The Law on Retrenchment: Why Is there a need for government intervention to manage excess manpower caused by pandemic Covid-19


Ganesh Magenthiran (Civil Litigation)

Hakem Arabi & Associates

The discussion under this chapter will be focused on the rights and entitlement of the employees under the employment law and contract. The lockdown has come with its economic consequences in our country, the business across the world are also experiencing unprecedented predicament including issues related to the employment. By considering this current predicament, we endeavour to provide our understanding of some common issues arising out of COVID-19 which may help the employers in taking a concerned approach in dealing with their employment related matter.

The World Bank in a report on the economic impact of the Covid-19 pandemic has issued a warning that Malaysia is likely to experience a deeper contraction of -4.6 percent in a lower-case scenario. The said calculation was made on two different scenarios divided by the region - a "baseline" refers to severe growth slowdown followed by a strong recovery, and a "lower-case" or a deeper contraction followed by a sluggish recovery. In the report prepared by the WORLD BANK , MALAYSIA has been placed under the category of deeper contraction which means that the country's real gross domestic product (GDP) being the most-watched indicator of economic contraction is predicted to bedeclined minimum for two or more consecutive quarters .

That being the case, the real concern now is that what will be the consequence if the prediction by the World Bank becomes a reality. A very obvious consequence would be the situation of experiencing an economic recession that would eventually force the business entities to opt either for a full or partial shutdown of the business operation. The natural consequence of such a shutdown would be the issue of worker ’s retrenchment or termination of the employment contract due to an element of frustration .

Therefore, the two (2) main questions that might be asked by the employers who in tend to exercise worker’s retrenchment process or termination of an employment contract will be as follows : -

  1. Does the employer both under law and contract is permitted to retrench their employees due to the COVID-19 outbreak?
  2. What is the position of the Ministry of Human Resources? Do they allow businesses to retrench employees due to the COVID-19 outbreak?

On the justification of retrenchment, there are matters to be looked at by the employer, such as, is there any surplus of employees to allow retrenchment on the grounds of redundancy? Therefore, it is an absolute necessary or mandatory for the employer to show a valid reason for redundancy.

In the Malaysian context, section 12(3) of the Employment Act 1955 provides that the employees may be terminated from service when such termination is attributable wholly or mainly to any of the four (4) scenarios set out under the said section.

It is well settled that the employer due to the reason of redundancy is entitled to organize his business in the manner he considers best. However, it must be remembered that any such measures to discharge or terminate the surplus of labour or staff must be done for a genuine commercial or economic consideration.

So long the said 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 bona fide”.

The court in Credit Corporation (M) Bhd vs. Choo Kam Sing & Anor (1999) held that for the purpose of this Act, an employee who is dismissed shall be taken to be dismissed by reason of redundancy if the dismissal is attributable wholly or mainly to:

  1. the fact that his employer has ceased, or intends to cease, to carry on the business for the purpose of which the employee was employed by him, or has ceased, or intends to cease, to carry on that business in the place where the employee was so employed, or

  2. the fact that the requirements of the business for employees to carry out work of a particular kind, in the place where he was so employed, have ceased or diminished or are expected to cease or diminish.

Based on principles and elements illustrated in the earlier decided cases, the two (2) main elements which the employer must prove to justify the retrenchment exercise may be briefly stated as follows: -

  1. a valid reason for redundancy

  2. the managerial prerogative to discharge the surplus of labour or staff as a result of redundancy was properly exercised and was done on a bona fide manner.

While the case law has decided that the retrenchment exercise by the employer for the reason of valid or genuine redundancy is permissible, however, it must be noted that any such justifiable retrenchment exercise could be declared invalid simply because of the selection of the employees for retrenchment was not done in accordance with Last in First Out (LIFO) principle or inadvertent failure on the part of the employer to adhere with the procedural requirement set out under Clause 22(a) of the Code of Conduct for Industrial Harmony 1975 (the Code).

The Industrial Court in Rocon Equipment Sdn Bhd & Anor vs. Zainuddin Muhamad Salleh & Yang Lain (2005) emphasized that even if redundancy did exist, another question to be considered is whether the said retrenchment is done in accordance with the accepted standards of procedure.

In short, in exercising retrenchment, not only the employer must have good grounds to do so, but he must also avoid unfair labour practice. That being so, where the employer has the intention to exercise retrenchment, the steps as spelt out below must be at all times be complied with:

A. Notice to the labour department

The employment retrenchment notification 2004 obligates the employers who are proposing to dismiss his employees on the reason of surplus must notify the labour office vide the prescribed Form PK1/98 at least 1 month before the retrenchment of the employee. An employer who fails to notify the labour office of the proposed redundancy commits an offence under section 99A of the EA 1955.

B. Lay-off is an alternative to the retrenchment exercise.

The Employer is also required to practice lay-off before it can be allowed to proceed with retrenchment exercise. Pursuant to clause 5 of employment (termination and lay-off benefits) regulations 1980, lay-off means the failure to provide work under the contract of employment for at least a total of twelve normal working days within any period of four consecutive weeks and without any remuneration.

The question which may arises is that whether the employees are entitle for full wages when they are off-work. The Industrial Court in the case of Goodyear (M) Berhad v National Union of Employees in Companies Manufacturing Rubber Products held that 50% of the basic wages is a reasonable quantum.

C. Advance Notice to the Employee

In respect of termination notice to the redundant employees, the employer under Section 12 (2) of the Employment Act 1955 shall give minimum notice to the employees before retrenchment. It must be noted that although the act did not prescribe any definite time period, the employer is encouraged to give early warning as practicable to the workers concerned.

D. The principle of LIFO (Last in First out) AND FWFO (Foreign Work First out) must be adopted in the selection process of the employees for retrenchment

The principle of LIFO ("Last in, first out) has become entrenched in carrying out any retrenchment exercise. Pursuant to this principle, the junior employee would have to leave the employment before the senior could be directed to leave. Any departure from the principle of LIFO must be objectively justifiable .

With regards to the principle of FWFO (foreign worker first out) , the principle of which derived from Section 60N of the Employment Act 1955, an employer who in tends to reduce the work force due to redundancy, must first eliminate or terminate the service of the foreign workers employed in the similar capacity to that of the local employee before it retrenches the local employee.

E. Payment of Compensation

Not all employees are eligible claim for a redundancy payment . On ly emp loyees who are covered by the Emp loymen t Ac t and dism issed for reason of redundancy are entitled to receive the redundancy benefits under employment (termination and lay -off benefits) regulations 1980, Clause 6(1) . Clause 11 further requires the redundancy paymen t be paid by the employer to the employee not later than 7 days after the contract of service of an employee is terminated.

However, it must be noted that the industrial court in the case of Mamut Copper Mining Sdn Bhd v Chau Fook Kong [1997] 2 ILR 625, held that this obligation, however, is limited to the financially capable employer. An employer who is facing financial and resorting to retrenchment in the hope of keeping itself financially afloat is not expected to fulfil this obligation.”

Based on the legal provision contained in the relevant statues and further, by referring to the principles illustrated by the Malaysian Court in relation workers retrenchment issues, it can be concluded that the employer who wishes or intend to retrench its employees are not only required to prove the existence of real or actual redundancy but are also obligated to ensure that such retrenchment process has been carried out in accordance with the standard procedural requirement recommended under the CODE OF CONDUCT.

Having discussed the legal position of the issues involving the worker’s retrenchment, the focus now shall be directed on answering the question of what is the position of the Ministry of Human Resources on matters related to the worker’s retrenchment due to the global outbreak caused by COVID-19.

On 24 March 2020, the Ministry of Human Resources (“Ministry”) has released its second FAQ on the COVID-19 outbreak (“FAQ”) on 24th March 2020, where under the said FAQ, the Ministry of Human Resources has stated that while the retrenchment of employees is the prerogative of the employer, but such retrenchment exercise must have complied with these three (3) basic requirements: -

  1. There must be a genuine financial impact on the business;

  2. Employers must exhaust other means first before opting to retrench employees such as reducing working hours, reducing or freezing the hiring of new employees, reducing or limiting overtime, limiting employees from working on weekends or on publc holidays, reducing employees ’ wages or laying - off their employees temporarily .

  3. In the event, retrenchment of employees cannot be avoided , employers should terminate the services of foreign workers first before considering local employees ( i .e . Foreign Worker First Out) . If retrenchment of local employees is being considered, employers are encouraged to comply with “Last in First Out” . However , the Ministry has stated that employers can depart from these principles if it has strong justifications to do so .

It must be no ted tha t these three (3) requirement set out by the Ministry is consistent or identical with the legal principles or approach that being followed or applied by the court in deciding cases involving unlawful retrenchment exercise by the employer. Therefore, it must be noted that as far as issues involving workers’ retrenchment concerned , the Ministry did not set any new regulation or condition that can be distinguished or differentiate with the legal position currently in place .

However, it must be remembered that the companies which have received benefits and assistance under the economic stimulus package are not permitted or allowed to terminate or retrench its employees for minimum of three (3) months or maximum of six (6) month commencing from 01-04-2020. However, the wage subsidy incentive introduces by the government is extended only to the employers of the Small and Medium Enterprise companies and the same is applicable only for the employees with a monthly salary less than RM4000-00 .

The secretary-general of the Malaysian Trades Union Congress (MTUC) in his statement dated 07-04-2020 confirmed that there are 30% to 40% of the SME workforce with a monthly salary in the range of RM4000 to RM8000 per month. In the same statement, he also expressed his views and concerns that since these employees are not covered under the wage subsidy scheme hence the possibility of them being retrenched have heightened. Under the said pretext, he urged the government to introduce an emergency employment regulation to make the retrenchment illegal for the stipulated period.

While it must be appreciated that the said suggestion was made on the perception of giving protection to the employees, the question one must ask is that whether any such move or steps by the government that are to make the retrenchment illegal is permissible under the law. As we have explained earlier, the cases have decided that in dealing with the workers’ retrenchment issues, as long the managerial power to perform the retrenchment process is exercised bona fide, such decision is immune from examination even by the Industrial Court.

From the principles laid out by the court in dealing with issues of worker’s retrenchment exercise by the employer, the retrenchment exercises by the employer are not questionable provided that it can be shown that it was not done for a bona fide redundancy reason. That being the case, the suggestion mooted by the MUTC to declare retrenchment illegal for the specific time period will run contrary to the statutory rights accorded to the employers under Section 12(3) Employment Act 1955. Apart from the legal perspective, it also must be noted that any move to declare retrenchment illegal merely to prevent the employer from practising the retrenchment process will not serve the purpose if the employer is financially incapable to pay the wages.

Given the fact that every employer for the reason of actual or bona fide redundancy is statutorily permitted to terminate or retrench its employees, it is not feasible or legally permissible for government in exercising its executive power to adopt the suggestion mooted by MUTC. Although the option of declaring the retrenchment illegal cannot be implemented, however, the government could still play an important role in managing excess manpower and responsible retrenchment exercise by working closely with theMalaysian Trade Union Congress (MTUC) and Malaysian Employers Federation (MEF).

A similar approach adopted by the Singapore Ministry of Manpower where the ministry by way of collaboration or a joint effort with the National Trade Union Congress (NTUC) and Singapore National Employers Federation (SNEF) had come up with the Updated Tripartite Advisory Managing Excess Manpower and Responsible Retrenchment guidelines in March 2020. All the three (3) departments have thus jointly rolled out the advisory role to ensure “responsible retrenchment”

The main purpose of the said advisory was to provide a guideline to the affected employer so that the retrenchment exercise will be carried out responsibly without jeopardising the fundamental/basic rights of the employees. It is emphasized that the selection of employees for retrenchment should be based on objective criteria such as the ability of the employee to contribute to the future business needs and the retrenchment exercise should be conducted fairly.

Pursuant to the said advisory guidelines, all employer effective from 12 March 2020, having ten (10) or more employees and intend to implement any cost-saving measures that affect the employee’s monthly salaries is mandatorily required to notify Ministry of Manpower of its intention to do so. This would also enable tripartite partners to step in to provide the appropriate support to both employers and employees when needed including but not limited to find alternative employment and/or identify relevant training to enhance employability. The Singapore government have prepared and issued a specific Tripartite guideline for the Mandatory Retrenchment Notification by the Employer.

Apart from setting certain guideline on how the retrenchment exercise should be carried out by the employer, the Tripartite Guidelines also provide some guidance on possible cost-saving measures that can be adopted to manage excess manpower. The Proposed measures include redeploying workers to alternative areas of work within the organisation, a shorter workweek, temporary layoff, flexible work arrangements and a flexible wage system.

The cost-saving measures introduced under the said Advisory Tripartite guideline that is to assist the employer to manage excess of manpower is divided into four (4) categories as follows: -

1. Adjustment to work arrangements WITHOUT wage cuts

  1. Instead of retrenchment send the Employees for Training to upgrade their SKILLS and EMPLOYABILITY

    1. The employers are encouraged to retain skilled workers by enrolling them for training to upgrade their skills where the employer who opted for this option will be assisted by the government through several key programmes introduced for the said purposes.

  2. Redeployment of employees to alternative areas of work within the company

    1. If changes are structural, the employees can be redeployed or rotated when the job scope is enlarged, enriched or restructured and relevant training should be provided to them.

  3. Flexible Working Hours (FWH)

    1. FWS allows companies to optimise the use of manpower resources when the demand for its products or goods sees positive rebound that will cause peaks in manpower demands. In making this suggestion, the employees are assured of a stable monthly income during the period of FWS.

    2. To illustrate, the employer and employee (covered under Part IV of the Employment Act) agree to reduce weekly working hours from 44 hours to 40 hours for 4 weeks and the accrued 16 hours are then used to offset the increase in work hours (above 44 hours) in the next 4 weeks. In offsetting the overtime pay incurred in the next 4 weeks, the employee (or union if company is unionised) and the employer may agree on the rate at which the accrued hours are to be valued.

2. Adjustment to work arrangements with wage cuts

  1. Part-time work, sharing of jobs or other work arrangements

    1. The employer instead of retrenching workers is advised to make appropriate changes to the working schedule or implement other working arrangements such as part-time work and sharing of jobs or other flexible work arrangements.

  2. Shorter Week Arrangement or Temporary Lay-off

    1. Through this method, it was suggested that the employer with the financial performance is severely affected can either request the employees to take up 50% of the earned annual leave or implement work hour reduction that does not exceed three (3) days in a week. However, this measure comes with a condition that it cannot be implemented for more than three (3) months.

    2. Under the said measure, it was recommended that the employer to pay the affected employees minimum of 50% of their salaries on the day(s) when the employees are not working or during the period of when the shorter week measures are implemented.

    3. Temporary Lay-off is also one of the measures recommended under the category of temporary work arrangement. However, it must be noted that this measure comes with the limitation that it cannot continuously be implemented for more than one (1) month.

3. The Third approach recommended under the said Tripartite guideline is about the direct adjustment to wages.

  1. This approach is recommended for the companies suffering from extremely poor or uncertain business conditions that are likely to be long term. Under this measure, the employer who has taken efforts to reduce the manpower cost may consider adjusting payment for selective wage components such as Annual Wage Increment, Variable Bonus Payment and other allowances to the employees.

4. No Pay Leave should be the last resort

  1. As a last resort, some companies may have to put employees on no-pay leave to survive and save jobs.

The call for an immediate government intervention to prevent the occurrence of any mass workers’ retrenchment exercise especially among the business entities that are affected severely due this global outbreak cannot be taken lightly. Ever since the MCO is implemented, the employers throughout the country representing various group of business entities/sectors have publically expressed their predicament and stated that they will have to resort for partial or a full shutdown of the business operation if the situation persists for period longer than the expected.

This being the situation, an immediate intervention by the government of Malaysia through a collective effort with the other relevant agencies such as MTUC and MEF becomes inevitable. The government must immediately step up and draw proper guideline or framework that is not only provides protection to the employees retrenched from the employment but also several recommendations on the alternatives cost saving measures that can be taken by the Employers as opposed to worker’s retrenchment exercise.

The government intervention during this critical period is also important to ensure that the retrenchment process is being carried out fairly and reasonably by the employer. The MTCU also through several press statement has been continuously urging the government to immediately assist them by introducing Emergency Regulation that to prevent any scenario of mass worker’s retrenchment practise by the Employer. A quick move by the government to come up with the proper guideline and recommendation same or similar to the one introduced by the Singapore government will surely assist the employers to manage excess work force and practise a fair and reasonable retrenchment exercise.