for discharge on retrenchment, and,as retrenchment means in ordinary parlance, discharge of the surplus, itcannot include discharge on the closure of business.

The term ‘retrenchment’ has also been explicitly explained by HisLordship Datuk Gopal Sri Ram JCA in

William Jacks and Co (M) Bhdv S Balasingham

(1997) as follows:

Retrenchment means the discharge of surplus labor or staff by an employerfor any reasons whatsoever otherwise than as a punishment inflicted byway of disciplinary action. Whether the retrenchment exercise in aparticular case is bona fide or otherwise is a question of fact and degreedepending on the peculiar circumstances of the case. It is well settled thatthe employer is entitled to organise his business in the manner heconsiders best. So long as the managerial power is exercised bona fide, thedecision is immune from examination even by the Industrial Court.However, the Industrial Court is empowered and indeed duty-bound toinvestigate the facts and circumstances of the case to determine whetherthe exercise of power is in fact bona fide.

In the Indian context, s 2 of the Indian Industrial Disputes Act 1947defines ‘retrenchment’ (cited in Pathmanathan, et al, 2003 at pp 129)as:

the termination by the employer of the service of a workman for anyreason whatsoever, otherwise than punishment inflicted by way ofdisciplinary action, but does not include:

(a) voluntary retirement of the workman; or

(b) retirement of the workman on reaching the age of superannuation ifthe contract of employment between the employer and the workmanconcerned contains a stipulation in that behalf; or

(c) termination of service of a workman on the ground of continued ill-health.

An organisation may have surplus employees due to a downturn inbusiness, installation of new labour saving machinery or device orstandardisation or improvement of plant or technique which mayresult in retrenchment. Recently,

The Star

(2 February 2009) reportedthat the Seagate Technology in Penang will be cutting a few hundredjobs in its Penang plant. The job loss, which is part of Seagate’s planto reduce its global workforce by 6%, will be incurred through theintroduction of the voluntary separation scheme (‘VSS’).

4

The Star

(5February 2009) also reported that 12,000 workers of Bumiputra

4 For details, see http://skorcareer.com.my/blog/seagate-penang-to-cut-200-jobs/2009/02/15/.

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Commerce Bank (‘BCB’) have been asked to decide if they want tostay with the company or opt for a mutual separation scheme (‘MSS’)which allows them to discontinue their service with the bankinggroup. The MSS, unlike the more familiar VSS, is where employees aregiven less than a month to decide on whether to quit their service orto stay on with their organisation

5

.

Redundancy occurs when an organisation has excessive workersbut with little work to do. This will result in the reorganisation of theemployers’ undertaking and consequently some employees may befound redundant, and therefore retrenched. In

Baxter Healthcare SA(Malaysian Operations) v Mazlina Abu Bakar

(1992), the IndustrialCourt held that retrenchment is a necessary incidence of running anindustry, but retrenchment is justified only when the reason behind itis due to the shortage of work, whether permanently or for anindefinite period, there has arisen a surplus in the number ofworkmen 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 Actto cover a dismissal attributable wholly or mainly to:

(i) the fact that the employer has ceased, or intends to cease, to carry onthe business for the purpose for which the employees was employedby him; or

(ii) the fact that he has ceased, or intend to cease, to carry on thatbusiness in the place where the employee was so employed; or

(iii) the fact that the requirements of the business for employees to carryon out work of a particular kind in the place where the dismissedemployee was so employed, have ceased or diminished or areexpected 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 showthat redundancy was the real reason for retrenchment. If an employerfails to establish that the principle reason for the dismissal was due toredundancy, the dismissal will be unfair and it is the duty of the courtto protect the employees from unfair redundancy (Rozanah, 1998).

Retrenchment seems to be a popular measure taken by manyemployers during the economic down. This is evident in the contextof 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.

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economic and the financial crisis in the late 1990s and also the recentworldwide economic downturn. Sometimes, it may not be due to aneconomic downturn but cases of retrenchment still arise due to areorganisation, reallocation of duties, restructuring exercises,reduction in the requirements for employees, reduction in work ordue to the changes of the company policy.

In Malaysia, s 13(3) of the Industrial Relations Act 1967 (‘IRA1967’), recognises the right to terminate an employment contract byan employer of any workman by reason of redundancy or by reason ofthe reorganisation of an employer’s profession, business, trade orwork or the criteria for such termination.

Besides the termination of the employment contract due toredundancy or reorganisation, the section also recognises five otherprerogatives of employers, which includes:

(a) The right to promote by an employer of any workman from lowergrade or category to a higher grade or category;

(b) The right to transfer by an employer of a workmen within theorganisation of an employer’s profession, business, trade or work,provided that such transfer does not entail a change to the detrimentof a workman in regard to his terms of employment;

(c) The right to employ by an employer of any person that he mayappoint 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 specifictasks to a workman that is consistent or compatible with the terms ofhis employment.

In employment law, employers are required to have a reasonablereason to terminate a contract of employment via retrenchment ass 20

6

of the IRA 1967 provides remedies to employees for dismissalwithout just cause or excuse. In this context, whether a workman isa member of a trade union or not, he can file a representation to theDirector General of Industrial Relations (‘DGIR’) in writing within

6 Section 20(1) of the Industrial Relations Act 1967 states: ‘Where aworkman, irrespective of whether he is a member of a trade union ofworkmen or otherwise, considers that he has been dismissed withoutjust cause or excuse by his employer, he may make representations inwriting to the Director General to be reinstated in his formeremployment; the representation may be filed at the office of theDirector General nearest to the place of employment from which theworkman was dismissed.’

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60 days of his dismissal seeking for reinstatement to his formeremployment if he considers that he was dismissed without just causeor excuse.

Upon receipt of the representation, the DGIR will take steps asnecessary or expedient for a settlement. The DGIR will try to resolvethe case through conciliation. If there is a failure to do so throughconciliation, the DGIR will refer the case to the Minister, who may, if hethinks fit, refer the matter to the Industrial Court for an award. Thusfrom the above process, it is clear that a dismissed workman cannotbring his case directly to the Industrial Court as only the Minister ofHuman Resources can refer his case to the Industrial Court.

An award, decision or order of the court is final and conclusiveand cannot be challenged, appealed against, reviewed, quashed orcalled in question in any court. Although the award or decision madeby the Industrial Court is final, however it can be challenged in theHigh Court by way of certiorari on the ground of error of law orexcess of jurisdiction.

The Industrial Court statistics over the last three years (2006–2009) has shown an increase in termination cases due toretrenchment. Other cases which have also seen an increase over theyears are unfair dismissal (termination) due to misconduct andconstructive dismissal. In most of the unfair dismissal cases, theawards were made against the employers who were not able toprovide evidence or the reasonableness of the reason for dismissingthe workmen.

Similarly, in most retrenchment cases, awards were made againstthe employers due to the poor selection of workforce forretrenchment, and for handling the retrenchment exercise itselfwhich violated the relevant statutes and the Malaysian Code ofConduct for Industry Harmony 1975.

Analysis of Awards of Termination Cases (2001–2009)

Source: Malaysia Industrial Court, http://www.mp.gov.my/

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 1638 2144 2051 1200 878 613

Retrenchment 41 52 61 61 16 32 422 155 114

Others – – – – – – 402 573 328

Total

793 897 864 1733 2182 2125 2121 1732 1195

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Employers are still ignorant of the relevant statutes, the requiredprocedures for retrenchment and the code of conduct itself.Therefore, this paper will be useful to employers and human resourcepractitioners in managing retrenchment. The management ofretrenchment should not be viewed as a reactive but a proactiveexercise, which begins with effective human resource planningaligned with the organisational strategic plan.

The retrenchment exercise should also be seen as a last resortwhen limiting recruitment, reducing working hours, helpingemployees (workmen) find alternative employment, encouragingearly retirement, offering voluntary separation scheme (‘VSS’) andother measures have been exhausted.

METHODOLOGY

Research in employment law is qualitative in nature and involves theanalysis of both statutes and case laws. Statutes are primary while thecase laws are secondary. Thus, this paper is based on the analysis ofthe relevant statutes on retrenchment such as the Employment Act1955 (‘EA 1955’), the IRA 1967 and the Employment (Termination andLay-Off Benefits) Regulations 1980. The Malaysian Code of Conductfor Industry Harmony 1975 was also analysed for this purpose. Besidescase analysis based on criterion based sampling of the Industrial Courtawards on retrenchment, the implications of the awards to humanresource management practice were also made. The inputs for thispaper are also based on the author’s experience from conductingseveral trainings for managers in employment law, which includesretrenchment and various discussions on retrenchment issues withseveral human resource management practitioners. The author is alsofamiliar and has been involved in the field of human resourcemanagement and employment law as a lecturer, consultant, trainerand speaker for more than 12 years, and is also familiar with theemployment laws and cases in Malaysia.

LITERATURE REVIEW

Academic studies in the area of employment law in Malaysia arelimited but there has been a growth over the years. Over the last twodecades, some of the authors who have written about Malaysianemployment 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),

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Parasuraman (2004), and Chen (2007). Although there are manyarticles, write ups and coverage on the topic of retrenchment writtenin the context of Malaysia, specific academic studies in this area arelimited. One of the most recent studies on retrenchment in Malaysiawas done by Marsono and Yussof (2008) from the perspectives of theemployers’ legal right to retrench. As there has not been any furtherstudy done recently on retrenchment law and its implications tohuman resource management, this paper aims to fill the gap in theMalaysian retrenchment literature.

THE MALAYSIAN EMPLOYMENT LAWS ON RETRENCHMENT

In carrying out a retrenchment exercise, employers must base it onthe legal requirement and justification to carry out the reorganisationand restructuring. In the Malaysian context, besides s 13(3) of the IRA1967, which recognises the right to terminate a contract ofemployment due to redundancy or reorganisation, s 12(3) of theEmployment Act 1955 also provides the following:

Notwithstanding anything contained in sub-s (2), where thetermination of service of an employee is attributable wholly or mainlyto the fact that:

(a) employer has ceased, or intends to cease to carry on the business forthe purpose of which the employee was employed;

(b) the employer has ceased or intends to cease to carry on the businessin the place at which the employee was contracted to work;

(c) the requirements of that business for the employee to carry out workof a particular kind have ceased or diminished or are expected tocease or diminish;

(d) the requirements of that business for the employee to carry out workof a particular kind in the place at which he was contracted to workhave ceased or diminished or are expected to cease or diminish;

Another legislation, which is the Employment (Termination and Lay-Off Benefits) Regulations 1980, provides the amount of termination orlay-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 oftermination or lay-off benefits payment to which an employee isentitled in any case shall not be less than—

(a) ten day’s wages for every year of employment under a continuouscontract of service with the employer if he has been employed bythat employer for a period of less than two years; or

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(b) fifteen days’ wages for every year of employment under acontinuous contract of service with the employer if he has beenemployed by that employer for two years or more but less thanfive years; or

(c) twenty days’ wages for every year of employment under acontinuous contract of service with the employer if he hasbeen 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 meaningassigned thereto under section 2(1) of the Act and ‘a day’s wages’ shallbe computed in such manner so as to give the employee his averagetrue day’s wages calculated over the period of twelve completedmonths’ service immediately proceeding the relevant date.

(3) For purposes of this regulation, the period of employment under acontinuous contract of service shall include any such employmentprior to the date on which these Regulations come into force.

(4) The termination or lay-off benefits payment to which an employee isentitled under this regulation shall be in addition to any payment towhich he may be entitled under section 13 of the Act.

The Employment (Termination and Lay-Off Benefits) Regulations1980 also provides for retrenchment due to a change of ownership ofbusiness which is as follows:

Regulation 8 Change of ownership of business

(1) Where a change occurs (whether by virtue of a sale or otherdisposition of by operation of law) in the ownership of a business forthe purposes of which an employee is employed or of part of suchbusiness, the employee shall not be entitled to any termination benefitspayable under these Regulations, if within seven days of the change ofownership, the person by whom the business is to be taken overimmediately after the change occurs, offers to continue to employ theemployee under terms and conditions of employment not lessfavorable than those under which the employee was employed beforethe change occurs and the employee unreasonably refuses the offer.

(2) If the person by whom the business is to be taken over immediatelyafter the change occurs does not offer to continue to employ theemployee in accordance with paragraph (1), the contract of serviceof the employee shall be deemed to have been terminated, andconsequently, the person by whom the employee was employedimmediately before the change in ownership occurs and the personby whom the business is taken over immediately after the changeoccurs shall be jointly and severally liable for the payment of alltermination benefits payable under these Regulations.

(3) Where an offer by the person by whom the business is taken overimmediately after the change occurs to continue to employ the

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employee is accepted by such employee the period of employment ofthe employee under the person by whom the employee wasemployed immediately before the change occurs, shall, for thepurposes of these Regulations, be deemed to be a period ofemployment under the person by whom the business is taken over,and the change of employer shall not constitute a break in thecontinuity of the period of his employment.

REASONS FOR RETRENCHMENT

The right of an employer to close down the whole or a part of hisbusiness has been recognised by the Industrial Court and the superiorcourts. In

Siemens Malaysia Sdn Bhd v Cheong Kok Leng

(2004), theIndustrial Court highlighted the employer’s right to retrench inindustrial jurisprudence is well settled as can be seen from existingcase law and textbook authorities. The court will not intervene as longas the reason is bona fide. However, when an employer terminates theemployment contract of an employee based on reasons other theemployees participation in lawful activities of trade union, it is calledvictimisation.

There are several reasons for retrenchment which can beclassified as both external and internal reasons. The major externalreason or factor is economic crisis; recently in Malaysia, manyemployers suffered great financial losses and were forced to retrenchmany of their employees. Market failure and unexpected competitionin the business also lead to retrenchment.

Some of the internal factors that lead to retrenchment are asfollows:

(1)

Drop in the product market

. This will affect the organisation’sfinancial status as the products that are being sold in the marketdoes not make enough profit to cover the production cost.Thus, the company will try to reduce labour cost by retrenchingsome of its employees.

(2)

High production cost

. In this case, the employees are victims ofcost cutting. The employers would want to reduce labour costsand free resources by removing unwanted employees.

(3)

Part of the operation shifted to different location

. The numberof employees needed at the operation workplace will decreaseas there is not much work to be done.

(4)

No demand for products or services

. When there is no demandfor the products or services, the employees are no longerneeded. Keeping them will result in a financial loss for thecompany.

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(5) Outsourcing of production or part of its service. This is usuallydone when the company is able to get cheaper labour cost byoutsourcing.

(6) Outsourcing helps a company to maximise profits and reduceproduction costs simultaneously.

(7)

Shift to automated system

. The use of new technology reducesthe need for human resources as most of the work is being doneby machineries especially in the manufacturing sector.

(8) Sale of company. This happens when a company is being takenover by another company or combined with another company;this would result in a major restructure in the company. Some ofthe employees may no longer be needed and may be retrenched.This situation can be seen on the issue of our local televisionstation, ntv7 which was taken over by Media Prima Bhd by theend of 2005.

7

(9) Business closure. This happens when an organisation losesmoney and is declared bankrupt which results in the employeeslosing their job. This issue occured recently at Prai, Penang,where 950 employees of Nikko Electronics Bhd wereretrenched after the company closed down its factory.

8

In the past, the Industrial Court handed down an abundance ofawards involving retrenchment. Employers intending to carry out agenuine retrenchment exercise should be prepared to reveal to thecourt their reasons for the exercise and the steps that they havetaken to reduce costs. Most of the awards acknowledged theprinciple that the retrenchment due to the reorganisation of abusiness is a function within the power and the prerogative of themanagement and no arbitrator should intervene with the bona fideexercise of the power (Chen, 2007). However in

Nepta HoldingsSdn v Tan Sin Eoh

(2001), the Industrial Court held that theretrenchment of an employee was unfair as the company had not

7 After the take over by Media Prima Bhd, ntv7 has started a downsizingexercise with contract employees being the first to be let off. ntv7 hasalso targeted 200 staff members who applied for the VSS in theretrenchment exercise. Available at http://groups.yahoo.com/group/alternatif-net/.

8 For further details, please see Combating Global Financial Crisis:Proposals to Revive Penang’s Economy, prepared by Penang JointChamber 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.

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adduced sufficient evidence to support its cost saving measures,such as whether there were other employees termination exerciseand if such amount made a substantial difference to its survival orclosure and its accounts of alleged projected loss.

CONDITIONS PRECEDENT TO RETRENCHMENT

If redundancy is real, the employers will have to adhere very strictlyto the provisions relating to redundancy and retrenchment in theCode of Conduct for Industrial Harmony (‘Code’). The signatories tothis Code on 9 February 1975 were the Ministry of Labour andManpower (now known as the Ministry of Human Resources), theMalaysian Trade Union Congress (‘MTUC’) and the MalaysianEmployers Federation (‘MEF’), then known as the Malaysian Councilof Employers’ Organisations. The underlying rationale for this Codewas to lay down principles and guidelines to employers andemployees on the practice of industrial relations for achievingindustrial harmony.

Where redundancy is imminent, the conditions precedent toretrenchment is that the employer should, in consultation with theemployers’ representatives or their trade union and in consultationwith the Ministry of Human Resources, take positive steps to minimisereductions of the workforce by adopting appropriate measures suchas:

(1) Limitation on recruitment — hire employees only where it isabsolutely necessary and when there is loss of employeesthrough natural wastage or attrition. No hiring should beundertaken and existing jobs should be redesigned through jobrotation, job enlargement job enrichment including formation ofautonomous work groups or self directed work teams;

(2) Restriction of overtime work — spillover of work should beundertaken by employees who are under utilised;

(3) Restriction of work on day of rest — work on rest days shouldnot be encouraged unless it is deemed absolutely necessary as itcan be costly;

(4) Reduction in the number of shifts or working days in a week —this would reduce maintenance costs of plant and machineryincluding utilities during off peak periods; however, employeescannot be compelled to use their annual leave for this purposeunless it is by mutual consent or it is provided for in thecollective agreement;

(5) Reduction in the number of hours of work — although the EA1955 sets out the maximum number of hours an employee is

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allowed to work in a day, there is a provision for the employer toseek the permission of the Director General of Labour to exceedthe limits especially when the employer reduces the workinghours for certain days in a week and makes up for the loss overthe remaining days in the week by allowing employees to workbeyond eight hours daily subject to a maximum of 48 hours ofwork in each week;

(6) Retraining which may include transfer to other departments orreassignment of duties — employees must be allowed toundertake systematic and planned training before embarking ona new job and training in anticipation of jobs to be created in thefuture.

PROCEDURE OF RETRENCHMENT

A retrenchment exercise is subject to some governing proceduresbased on the Code. The employer, after having taken the foregoingappropriate measures which, inter alia, includes cost containment orcost 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 onwhether there was redundancy in the company, whether thecompany was entitled to retrench the claimant pursuant to theredundancy situation and whether the retrenchment was bona fide.The test was held to decide on whether there had been redundancyand simply whether there had been a cessation of, or diminution inthe requirement of the kind of work in which the claimant had beenengaged with. The facts in this case established that the requirementfor the claimant’s services had diminished following the completionof the contract in February 1994. In law therefore, there was aredundancy and the company was entitled to economise by reducinglabour costs. If the company did so fairly, the court would notinterfere with the company’s prerogatives (Rozanah, 1998).

In an earlier case of

Food Specialties (M) Sdn Bhd v Esa bin HjMohamad

(1989) regarding on whether the redundancy situationand retrenchment by the employer was a colorable exercise to getrid of the employee, the learned chairman of the Industrial Courtsaid:

The company must come to court with concrete proof of redundancy, forthe burden is on it to prove that there was actual redundancy on which thedismissal was justifiably grounded. Were it not so, any employer could usethe exercise of reorganisation and purported redundancy to dismissparticular workmen with impunity.

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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 theemployee which must be made redundant, not his position or title.

Therefore, in that case, it was clear that there was no redundancy asclaimed by the company. The company continued to exist. It alsomade profit in the year 1991, although the company claimed that thecompany’s margin was reduced. It was also clear that the company’sloss of profit was not because the business was doing badly but firstlybecause the company ordered new equipment for itself and secondlybecause the company showed a loss in the year ending 1990/1991.These losses were mainly due to the depreciation in value of its fixedassets, which amounted to a loss in the profit margin of the company.Therefore, the claimant’s termination was unfair labour practice andalso a dismissal without just cause or excuse since there was noredundancy (Hew, 2002).

According to Marsono and Yussof (2008), if the retrenchmentexercise is done in accordance with the relevant procedures, thenthere 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 asa result of a reorganisation and downsizing exercise made by thecompany to minimise its losses.

In the event that the issue of retrenchment is referred to theIndustrial Court, the court will generally look at the following issues:

(1) whether the retrenchment was justified, that is by looking at thecircumstances of the case;

(2) whether the employer is in a position to give the true groundsfor the retrenchment; and

(3) whether the retrenchment is made bona fide.

The Industrial Court in

Rocon Equipment Sdn Bhd & Anor vZainuddin Muhamad Salleh & Anor

(2005) emphasised that even ifredundancy did exist, the retrenchment must be done in accordancewith the accepted standards of procedure. In this context, cl 22(a) ofthe Code of Conduct for Industrial Harmony 1975 provides thefollowing measures to be taken by the employer:

(1) to give as early a warning as practicable to the workersconcerned;

(2) to introduce schemes for voluntary retrenchment and retirementand for payment of redundancy and retirement benefits;

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(3) retiring workers who are beyond their normal retiring age;

(4) to cooperate with the Ministry of Labour and Manpower tohelp his or her workers to find work outside the company’sundertaking;

(5) to spread the termination of employment over a longer period;and

(6) to ensure that no such announcement is made before theemployer’s workers and their representatives or trade unionhave been informed.

The Code is not a legally enforceable document; however employershave 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) SdnBhd

(1997), which stated:

The reasonableness of the dismissal may well depend on the procedurefollowed. It is pertinent to point out that article of the Code of Conduct forIndustrial Harmony, jointly agreed on 9 February 1975, by the MalaysianCouncil of Employers’ Organisation and the Malaysian Trade UnionCongress with the Minister for Labour, provides, inter alia, for pre-dismissalinquiry …

The Government also introduced a new sub-s 30(5A) to the IndustrialRelations Act 1967 to give the Code the desired ‘teeth’ in 1980, whichstipulates that in making the award, the Industrial Court may take intoconsideration any such code or agreement relating to employmentpractices.

Although the provision under s 30(5A) is only discretionary andnot mandatory, the Industrial Court has been consistent hitherto inbeing guided by the Code in arriving at decisions in retrenchmentcases. The time is right for the government to legislate the Code tomake it mandatory for employers to adhere to, in the interest ofenhancing social justice and security of tenure of employment.

RETRENCHMENT PRINCIPLES ENUNCIATED BY THEINDUSTRIAL COURT

The Industrial Court in

Cycle & Carriage Bintang Bhd v Cheah HianLim

(1992) laid down the salient points of general principles onretrenchment as follows:

(i) It is for management to decide on the strength of the staff which itconsiders necessary for efficiency in its undertaking. When themanagement decides that its workmen are surplus and that there is

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therefore a need for retrenchment, an arbitration tribunal will notintervene unless it is shown that the decision was capricious or madewithout reason, mala fide, or actuated by victimisation or unfairlabour practice.

(ii) It is the right of every employer to reorganise his business in anymanner for the purposes of economy or convenience, provided thathe acts bona fide.

(iii) An employer has the right to determine the volume of his staffconsistent with his business and if, by the implementation of areorganisation scheme adopted for reasons of economy and bettermanagement, the services of some employees become in excess to itsrequirements, the employer is entitled to discharge such excess.

(iv) In the absence of any agreement on the point, an employer is notobliged to find suitable employment for redundant workers.

(v) In effecting retrenchment, the employer should comply with theindustrial law principle of last in first out (‘LIFO’) unless there aresound and valid reasons for the departure from the principle. Thus, anemployer is not entirely denied the freedom to depart from thisprinciple.

(vi) The retrenchment of an employee can be justified if it was carried outfor the profitability, economy or convenience of the employer’sbusiness. The services of an employee may well become a surplus ifthere was a reduction, diminution or cessation of the type of workthe employee was performing.

It has been established in employment law that in effectingretrenchment, an employer should comply with the industrialprinciples of LIFO. The principle of LIFO has to be adhered to by theemployer in retrenchment exercises very strictly unless there arevalid, acceptable and sufficient reasons for departure from the saidprinciple.

The LIFO principle is subject to two limitations: first, the ruleoperates only within the establishment in which the retrenchment isto be made, and second, the rule applies only to the category to whichthe retrenched workmen belong. Establishment, or industrialestablishment, means the place at which the workmen are employed.Consequently, it would not include the several branches of a companysituated in different locations in the country. Category means a classor trade such as a turner, a motor mechanic, an electrician and thelike.

As the principle of LIFO is not provided for by statutory law and isonly one of the objective criteria in the Code, this principle shouldalways be considered as an important feature in the selection ofemployees for retrenchment.

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It must be emphasised that the employer is not denied thefreedom to depart from the LIFO principle, if, after taking intoconsideration the objective criteria and special circumstances, theemployer has sufficient and valid reasons to do so. In

MaybankDiscount Bhd v Nooraini binti Mohd Ishak

(1994), the IndustrialCourt asserted that the LIFO principle is not applicable where there isonly one workman in the particular job category. Some of the otherreasons for the departure from the LIFO principle are, that:

(1) The employer may take into account the efficiency and trustworthiness of the employees, and if he is satisfied that a personwith long service is inefficient or unreliable in the discharge ofhis duties, it would be open to the employer to retrench him,while retaining in employment another who may be junior tohim in service. However, there should be substantive andreliable evidence (recorded history) showing the inefficiency orunreliability of the employee. If poor performance is to beasserted, then it is vital for the employer to maintain a properand transparent appraisal system.

(2) An employee who is less productive due to long absencesthrough medical leave may be selected for retrenchment in theinterest of operational efficiency.

(3) Staff members possessing special qualification in the interest ofthe business may be retained over a senior employee withlonger years of service.

In any analysis of the Industrial Court cases on retrenchment, it wouldbecome apparent that the allegation would invariably be that theemployer had not followed the LIFO procedure in selectingemployees for retrenchment. The fact that the LIFO principle may bedeparted from gives rise to complaints of abuse of the procedure bythe employer, and their subsequent justification, in some cases by theIndustrial Court, could give rise to questions of fairness of its awards.

The Industrial Court seems to argue that so long as the selectionof employees for retrenchment is on the basis of objective criteria asperceived by the employer and acquiesced by the court, any violationof the LIFO principle it may incidentally entail, is justifiable in theinterest of the efficiency of the enterprise. In other words, theselection of employees to be retrenched on the basis of such objectivecriteria may acceptably result in some seniors being retrenched inpreference to their juniors who, according to these criteria areretained.

Retrenchment must therefore be conducted fairly and not taintedby any unfair legal practice. Thus, while retrenchment is permissible,a justifiable retrenchment exercise could be declared invalid simply

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because the selection of the employees for retrenchment is not inaccordance LIFO

(Anantaraman, 2005).

The violation of the LIFO principle it may incidentally entail, isjustifiable in the interest of the efficiency of the enterprise. In otherwords, selection of employees to be retrenched on the basis of suchobjective criteria may acceptably result in some seniors beingretrenched in preference to their juniors who according these criteriaare retained. In the case of

Malaysian Shipyard and EngineeringCompany v Mukhtiar Singh & 16 Ors

(1991), the selection ofemployees to be retrenched was based on selection criteria drawn upby the company unilaterally. Nevertheless, the company claimed thatthe selection was based on a point system embodying the objectivecriteria as stipulated in the Code guidelines such as age, in the termsof physical fitness and endurance (as ascertained from the claimant’smedical record), ability (as assessed from the claimant’s performancerecord over a three year period) and the claimant’s conduct from hisdisciplinary record over a five year period. The way the IndustrialCourt, in this case, sought to justify the employer’s retrenchmentexercise makes one wonder whether the court indeed actedaccording to equity and good conscience as it ought to do. Forexample, the Industrial Court exonerated the employer for notconsulting the union on the ground that there was no legal obligationon the part of the company to consult or warn its employees beforeretrenchment; the court averred that in employment law, the burdenof proof is on the employer to show that the factors that he had reliedon in selecting an employee for retrenchment are such as to provethat he had acted reasonably in his determination of the issue(Anantaraman, 2005).

Apart from the principle of LIFO, there is a requirement thatmandates all employers to comply with s 60N of the EA 1955 whencarrying out a retrenchment exercise. With effect from 1998, wherean employer is required to reduce his workforce by reason ofredundancy, the employer shall not terminate the services of a localemployee unless he has terminated the services of all foreignemployees employed by him in a capacity similar to that of a localemployee.

IMPLICATIONS TO HUMAN RESOURCE MANAGEMENT

Retrenchment can bring diverse impacts to all parties concernedincluding employers, employees and the organisation. It also affectsthe harmonious working relationship in any organisation. Exercisingretrenchment without just reason or failing to abide by proceduresmay affect the operations in an organisation. This is because some

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retrenched workers may claim that the retrenchment was a wrongfuldismissal and demand that the organisation either reinstate them oroffer them equivalent retrenchment benefits. They may also file areport claiming that they have been wrongfully dismissed by theirformer employers and claim for either a reinstatement or forcompensation in the labour department. The organisations concernedwould then have to spend additional time to handle the issue in theIndustrial Court. They would need to provide adequate evidence toprove that the retrenchment was necessary and that they exercised itaccording to lawful procedures. Such claims can affect thesmoothness of operations in the organisation.

Human resource practitioners must remember that the Code ofConduct places the burden on them to provide advanced warning ofany impending retrenchment to its employees and to take othermeasures to lessen the impact for the retrenched employee. If theCode was not observed and the matter goes to the Industrial Courtand if it is proven that the company had not been fair to theretrenched workman, the court may order the company to reinstatethe workman or pay compensation in lieu.

Retrenchment can decrease employees’ loyalty to theorganisation. The remaining employees may be dissatisfied with theorganisation for retrenched workers to save its business. Theirwillingness to put in the effort and to invest their time inaccomplishing tasks assigned to them may also decrease. Hence, theirwork productivity also decreases and affects the organisation’sprofitability. The remaining employees may also feel less securetowards their job. These reactions easily threaten the organisation’sperformance.

Retrenchment also causes the loss of talented employees.Organisations invest time, money and resources to train theiremployees to perform their jobs effectively. As soon as theseemployees are retrenched, the company loses its investment in them.The situation will worsen if the retrenched employees are employedby the organisation’s competitors. The competitiveness of theorganisation in the industry can be threatened since the retrenchedworkers may reveal its strategy to the competitors.

An effective human resource planning in getting the right numberof the right employees for the right jobs at the right wage and at theright time is a proactive approach in managing retrenchment. In fact,retrenchment will not even take place with a good human resourceplanning aligned with the organisational strategic plan. However, ifretrenchment is inevitable and does takes place, the human resourcepractitioners play a major role in helping the employees and

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management cope and manage the retrenchment exercise. Theyshould start discussing with their employees and unions on thepossibility of retrenchment due to the financial situation of thecompany.

Close communication and consultation with employees andunions at each step of the way prior to the actual retrenchment takingplace, goes a long way to reduce the impact of a surprise to itsemployees and provides the opportunity for the employer to explainthe reasons for the need for retrenchment They can spread theretrenchment period over a longer period of time and a implement aspecific formula which is equitable and fair to select employees forretrenchment, applying the LIFO principle as closely as possible.

Human resource management can introduce a fair and reasonablevoluntary retrenchment scheme (‘VSS’). If the VSS is attractive enoughin terms of the years of service and actual graduated rates of benefitsin terms of per year of service, naturally, it would be to the employee’sadvantage to accept such a ‘golden handshake’. The management canalso assist employees who have been chosen to be retrenched to findalternative jobs. They can also advise the employees concerned toregister with employment exchanges (operated by the Ministry ofHuman Resource) or send their resumes to reputable recruitmentsearch consultants.

CONCLUSION

The employer has a right to reorganise his business for reasons ofeconomy or convenience and this will lead to the discharge of someemployees which is permissible. However, the retrenchment must bebona fide and not for the purpose of victimising the employees inorder to get rid of their services. In Malaysia, there are severalemployers with poor understanding of the legal requirement and theprocedures for retrenchment termination due to redundancy andreorganisation. As far as possible, retrenchment should be avoidedand seen as a last resort. However, when the need to retrench arises,it must be done without violating the relevant statutes and the codeand it must be based on the established procedures. Before embarkingon the retrenchment of employees, the employer must take intoconsideration other alternatives such as the adoption of theappropriate measures as outlined in the Code of Conduct, such asrestricted hiring, reduction in overtime work, shorter working days,etc. When effecting retrenchment, the employer must comply withthe principle of LIFO unless there are sound and valid reasons fordeparture. The management of retrenchment should not be viewed asa reactive but a proactive exercise. A good management of a

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retrenchment exercise will help reduce the number of retrenchmentcases and claims made to the Industrial Relations Department, as wellas create harmonious working relations.

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