Retrenchment in Malaysia – a boon or bane? Part 1 - Labour Law Blog

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Jul 6, 2020

Retrenchment in Malaysia – a boon or bane? Part 1




THE current Covid-19 pandemic has caused (and continues to cause) many businesses to not be able to operate as usual due to government-imposed restrictions on movement and this has caused negative impact to the revenue of most businesses.

In these uncertain times, business owners could, if not done already, resort to implementing cost-cutting measures. Business owners would also have to think of ways to reorganise their business to become more cost effective. Any business reorganisation in the current circumstances may require dealing with the unpleasant reality of having to lay-off employees. The focus of this two-part series is to provide insights on retrenchment and the administrative requirements to be considered before embarking on a retrenchment exercise.

Retrenchment is essentially an exercise of terminating employment, premised on the fact that the employee has become surplus, i.e. when an employer has more employees than is essentially required for its operations. Such surplus may arise due to a variety of reasons, including the loss of a sector of work which may result in the expertise or skills of certain employees becoming redundant; automation of work processes; loss of profits/revenue, merger of businesses; and other factors.

In such circumstances, some of the questions that arise include, Can I retrench my employees?; Who can I retrench?; Do I need to pay the retrenched employee any compensation, and if so, how much?

In Malaysia, while companies are at liberty to organise or structure their businesses to maximise efficiency and profitability, nevertheless, given that a retrenchment exercise will have adverse effects on the employees’ livelihood, it therefore has to be done in good faith.

A useful guide to what constitutes “fair labour practice” within the context of a retrenchment exercise may be found in the Malaysian Code of Conduct for Industrial Harmony (“the Code”). Clause 20 of the Code sets out the best practices to be followed by an employer in carrying out a retrenchment exercise. Although the Code does not have the force of law, it is advisable that any retrenchment exercise undertaken abide by the principles and guidelines set out in the Code, as a failure to comply can result in the retrenchment being declared as an unfair dismissal by the Malaysian Industrial Court.

It is important to note that should the retrenched employee make a representation for unfair dismissal against their employer at the Industrial Court, the said employer will bear the burden of proving that the retrenchment exercise was done in good faith. It is here, that the employer will be advantaged by providing evidence of compliance with the Code.

The Code also recommends that the employer undertake alternative cost-cutting measures prior to a retrenchment exercise, and the impact of such measures should be assessed to determine whether they can help keep the business afloat. Such measures may include freezing or limiting recruitment of new staff; restricting overtime work or work on the weekly day of rest; reducing the number of work hours or number of shifts worked a week; re-training and/or transferring employees to other departments.

Where retrenchment is inevitable despite the implementation of cost-cutting measures, the Code recommends that employers take the following steps:

-> provide early warning to the employees affected;

-> introduce a voluntary retrenchment and retirement benefit scheme, and provide payment of redundancy and/or retirement benefits;

-> retire employees who are beyond the normal retirement age;

-> assist employees find alternative employment; and

-> conduct the retrenchment exercise on a staggered basis amongst the employees so that it is spread over a longer period.

Crucially, the Code emphasises that employers must ensure employees and their representatives/trade union (where relevant) have been informed before the retrenchment exercise is carried out.

The next part of this article will consider the principles behind the criteria for selecting which employee to retrench, the administrative requirements for retrenchment, and the appropriate retrenchment benefits to be provided to the employees in such situations.

This is the first of a two-part series on retrenchment. This article was contributed by Ashley Tay and Rubini Murugesan of Christopher & Lee Ong.


Source : The Sundaily

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