Contents

Introduction...............................................................................................................2
Employers obligation during Movement Control Order (MCO) and Extended MCO
(EXTENDED MCO..................................................................................................3
The Code of conduct for Industrial Harmony...........................................................6
What is Retrenchment...............................................................................................7
The Reasons for Retrenchment.................................................................................8
Principles Governing Retrenchment..........................................................................8
Dismissal Without Just Cause and Excuse..............................................................10
Notice Period...........................................................................................................11
Redundancy, Downsizing and Lay-offs..................................................................11
Outsourcing.............................................................................................................18
Retrenchment, Voluntary Separation Scheme (VSS ) and Mutual Separation
Scheme ( MSS ).......................................................................................................19
Mutual Separation Scheme......................................................................................20
Voluntary Separation Scheme.................................................................................22
Conclusion...............................................................................................................28

1
HUMAN CAP IN A PANDEMIC – OVERREACTING IS
BETTER THAN NOT REACTING

Introduction
The coronavirus (COVID – 19) pandemic has impacted the ability of businesses
around the globe to maintain operations and fulfill existing contractual obligations.
Governments have imposed unprecedented travel regulations, and instituted
restrictive interventions on companies and organizations. All business sectors have
experienced severe interruptions or cancelled events due to a combination of
government rules and contagion concerns.

As the impact of the COVID – 19 pandemic magnifies, companies are not exempt
from the harsh economic realities at various levels, including the impact on human
capital.

This pandemic may trigger retrenchments, and both employer and employee need
to address this issue immediately. Critical planning, implementation and
subsequently, the successful completion of this exercise is of the utmost
importance. Failure to address the human capital of an organization may give rise
to new events every day that may affect a business’s ability to sustain value to its
shareholders and may pose a concern in years to come.

The interest of the shareholders must take precedent over the interests and welfare
of employees. The idiom, “maximization of profits, or minimization of losses”, is
never more apt than during a period of crisis and uncertainty, such as this one.
Leadership is called upon, or in fact, demanded to steady the “ship”. Doubtless, it
is a sensitive and unpopular decision when attempting to remove colleagues who
have faithfully and sincerely contributed to the organization over a period of time.

Employers should engage in open dialogue with their employees to discuss the
impact of COVID-19 on their business operations and employment contracts as
well as issue new policies and procedures in line with any proposed measures.

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This paper attempts to consider the impact of COVID -19 on Malaysian labor laws
and outline alternative common law, mechanisms, and practices available to
employers in the face of the instantaneous evolution of COVID-19.

The harsh reality is that there will be redundancies, and it is not the fault of the
company or the incompetence of the managers that this will occur. It is also not an
attempt to absolve any past decisions of the Board. COVD-19 was not expected. A
religious man may say it is an act of God, a legal mind may argue that it is Force
Majeure while a leader would say, “It is just business, nothing personal”.

Employers obligation during Movement Control Order (MCO)

and Extended MCO (EXTENDED MCO)
The Government of Malaysia imposed the first MCO from March 18th, 2020 to
March 31st , 2020, and subsequently a number of EXTENDED MCO’s from April
1st 2020 to June 9th 2020 in two (2) week intervals.

On February 5th, 2020, the Ministry of Human Resources (MOHR) issued a

guideline titled “ Guidelines on Handling Issues Relating to Contagious
Outbreaks including Novel Coronavirus” (MOHR GUIDELINES). MHR further
released a “frequently asked questions (FAQ)” on the same matter on March 19th ,
2020.

The MOHR GUIDELINES or FAQ does not have any statutory obligations but
employers are strongly encouraged to adhere to the same.

MOHR has taken amongst others, the following positions during the MCO and
Extended MCO:

1. All employees are to be paid their full salaries and allowances. Employees
who do not earn a fixed daily wage, employers are required to ensure that
their wages do not fall below the Minimum wages order 2020 ( The
minimum wage increase has been gazette and came into effect on February
1, 2020 ; ( Appendix 1 )
2. Employers may not require their employees to take unpaid leave; and
3. Employers cannot force the employees to take annual or unpaid leave;

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In addition, The Bar council industrial and employment Law Committee (IELC)
also published a position paper and has taken the following position during MCO
and Extended MCO:

1. The three ( 3 ) above per MOHR, and that in respect of item three ( 3 )
above, it maybe be executed if mutually agreed;
2. An employer facing financial difficulties in paying full salaries and
allowances may seek the consent of the employees to pay a reduced salary to
avoid retrenchment;
3. An employer facing difficulties due to COVID-19 may resort to a
retrenchment or temporary lay-offs of its employees, subject to compliance
of certain conditions and appropriate measures;
4. Employers cannot rely on force majeure to avoid its contractual obligations
if the contract of employment does not contain a clause which provides for
it; and
5. An employer cannot rely on doctrine of frustration unless the MCO extends
to a prolonged period of time such that the performance of the contract
becomes impossible.

In addition, under section 24 of the Employment Act 1955, the employer cannot
deduct their employees` salary on the grounds of shut down. For employees not
subject to Employment Act 1955, any right to impose a pay cut will depend on the
employment contracts between employers and their employees.

The courts have held that any unilateral deduction in salary of the employee when
there is no contractual right for the employer to do so, is almost always considered
a fundamental breach of the contract of employment and amounts to a repudiation
of the contract by the employer.

Therefore, employers must first consult and obtain the consent of its employees
before applying any pay cut or salary deductions.

Employers are also not allowed to unilaterally deduct the employees annual leave
entitlement to cover the MCO or EXTENDED MCO period. The employer must
consult and obtain the consent of the employee.

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Employers whose business are severally impacted by the COVID -19 and are
unable to pay employees their full salaries during the period may need to consider
other cost cutting measures before resorting to salary reductions of the employees.

Employers whose businesses are severally impacted by the MCO and are unable to
pay employees their full salaries during the period may need to consider other cost
cutting measures.

Employers cannot force employees into taking “unpaid leave” as it has the same
effect as a pay cut. The Employment Act 1955 only has provisions regulating paid
annual leave and sick leave, and does not sanction forced unpaid leave.

In the eventuality of extreme financial difficulty, an employer can impose a pay cut
as a last resort after considering all other alternatives.

In the case of Lim Ban Leong V Gold Bridge Engineering & Construction Bhd, the
Industrial Court held as follows:

“Traditionally, any salary cut to an employee`s pay can be used as a ground

by the employee to plead constructive dismissal. However, if the Company
is facing losses and is trying to fight off closure of its business, then pay-cut
or retrenchment of its employees, the company may appeal to the employees
to ride through the rough times with the company. When the business picks
up then the pay cut maybe paid back or the employee reinstated. The court
maintained that there should have been more dialogue between the
respondent with its employees in order to maintain industrial harmony.”

In the Industrial Court case of Penas Realty Sn Bhd v Chee Yew Kong (2002):

“The court took into consideration of the economic situation at the material
time and found that the Company had to implement a plan to ensure that
both the Company and the employees are safeguarded. The Court finds that
the reduction of salary of the claimant and the other relevant employees is
bona fide and justified in the view of the financial situation of the company
and the dire straits it is and that it was intended to be win-win for both
employees and the respondent otherwise the employees maybe retrenched”.

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Based on both the above cases, it is arguable that salary deduction or pay-cuts
could be permissible under the COVID-19, especially if it is the only option to
ensure the employees are retained. Such actions must be discussed and agreed
mutually by both the employer and employee and is in writing.

Employment Act 1955, first schedule Sec 2 ( 1 ) defines an employee as an

individual whose wages is RM2,000.00 or less and must have a written contract
regardless of the nature of work.

The Code of conduct for Industrial Harmony

The Code which was issued in 1975 is a guide for employers who are
contemplating retrenchment of their employees. The Code is not a legal document,
but employers are encouraged to comply by the code to ensure industrial cordiality.

The Code states that, where redundancy is inevitable, an employer should take
necessary steps to limit reductions of workforce wherever possible by adopting
appropriate measures. These measures can be condensed as follows:

1. Limitation on recruitment;
2. Restriction of overtime work;
3. Restriction of work on weekly day of rest;
4. Reduction in number of shifts or days worked a week;
5. Reduction in the number of hours of work;
6. Re-training and /or transfer to other departments / work

When the Board has approved a retrenchment exercise, the Code requires where
possible for employers to take the following measures:

1. Informing the affected employees in advance of the impending measures

being undertaken;
2. Introducing voluntary separation or mutual separation schemes,
incorporating payment of redundancy and retirement benefits;
3. Retiring workers who are beyond the retirement age;
4. Assisting workers to find alternative employment;
5. Extending the termination of employment as long as economically possible;
and

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 6. Ensuring that employees are equal participants in the measures being
undertaken by having dialogues and consultation before the formal
implementation.

As mention earlier, the Code is not legally binding on employers but complying
with the Codes is good practice and will be seen favorably by the Courts in the
event an employee decides to bring an unfair dismissal claim as a result of
retrenchment.

What is Retrenchment
“Retrenchment” has been explicitly explained by Gopal Sri Ram JCA in the case
of Williams Jacks & Co ( M ) Sdn Bhd v Balasingam ( 1997 ) 3 CJL 235 as
follows:

“Retrenchment has been defined as the discharge of surplus labour or staff

by an employer for any reason whatsoever otherwise than as 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 of degree
depending on the peculiar circumstances of the case. It is well-settled that
the employer is entitled to organize 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”

From the above judgment, it can be summarized that it is the prerogative of an

employer to retrench his employees in any manner of choice as long as it is bona
fide, or in other words, done under good faith.

Retrenchment should be in accordance to the general principles of Industrial Law,

and retrenchment compensation maybe payable. Temporary lay-offs and salary
reductions may only be done after consultation and with the consent of the
employees. Lay-off benefits may be payable under the Employment (Termination
and Lay-off Benefits) Regulations 1980. Where there is a collective agreement in
place, all such action shall be undertaken in compliance with the same.

7
Employers are advised to comply with the necessary redundancy and retrenchment
laws insofar as termination of employment due to extended business downtime
caused by COVID-19 is concerned.

It can be argued that foreseeable business losses and reduction in revenue due to
the effects of GOVUD-19 is a ground for termination of employment. For
example, if an airline has decided to stop several flight routes, employees working
on those routes, may be terminated as their services have become redundant.

The Reasons for Retrenchment

An employer may undertake a retrenchment exercises for the following reasons:

1. Interruptions in the supply chain, which has a domino effect on revenue and
profits;
2. The company is in financial difficulty for whatever reasons in terms of
profits, positive cash flows and it remains a concern;
3. A reorganization of the workforce to increase efficiency or cut costs;
4. The closing down of certain production plants or service centers due to
several factors, including change of products, unprofitable, reduction in sales
contributing to financial loss;
5. An excess number of employees following a corporate exercise ( mergers,
acquisition) where similar tasks are being performed; and
6. Outsourcing certain functions of the organization due to excess costs;

Principles Governing Retrenchment

The courts are of the view that they will not be in a position to decide the number
of employees an organization needs to employ, and thus do not intervene in such
matters.

The courts are to ensure that the retrenchment is not mala fide, such as where
retrenchment is camouflaged as a redundancy, or where affected employees were
victims of unfair labour practices.

It is the right of every employer to organize and/or re-organize his business in any
manner that he or she deems fit, provided that their acts are bona fide.

8
The employer is not obliged to find alternative employment to replace retrenched
employees unless it is incorporated in their employment contract.

In effecting termination, the employer should implement the principle of “FWFO”

(Foreign worker – First Out) within the same job category during retrenchment i.e.
foreign workers are terminated first before local workers. Thereafter, employers
should implement the principle of “LIFO” (Last-in-first-out) if termination
involves local workers and within the same job category.

The employer must give the affected employees a notice of retrenchment. The
notice period is based on the employment contract or collective agreement and the
employees who fall within the scope of the Employment Act (EA). It is good
practice to inform and consult employees of a potential retrenchment as soon as
possible. Employers are also required to submit a written notification to the
Labour Department at least 30 days before conducting a retrenchment exercise.

An employee who falls within the scope of the EA is entitled to termination

benefits if he has been employed for at least 12 months. The termination benefits
are based on Section 6, Employment (Termination & lay-off benefits) 1980. An
employee who is not covered by the EA is only entitled to retrenchment benefits if
it is incorporated in his employment contract. If such terms are absent, then
benefits relating to termination is solely at the discretion of the employer to pay,
including the quantum of the benefits (if any).

Retrenchments are sometimes a messy and costly affair if not undertaken

according to best practices, codes, or common law. HR professionals and in-house
counsel of employers must diligently plan and implement retrenchment and decide
on the best available options as stated below:

1. Redundancy, downsizing and lay-offs.

2. Outsourcing
3. Mutual Separation Scheme
4. Voluntary Separation Scheme

9
Before the commencement of retrenchment, the employer must take necessary
steps to mitigate the situation to avoid retrenchments in the first place. These
measures could be as follows:

1. Cost cutting measures;

2. Moving into cheaper / less expensive premises;
3. Freeze on staff recruitment or zero recruitment;
4. Non replacement of employees resigning;
5. Reducing overheads;
6. Directors reducing their fees and allowances;
7. Freeze on salary increments and bonuses;
8. In selecting the employee for retrenchment, the employer complied with
the principles of FIFO and LIFO

The factors to be considered before a retrenchment due to redundancy is

undertaken are as follow:

1. The company has carried out a reorganization exercise;

2. Following the exercise, it is found that for the company to continue profits
or positive cash flow, there must be redundancy;
3. The exercise is bona fide; and
4. At the point of retrenchment, there were no more work or there was surplus
of labour for a particular job and genuinely not available, cannot be
outsourced and the work cannot be undertaken by existing staff.

Dismissal Without Just Cause and Excuse

The Industrial Relations Act 1967 (IRA) via section 20 empowers an employee to
act against his employer if he feels that he has been dismissed without just cause
and/or excuse. The provisions entitle the employee to claim for remedy of
retrenchment, although the Industrial Court rarely awards such a remedy. In lieu of
reinstatement, the Court may grant compensation.

The Court is looking at the term “just cause and excuse” in the perspective of the
employer to retrench the employees.

10
Notice Period
Generally, the length of notice depends on the employee`s length of employment.
The EA states the following:

1. If the employee has been employed for less than two ( 2) years, notice
must be given at least four (4) weeks in advance;
2. If the employee has been employed for more than two (2) years but less
than five (5) years, notice must be given at least six (6) weeks in advance;
and
3. If the employee has been employed for more than five (5) years, notice
must be given at least eight (8) weeks in advance

If the employer is unable to provide such a notice, the employer would then need
to pay salary in lieu of notice period. However, in situations where the employment
contract company handbook or collective agreement provides a more favorable
length of notice, that notice period shall prevail against EA1955.

Redundancy, Downsizing and Layoffs

An employer may carry out a retrenchment exercise anytime he thinks it is
necessary or when he has a surplus of employees.

“Redundancy does not mean the job or work no longer exists. Redundancy
situation may arise where the business requires fewer employees of
whatever kind” (Stephen Beng v FCB ( M ) Sdn Bhd & Anor [ 1999 ] )

The Courts have further concluded that:

“Retrenchment of an employee can be justified if carried out for the

profitability, economy or convenience of the employer`s business, the
services of an employee may well become surplus, if there is a reduction,
diminution or cessation of the type of work the employee was performing”
( Cycle & Carriage Bintang Bhd v Chiah Hian Lim [ 1992 ] )

11
In the book “The Supreme Court on Industrial Court” by Soonvala, it is stated :

Retrenchment is a necessary incidence of running an industry, but

retrenchment is justified when due to shortage of work, whether
permanently, or for an indefinite or indeterminate period, there has arisen
surplus in the number of workmen in the employment of the Company.

Thus, an employer may re-organize his commercial undertaking for any

legitimate reasons, such as promoting better economic viability. But he must
not do so for a collateral purpose. It should not be carried out for the purpose
of getting rid of an employee whom the employer does not like. The Court
has the power to decide whether the particular exercise of management
power was exercised bona fide or for collateral purpose (Harris Solid State (
M ) Sdn Bhd & Ors v Burno Sentil Periera & Ors [ 1996 ] ).

“Under the above case of Harris, although the employer is given the power
to freely manage its business under management prerogative, it does not
mean the employer has an absolute power. The employer is bound to
exercise his management prerogative with bona fide intention, without
discriminating and victimizing his employees. This is to ensure the employer
will not exercise its rights arbitrarily and to prevent unfair labour practice.
This is because power tends to corrupt, absolute power corrupts absolutely.
Therefore, the right of an employer under management prerogative can be
challenged in the Court of law”.

In the book “Industrial Relations in Malaysia”, Dunston Ayadurai maintains:

That there must first be redundancy or surplus labour before there can be
retrenchment or termination of the surplus. He explains further that
redundancy is normally the result of re-organization of the services of an
employer and its consequence is retrenchment.

Based on the above decided cases and authorities, it can be argued that the tenacity
of COVID-19 and its impact on the labour market shall result in retrenchment in
various forms.

12
The case, Rasyidah Rosli V Ally Azran Holding Sdn Bhd (2019), concerns a
company not acting bona fide:

Three employees (3) were terminated via a notice of termination. The notice
of termination referred to an earlier meeting where the employees were duly
informed of the financial problems of the company and the need to reduce
the number of employees.

The three (3) employees claimed that no meetings had taken place and the
company was unable to furnish any evidence that the meeting did indeed
took place and as such the three were not aware of the company’s financial
problems. In addition the termination notices did not state the reasons for the
said termination.

A review of the company`s financial statement for the preceding three (3)
years reflected that there was a gradual drop of the company’s revenue, the
company was still profitable in all of those 3 years and were not financially
distressed.

Also the termination notices did not set out the reasons for the terminations,
and that the company failed to produce evidence of the purported meeting
with the employees. In addition, the company was unable to provide
evidence that the 3 employees` position were redundant and evidence was
derived that at the point of termination the employees` functions were still in
existence and had subsequently been taken over by other staff or outsourced.

In respect of one of the claimant, although there was testimony that her job
function had been outsourced, the company failed to justify how the
outsourcing was a cost-cutting measure.

The court concluded that the dismissals were unfair and awarded each employee
back wages of 14 to 15 months compensation in lieu of the reinstatement of one
month`s salary per year of service.

13
Anthony Van Der Wal V Petroleum Geo- Services Exploration (M ) Sdn Bhd
( 2019 ) is a case where the Company acted bona fide and retrenchment was a
necessity due to adverse business conditions:

The Claimant`s grievances were as follows:

 Employee for Twenty-two (22) years of service;

 Capping of severance package at 7 months` salary and subject to
preconditions;
 The Company was making healthy profits;
 Actions by the company globally indicated that the company was not
facing any financial difficulties;
 Company was spending on non-essentials;
 Executive Directors were lucratively remunerated;
 Dismissal was not carried out fairly;
 Company did not adherer to the Code of Conduct for Industrial
Harmony
 Was arbitrarily selected for retrenchment and not informed on the
selection criteria;
 Was not consulted prior to dismissal;
 Was not offered an alternative position; and
 Town hall sessions only generally addressed the Company`s
reorganization

The Company provided evidence that the company had losses at a Group
Level and the outlook was not good. The Company further submitted that
the Group made a business decision, deciding that it was necessary to
reorganize, and that it was entitled to do so. The Company further contented
that even if an employer was not suffering financial losses, it is still entitled
to undertake a retrenchment exercise to ensure that it is kept afloat. It also
showed that fifty-four (54) of the Company`s employees were also made
redundant as part of the reorganization.

In relation to the severance compensation, the Company contended that there

is no statutory obligation to pay termination benefits to non-EA employees.
Nevertheless, the Company did offer to pay termination benefits as a
14
 goodwill gesture, but the employee refused to sign off on the relevant
documents to accept them.

The Court did find that the Company`s financial situation was not adverse,
but there was sufficient evidence to show that the Company was operating
with a negative operating income in the preceding years. The Court also
noted that the employee was offered an alternative position in England, but
he declined due to the reduced salary.

The Court further pointed out that there was no legal obligation for the
Company to consult the employee and give early warning of the impending
retrenchment, and that a lack of consultation would not automatically render
the retrenchment male fide. In the case, the Court found that the Company
did give ample notice as a newsletter was sent to all employees informing
them of the need to reorganize, and the town hall meetings were held
outlining the retrenchment package.

The Court contended in respect of the capping the severance package to

seven (7) months` salary that once retrenchment is found to have been
genuine, a failure to provide sufficient compensation would not invalidate
the retrenchment.

The Court was satisfied that the Company had proven its case, and
dismissed the employee`s claim.

In the case of Mohd Zakir Yusoff v Telarix (M ) Sdn Bhd ( 2020 ), the Court was of
the view that retrenched on grounds of redundancy was not proven.

Employee`s Claim:

 Was issued with a letter of termination stating that he was being

retrenched due to redundancy;
 His position was taken over by another recently hired individual
 The Company advertised 3 positions covering similar job functions
5 months after he was made redundant.

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The Company contention:

 Both the Company and its global Group of Companies had been
suffering financial losses, and challenging business conditions that
necessitated a global workforce reduction;
 The workforce reduction was genuine and 15 employees were
made redundant across different jurisdictions;
 Employees performance was not an issue

The Court contended:

 The Company failed to prove that it had been suffering losses;

 The Company failed to provide evidence to show how the decision
was made to restructure;
 The Company failed to provide the basis on which the employee was
selected for retrenchment;
 The Company failed to provide any records of discussions by the
board or Management of the retrenchment exercise; and

The Court concluded that the Company had failed to prove a genuine
redundancy, and that the employee`s services, job function, duties and
responsibilities existed at the time of his termination and continued to exist
thereafter. The Court awarded the employee back wages of 15 months, and
compensation in lieu of reinstatement of one month`s salary per year of
service.

The case of Ganesh Beloor Shetty v Ranbaxy (Malaysia) Sdn Bhd ( 2019 ) pertains
to adequate notification of retrenchment and the employer acting bona fide:

Employee`s Claim:

 That his position as Head of Medical Affairs is compulsory for the

Company to have such position to comply with the law;
 Was terminated on grounds of retrenchment arising from redundancy;
and
 Was not given notice that a restructuring was being carried out.
16
Company`s Claim:

 Following a Corporate amalgamation and restructuring, the

employee`s role no longer existed;
 The regional office had been closed down
 The employee`s boss had also been made redundant;
 The employee was consulted and informed on two occasions in the
preceding months;

The Court Contended that a failure to notify an employee of an impending

retrenchment exercise does not automatically render the exercise unlawful,
as long as it can be shown that the Company acted in good faith and after
reviewing the relevant guidelines, that there was no law stating that his
position was compulsory.

The burden is on the employer to prove on the balance of probabilities that

the employees` position had become redundant thus, resulting in their
retrenchment (Bayer ( M ) Sdn Bhd v Ng Hong Pau [1999] ). The employer
has to take all necessary steps and adhere to all relevant factors laid out in
the Code of conduct for Industrial Harmony 1975 before retrenching the
employees. The Industrial Court may take such Code into consideration in
delivering its decision.

The Code in any event has no legal force or sanction. It is depicted in the
case of (Penang & S Prai Textile & Garments Industry Employees Union
& Phoenix Bhd Penang & Anor ( 1989 )), where the first company`s failure
to adhere to the guidelines in the code did not render the claimants
retrenchment exercise unjustified.

In the case of Alfred AK Galin & 10 Ors v The Sarawak Club (2007 ), the
Industrial Court held that the employer had taken all necessary steps and acted in
accordance with the Code of Conduct for Industrial Harmony. The claimants were
unable to prove that the Club`s decision to privatize its bar services was without
reason, mala fide or unfair and victimization. The club was able to demonstrate

17
that it had to genuinely reorganize its operations to derive maximum benefits as the
Club`s bar was facing financial difficulties.

The Court concluded that the Club could terminate the employees as it has proven
that it was under financial difficulties for a period of time and had taken all
necessary procedures to retrench the employees.

Outsourcing
Outsourcing means asking a third-party to vendor for you on a contractual basis.
The benefits of outsourcing are lower costs and higher savings. The Company gets
access to quality services that are offered at a much lower cost. Maintaining an
infrastructure can be an additional burden for some businesses, however, it can be
removed by outsourcing. Most of the work outsourced are typically, non - core
activities of the company.

In the case of Rasyidah Rosli V Ally Azran Holding Sdn Bhd (2019) :

“In respect of one of the claimants, although there was testimony that her job
function had been outsourced, the company failed to justify how the
outsourcing was a cost-cutting measure”.

From the above case, it can be concluded that the employer must act bona fide and
ensure any that outsourcing of work must provide evidence to show that it benefits
the employer in terms of lowering the cost.

The employee may take action if he is dismissed because of outsourcing. The

employer cannot use the excuse of outsourcing by way of re-organization to render
the employee`s services redundant (Trident Malaysia Sdn Bhd v National Union of
Commercial Workers [1987]). The employer is not allowed to use the excuse of
outsourcing to disguise intention to get rid of the employees by rendering their
services redundant (Ipoh City & Country Club Berhad v Mohd Khurshaid Ramjan
Din [ 2006 ]).

18
As a temporary measure, the company may wish to outsource certain departments
which are not in concurrence with the immediate future plans of the company.

Recent cases at the various Courts will provide guidance to the employers, on the
stand taken by the courts in disputes arising from retrenchment.

The case of Tharmabalan Suppiah Velliah v MSL Travel Sdn Bhd (2019) which
pertains to the employer`s right to re-organize its business:

“The employee was retrenched as part of down-sizing exercise. The

Claimant complained that the employer did not take any necessary steps to
minimize its financial problems before implementing the retrenchment.

However, the employer did undertake a cost-cutting exercise for the

previous year, including moving premises, not replacing employees who had
resigned, reducing overheads, directors had taken pay cuts.

There was evidence that all the staff, including the employee himself were
aware of the operational slowdown. The employer also implemented the
retrenchment exercise under the principle of LIFO.”

The court was of the view that the employer had taken all necessary steps to
stay in business, and that the employer had exercised its power bona fide
when terminating the employee. The Court upheld the employer`s right to
reorganize its business, and dismissed the employee`s claim.

Retrenchment, Voluntary Separation Scheme (VSS ) and Mutual

Separation Scheme ( MSS )
Retrenchment as we have covered, is the dismissal of employees who are regarded
as a surplus to requirements. The Company / Department itself is not being closed,
but rather a select group of employees are retrenched. Not all employees are
retrenched.

Companies carrying out retrenchment are required to abide to the legal provisions
of the Employment Act 1955 (where applicable ) and the general rule of LIFO.

Any retrenchment must be bona fide. However, in practice to prove bona fide or in
good faith can sometime be difficult. To avoid having to establish good faith, and
19
to terminate an employee without being exposed to the risk of litigation for unfair
dismissal, many employers negotiate separation with their employees.

The normal practice is for the employer and employee to negotiate for some form
of settlement in terms of cash and allowances, where the terms for this settlement
are incorporated in the agreement. The said agreement shall contain a clause
stating that the separation package and terms are in full settlement of any claims
the employee may have, and that the employee will not bring an unfair dismissal
claim. However, sometimes employees do commence litigation against the
Company for unfair dismissal even after the settlement of the agreed compensation
amount.

Mutual Separation Scheme

Mutual Separation Scheme arises when both parties agree to terminate the
employment relationship. The keyword is mutual, i.e. both parties agree to a
settlement that is a win-win scenario for them.

The following legal principles were considered by the Federal Court;

In Nadarajah & Anor v Golf Resort ( M ) Sdn Bhd ( 1991 ):

The court observed that the Industrial Court “ must act according to equity,
good conscience and the substantial merits of the case without regard to
technicalities and legal form. Technical rules such as estoppel, limitation ,
laches, acquiescence, etc. ( unless otherwise provided for in the Act ) have
no place in industrial adjudication and they should not be allowed to be
invoked for defeating claims which are just and proper”.

In Tamil Nesan ( M ) Sdn Bhd v K. Ganesan (“Unreported”):

It is stated, “….even if some workmen accept (a) certain amount “in full and
final settlement of their account”, they cannot be estopped from further
claiming their legitimate dues nor can there be waiver in this respect of the
rights accruing to them under the industrial law. The principle of estoppel or
waiver cannot be rigorously applied against the workmen”

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The following legal points were considered by the High Court:

In the case of James Clement Hii Gin Kion v Menteri Sumber Manusia & Anor
(2015 ):

The Court cited Nadarajah & Anor v Golf Resort ( M ) Sdn Bhd ( 1991) and
found that “ the principle of estoppel has no place in Industrial
adjudication”. The Court further noted that “ should the Industrial Court find
that the termination was without just cause or excuse, being a court enjoined
to act according to equity and good conscience, in assessing any
compensation due to the ( employee ), without doubt will have due regard to
any monies paid and the appropriate deduction will be made for the
compensation already received. Therefore, the fact that the (employee )
accepted the compensation from the ( employer ) does not in any way
prevent or bar him from seeking the remedy of reinstatement from
Industrial Court.”

It is evidently clear from the above case that even if an employee negotiates
and signs a mutual separation agreement, to the affect that the termination
benefits are full and final settlement of all claims and that the employee
accepts as well as does not return the negotiated compensation amount, he
still has the right to commence litigation for unfair dismissal

To mitigate the risk of litigation for unfair dismissal after settling the agreed
compensation amount, it is advisable to incorporate in the Mutual Separation
Scheme that the compensation amount shall be settled after the 60 day
deadline for the employee to file for an unfair dismissal claim has been
completed. This may deter the employees to a certain level.

Any amounts that are eventually awarded by the Courts, following litigation
shall be deducted from the compensation sum already paid according to the
Mutual Separation Scheme. Therefore, it is imperative that a reasonable
compensation sum has been agreed and paid.

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Voluntary Separation Scheme
Voluntary Separation scheme arises when a company that is not officially
retrenching but nonetheless, wishes to get rid of employees.

In this scenario, the Company will make an announcement that is addressed to the
employees along the lines of:

1. “Profit hasn`t been good”

2. “We have been making losses”
3. “The Company will not be dismissing anyone, but will welcome
application from employees to be considered for VSS”

It is like a job advertisement that invites applicants. The difference here is that it is
not a job advertisement, but rather an invitation by the Company for application by
the employees to be considered for VSS.

Usually the Company will also talk about the terms and conditions of the VSS
(compensation terms, qualifications, and requirements etc.). Due to the nature of
VSS, it is usually more difficult for employees who have left the Company on VSS
to challenge this in the Malaysian Courts.

As in the case with all dismissals of employees, a VSS is more difficult for the
employee to argue on the grounds of unfair dismissal unless it can be shown that
the employee was coerced into it, or there existed the usual elements that may
render the VSS void or voidable.

The key word in this exercise is voluntary. This is a scheme whereby a Company
makes an offer to employees to end their employment in return for a reasonable
sum as compensation. It is a strategy employed by the Company aimed at reducing
the human resource strength within the Organization and the employer must be
able to prove that the dismissal is fair and just.

The following legal points were considered by the Industrial Court.

In Suseela Devi Balakrishnan v Inti International College Kuala Lumpur (2019):

The employee was offered VSS as her position as the Acting Chief
Executive Officer had become redundant because the Company was

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 “re-engineering its operations to be more efficient and better prepared for the
increasing competitive business environment”. The employee had
voluntarily applied to participate in the VSS, and the application was
accepted by the employer and the employee was paid an amount of
RM199,086.10 as compensation.

The employer believed that with the acceptance of VSS and settlement of
the agreed compensation amount the employment had ceased pursuant to the
mutually agreed VSS.

The employee however contended that she was dismissed without just cause
as the position was redundant and the VSS was not necessary as her
functions in the company continued to exist post VSS.

The key questions raised were:

 Whether the implementation of the VSS was justified; and

 If so, whether the VSS was carried out voluntarily or involuntarily (i.e.
carried out by force, or by coercion or duress, by unfair labour law or
practices ), which then may render the VSS as unfair dismissal.

The Court concluded based on the evidence derived that the “Company could not
prove the redundancy , and the Company could not produce cogent reasons for
offering the employee the VSS”, and therefore “ the company has failed to prove
with just cause or excuse for the employee`s dismissal”.

The Company`s witness also confirmed, that on the employee`s last date of
service, the Company had appointed a new Chief Executive who would have
commenced work in a few weeks.

The Court cited previous cases stating “It is clear that where someone else takes
over the work function of the dismissed employee, redundancy cannot arise and
that in such circumstances dismissal for reasons of redundancy will become a
dismissal without just cause or excuse”.

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The Court clarified that VSS is an “ alternative to a retrenchment exercise, and
may only be applied in the context of redundancy and not used as a license to
terminate employees in any manner whatsoever and even to the extent of issuing
VSS to employees without providing any justification”. “Therefore, even if an
employee`s employment is ended pursuant to a VSS ( as opposed to a
retrenchment), “the fact remains that the claimant`s employment has been ended
by mala fide”.

The Court further concluded that even though the offer letter contained the word
“Voluntary”, it is the manner in which the VSS was offered and executed that
determines whether the VSS was offered voluntarily.

In Telekom Malaysia Bhd v Pg Morshide Pg Omar (1983):

The Court concluded that “The employer conducted briefings with the
claimant and communicated to the employees that the VRP ( Voluntary
Retirement Plan ) was Voluntary, and those that declined would not be
retrenched”. In Suseela’s case, the “employee was clearly told that there was
no certainty in her employment if she did not accept the VSS offer”.

In Birch & Anor v University of London (1985 ):

The Court concluded that the scheme was clearly stated not to be a
redundancy scheme. In Suseela`s case, the Company admitted that the VSS
being offered to her identifies as redundant.

In Abdul Aziz Ismail & Others v Royal Selangor Club (2015):

The Court distinguished that in Abdul Aziz`s case all employees were
invited to apply for VSS, whereas in Suseela’s case, she was the only person
offered the VSS. It was the view of the Court that the employee was not
redundant, and that “she was put under pressure to accept the VSS “.

In Kumpulan Perangsang Selangor Bhd v Zaid Mohd Noh (1997):

The Court clarified that “accepting retrenchment benefits does not preclude
or estop an employee from contending that his dismissal from his
employment amounted to an unfair and unlawful dismissal”.

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 The court concluded that “the company has failed to prove the employee`s
redundancy which resulted in the termination of her employment” and “ the
claimant`s dismissal was without just cause or excuse”.

The employee was awarded back wages of 24 months, with deduction of

50% for post dismissal earnings and plus compensation in lieu of
reinstatement of one month`s pay per year of completed service. The amount
paid under VSS compensation package was also deducted from the award.

Steps in Business Manpower Planning Process

1)Enviroment Scan 2)Identification of Business

Issues
 External Threats and
Oppurtunities  Business Climate
 Market Share
 Internal Strengths and
Weakness  Product success and
failure

Organization Business &

Manpower Planning Process

3)Development of Business
Courses of Action 4)Aligning HR Plans and
 Discover new Strategies
markets,product
acceptability
 What are implications
for staff/employees
 Increases
sales/revenue
 Increase spending or 25
cost cutting
Aligning HR Strategies with Business

Strategies to decrease staffling level

Strategies to redeployment

Strategies for Training and Development

Strategies for reduction of in force (RIF)

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 VSS (RIF)-An Implementation Approach

Due Diligence

 Review future  Business plan

business  Target
strategy population/jobs/
 Study functions
Organizationa  Financial feasibility
l structure
 Workforce Business Proposal

Stakeholder &
Management Approval

 Present to
stakeholders the
Implementation Plan business proposal
 Obtain approval
i.e. budget

 Project
Management
team
 Communication Execution Management
plan
 Media strategy
 Rollout
 Communicate27
 Documentation
 Labor Office
Conclusion
Retrenchment is a very traumatizing exercise and the problems are overwhelming
if a company handles it without due care. In situations of both EA 1955 and non-
EA 1955, employers are encouraged to make payout for termination benefits for
both categories of employees.

While a company needs to retrench employees, the importance of handling the

exercise with empathy and dignity cannot be overlooked because all employees
have an unfettered right to file a claim under section 20 of the Industrial Relations
Act 1967 for unfair dismissal.

If the employee succeeds in proving that the termination was without just cause,
the company may be susceptible to a maximum of 24 months of back wages, in
addition to one-month wages for each year of service.

Therefore, how quickly a company can move forward positively after carrying out
a retrenchment exercise depends largely on how the retrenchment exercise was
planned and implemented.

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