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Law on Redundancy and Retrenchment

Info: 5449 words (22 pages) Law Essay
Published: 12th Aug 2019

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Jurisdiction(s): Malaysian law

Retrenchment may happen not only during recession but it is also relevant when the economic situation is good. Apparently, termination of service is permitted by law for operational reasons, which is commonly known as redundancy. The word redundant however, is not as simple as it sound as it is, in fact, it is very subjective. Redundancy occurs when the employee is no longer required to work. There are situations where a contract of employment is subject to some inevitable change. Redundancy may happen due to several reasons such as a downturn in production, sales or economy, the introduction of technology, business relocation, a business merger or a business is sold or restructuring of a company.

Furthermore, with the introduction of automation, industries usually employ very few workers. At the same time, as a result of reorganization, scaling down operation or closure of business, an employee’s services may become redundant and thus, his service may be terminated. Thus, in our context, retrenchment means a discharge of surplus of workers. However, retrenchment does not include termination of contract due to other reasons such as illegality or frustration or dismissal on the ground of misconduct (Ayadurai, 1998). In short, retrenchment occurs as a consequence of redundancy. The words of downsizing and retrenchment are used interchangeably. However, the main legislation governing this issue, that is, the Industrial Relations Act 1967, does not define the meaning of redundancy. Thus, for this purpose, reference should be made to common law principles.

In exercising retrenchment, not only must the employer have good grounds to do so, but, the law clearly provides that the employer is required to exercise it fairly. It is the practice that the recognized trade union must be consulted when an employer proposes to make the employee redundant. Section 13(3) of Industrial Relations Act 1967 recognizes management’s prerogatives to employ workers or to terminate them with a proper cause or excuse. While the court generally will not interfere with the bona fide exercise of power given to the management, it is equally important to note that the employer must provide a proper cause or reason before terminating the employees. Due to this reason, it is the employer who decides on the number of employees to be employed or to be retained by considering their viability and profitability of the business. Thus, when the employer is of the view that the number of the employees is too excessive, he is entitled to discharge the excess employees. Similarly, redundancy occurs where the business needs lesser number of employees or where the employer had suffered a business downturn due to its lost of major clients as could be seen inf Stephen Bong vs. FBC (M) Sdn Bhd & Anor (1993) where the court had confirmed retrenchment exercise made by the employer. As there was a clear shrinkage of work, thus, the employees were made redundant. On the same note, in the Kumpulan Perubatan (Johor) Sdn Bhd vs. Mohd Razi Haron (2000), the Industrial Court held that the massive retrenchment made by the employer was a genuine measure and not done for any ulterior motive to victimize the employees. Further, the court found no evidence that the employer had acted with mala fide in the retrenchment process.

3.0 Relationship between employer and employee

Relationship between employer and employee is based on the contract of the service. Good employer-employee relations are dependent upon efficiency. Employee’s efficiency may be enhanced if: they are kept informed on matters which concern them; and their views are sought on existing practices and on proposed changes which would affect them. Management should ensure that each employee is given full information about his rights and obligations. This should include information on.

this terms and conditions of employment;

agreements with trade unions which affect him;

what is required of him in his job and to whom he is directly responsible;

procedures for making suggestions or taking up grievances and to whom he can go to for help or advice on personal problems;

opportunities for promotion and any training which is necessary to achieve it;

safety rule.

www.mim.org.my: Code of Conduct for Industrial Harmony

Reorganization of Business

Reorganization of the employer’s business is usually the reason for redundancy. Although reorganization does not give rise to a reduction in work, there is a situation where the implementation of new technology in a business requires the recruitment of an employee with a new skill.


In Nixdorf Computer (M) Sdn. Bhd. v. Tan Hong Yak;,

The court held:

The reorganization carried out by the company was genuine, and on substantial merits of this case, the court ruled in favor of the company, that the reasons advanced by the company had been made out, and that the dismissal was lawful and bona fide, and made with just cause and excuse.

In HVD Film Production (M) Sdn. Bhd. v. Loh Shuey Ling, Annie25, the company alleged that it underwent a reorganization in 1991 following the increase in operating costs and this was evident from a comparison of the results of the first quarter in the profit and loss accounts. The operating expenses continued to increase through the second and third quarter of 1991 when compared with the results in 1990. The company therefore took steps to cut costs and streamlined its operations for better efficiency and productivity. The company closed two departments, the commercial department and the special projects department and the employees in those departments had their services terminated. The company also abolished the position of administrative officer and the service of the claimant was terminated. The claimant contended her dismissal was without just cause or excuse.

The case of Aluminium Company of Malaysia Bhd. v. Jaspal Singh [1987] 2 ILR 558 was referred to where it was said:

In the law of redundancy it is important to note that it is the services of the employee which must be made redundant and not his position or title.

Therefore, in present case, it was clear that there was no redundancy as claimed by the company. The company continued to exist. It also made a profit in the year 1991, though the company claimed that the company’s profit margin was reduced. It was also clear that the company’s loss of profit was not because the business was bad but firstly because the company ordered new equipments for itself and secondly the company showed a loss in the year ending 1990/91. These losses were mainly due to the depreciation in value of the fixed assets, which amounted to a loss in profit margin of the company. Therefore, the claimant’s termination was an unfair labour practice and also a dismissal without just cause or excuse since there was no redundancy.

In New Selangor Plantation Sdn. Bhd. v. Mariaie Rengan & Ors.

The court remarked:

It is well settled that an employer has the prerogative to transfer or relocate his employees and an employee cannot refuse to obey the directive of the employer to go on transfer. However such prerogative is not absolute or unfettered and it must be exercised in good faith. In the instant case it is the finding of this Court that the proposed reorganization was not contrary to the terms of the employment or for the purpose of harassing or victimizing the claimants. There was no change in the condition of service and the Court is not convinced the reorganization was to the detriment of the claimants resulting in economic loss.

Dismissing Redundant Employees: Prerogative of the Management

Managerial prerogative is a concept well known by the Industrial Relations Act 196711 and the Employment Act 1955. The Industrial Relations Act 1967 acknowledges the employer’s managerial prerogatives in matters relating to promotion, transfer, employment, termination, dismissal and retirement and the assignment or allocation of duties or specific tasks to a workman. It also recognizes that an employer has the right to suspend, transfer, lay-off or discharge a workman ‘for proper cause’, although these managerial prerogative rights are not absolute. Where it is shown that the exercise of these prerogatives is not bona fide or amounts to unfair labor practice or indicates victimization, the Industrial Court will not hesitate to strike down such exercise as bad. “Now the age when management could hire and fire at will is gone, it is possible to assert that the employer has a legal duty to treat his employees with due respect and consideration, mindful of their needs and problems and sympathetic with their difficulties. It is no longer possible to treat an employee as an expendable chattel or an object without feelings and emotions.”

This brings our attention to the issue of dismissal for reason of redundancy. Before there can be retrenchment or termination of the surplus, there must first be redundancy or surplus of labor. It is for the management to decide on the strength of the staff which it considers necessary for efficiency in its undertaking. When the management decides that workmen are surplus and that there is therefore a need for retrenchment, an arbitration tribunal will not intervene unless it is shown that the decision was capricious or without reason, or was mala fide, or was actuated by victimization or unfair labor practice. It is the right of every employer to recognize his business in any manner for the purposes of economy or convenience, provided he acts bona fide.

Despite the concept being an acknowledgment of the employer’s right to suspend, transfer, lay-off or discharge a workman, neither Act is clear on whether these prerogatives available to employer are exhaustive in nature. However, the court has made it clear that every such prerogative listed in the Acts is a qualified right and these qualified managerial prerogatives given to the employer are to be observed in such cases of retrenchment. Therefore, in determining whether retrenchment is justified in a particular case, the important issue being taken into consideration by the court is whether the dismissal of the redundant workers is fairly conducted and the retrenchment is bona fide and untainted by any unfair labour practice. In Cycle & Carriage Bintang Bhd v. Cheah Hian Lim, the retrenchment was held by the court as genuine and did not constitute dismissal without just cause or excuse. In Goon Kwee Phoy v. J. & P. Coats (M) Bhd., the appellant had his employment with the respondent company terminated on the ground of redundancy. The Industrial Court held on the evidence that there was no redundancy which would justify the company dismissing or terminating the employment of the workman.

4.0 Employment Protection

Redundancy refers to a surplus of labor and could be the result of reorganization of a business of the employer, in any manner for the purpose of economy or convenience or if there is a reduction, diminution or cessation of the type of work the employee is performing. In the above situations, the employer is entitled to discharge the services of some employees which become excess in requirements. In English law, under the Employment Protection (Consolidation) Act 1978, ‘redundancy’ is defined in s. 81(2) of the Act to cover a dismissal attributable wholly or mainly to:

1. (i) the fact that the employer has ceased, or intends to cease, to carry on the business for the purposes for which the employees was employed by him; or

(ii) the fact that he 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, or for employees to carry out work of a particular kind in the place where the dismissed employee was so employed, have ceased or diminished or are expected to cease or diminish.

Thus, in Chapman & Others v. Goonvean & Rostowrack China Clay Co. Ltd. [1983] All ER, it was held the test of whether there was redundancy was simply whether there had been a cessation of or diminution in the requirement of the respondents business to carry out the kind of work on which the appellant had been engaged, i.e the test under the second limb of the definition. On the evidence, the respondents requirements for the employees to carry out that kind of work had neither ceased nor diminished for they had employed other men to do the work. Accordingly, it was held the appellant had not been dismissed by reason of redundancy.

Rozanah Ab Rahman: LLB, MCL (IIUM) Lecturer, Faculty of Economics and Management, Universiti Putra Malaysia, “Redundancy: Rights of Employees.” www.cljlaw.com.my

5.0 Ethics of job Discrimination

Malaysian law has prohibited businesses from assessing or placing judgment upon employment prospects due to gender, race, ethnicity, creed, religion, political affiliation or even handicap in certain settings and situations. Because of this, those in the working world or those attempting to enter it, feel safe and assured that they will always be treated honestly, respectfully and fairly. If one does not get a job, the reasons must always be cogent and pertinent to the job and its particular set of qualifications. That’s not always the way it is. Believe it or not, discrimination still lives and thrives in businesses all over and in many cases; those who behave discriminatory can and do get away with it.

Most common form of discrimination is, unfortunately all too well common is sexual harassment, especially in the case of male-toward-female. This is a self-explanatory but is almost always a legal mind field. When one gender makes unsolicited sexual advances toward someone of the opposite gender and then rests that person’s job on the responses, discrimination takes place in a dot of opposite dynamic. What is meant by this is that a favor is given to a particular worker based on gender and appearance. For instance, a woman with a shapely body and large breasts is hired because of her gender and physical endowment instead of her qualification. Sexual harassment means any unwelcome verbal, non-verbal, visual, psychological or physical conduct of a sexual nature that might, on reasonable grounds, be perceived by the victim as placing a condition of a sexual nature on his or her employment because of his or her sex. Sexual harassment may also consist of an unwelcome verbal, non-verbal, psychological or physical conduct of sexual nature that might, on reasonable grounds, be perceived by the victim as an insult or humiliation, or a threat to his or her well-being, and has no connection with his or her employment. Sexual harassment in the office includes work related harassment which happens outside the office. Such work related harassment may includes situations taking place at work-related social gathering or functions, conferences, workshop or training sessions and during work assignments outside the office. Sexual harassment in the course of work-related travel is also considered sexual harassment in the office. Where sexual harassment occurs as a result of employment responsibilities or relationship over the phone and through electronic media, it is also considered sexual harassment in the office. There are two categories of sexual harassment, namely sexual coercion and sexual annoyance. Sexual Coercion is a type of harassment which has direct results in some consequence to the victim’s employment. It is employment discrimination.


6.0 Code of Conduct for Industrial Harmony

The Federal Government through the Ministry of Labor has constantly been playing its role as a third party in Malaysian Industrial relations. In February 1975, it witnessed the endorsement of the code of conduct for Industrial Harmony (which it helped to draft) by the Malayan Council of Employers Organization-the predecessor of the present Malaysian Employers Federation¡ and the Malaysian Trades Union Congress. The former represent employers in general while the latter represents workers in general. The code which was the brain child of the Ministry of Labor is not a legally enforceable document, rather a moral one signed in good faith and voluntarily by the two parties. It reflects some ‘ideals’ in industrial relations that both the parties wish to have.

6.1 Aim of the Code

The primary and stated aim of the code is “to lay down principles and guidelines to employers and workers on the practice of industrial relations for achieving greater industrial harmony.”

This broad aim may be broken down to some other refined objectives namely:

to protect the interest of both the employers and the workers

to smoothen the relationship between the two groups

to minimize the occurrence of industrial disputes and industrial action

to ensure continued increase of productivity

to avoid unfair labor practices

to enhance collaboration between management and workers.

www.mim.org.my: Code of Conduct for Industrial Harmony

6.2 Contents of the Code

The code consists of recommendation as to how each party should behave; their agreement to refrain from certain acts; and some areas in which they should cooperate. The Code of Conduct for Industrial Harmony commends that both parties

refrain from taking unilateral action with regard to any industrial dispute

resolve all differences and grievances strictly in accordance with the grievance procedures of collective agreement, or, where there are agreements by negotiation, conciliations and arbitration

ensure that at all times, all matters in dispute are dealt with by the proper machinery established for that purpose

promote constructive and positive cooperation at all levels of industry and abide faithfully by the spirit of agreements mutually entered into

establish, where none exists, a procedure which will ensure a complete and speedy investigation of grievances leading to a joint settlement

comply with the various steps in the procedure for disposal of grievances and avoid any arbitrary action which ignores these procedures

refrain from resorting to coercion, intimidation, victimization and avoid go-slow, sit-down and stay-in strike

educate management and workers on their obligation to each other

The Code of conduct for Industrial Harmony carries with it a spirit of collaboration between management and workers. Theoretically the Code should be able to bring the two sides closer and promote industrial harmony and stability. However, in practice it has not been quite successful in achieving its objectives as seen over the years. The effectiveness of the Code could be improved, among other ways, by establishing the proposed standing committee and enhancing the understanding and acceptance of the spirit of the Code at the enterprise level.

www.mim.org.my: Code of Conduct for Industrial Harmony

7.0 Legal Rights and Responsibilities

7.1 Redundancy

Apart from the fact that there should be valid reasons for redundancy and retrenchment must be conducted fairly and untainted by any unfair labor practice, there are certain important principles that need to be observed by employers in retrenching the redundant employees. These principles are important in ensuring that proper retrenchment has been carried out, thus protecting the employees from wrongful retrenchment.

7.2 LIFO Principle

The principle of ‘last in, first out’ or ‘last come, first go’ is an agreed procedure that is made between the employer and a recognized trade union. This agreed procedure may form part of the collective agreement between the management and the union and it has to be determined with reference to the workmen working in the same category of employment. The LIFO procedure is not an absolute mandatory rule and thus employer can depart from the rule in retrenching the staff. However, the employer must have sound and valid reasons for departure from the LIFO procedures before he can be allowed to do so. In cl. 22(b), the Areas for Cooperation and Agreed Industrial Relations Practices under the Code of Conduct for Industrial Harmony 1975, it was stated:

The employer should select employees to be retrenched in accordance with objective criteria. Such criteria, which should have been worked out in advance with the employees’ representatives or trade union, as appropriate, may include:

(i) need for the efficient operation of the establishment or undertaking;

(ii) Ability, experience, skill and occupational qualifications of individual workers required by the establishment or undertaking under (i);

(iii) Consideration for length of service and status (non-citizens, casual, temporary, permanent);

(iv) Age;

(v) Family situation;

(vi) Such other criteria as may be formulated in the context of national policies.

This guiding principle has been adopted by the court in deciding retrenchment cases.


In Sedcoforex (M) Sdn. Bhd. Nambi Ak Menang & Ors., it was the finding of the court that the company had breached the ‘last in, first out’ rule. The company conceded that it had relied on the recommendations of its supervisors for deciding the retrenchment of the individual workers without any regard to the LIFO principle. Therefore, it was unfair for the company to disregard the concept of ‘last in, first out’ when carrying out the retrenchment.

In First Allied Corporation Bhd. v. Lum Siak Kee; the claimant contended his dismissal subsequent to a retrenchment exercise undertaken by the company is without just cause or excuse. He stated that this was not a bona fide retrenchment exercise and that it was in repudiation of the LIFO principle. The company asserted that the retrenchment exercise was bona fide in sequel to the downturn of business which the company experienced. In pursuance to reorganization, a number of employees, including the claimant, became redundant. The LIFO principle was not applicable, as the claimant was not in the same category as those continuing in service. The claimant contended that if the retrenchment exercise was carried out in good faith and the principle of “last in, first out” applied then the claimant should have been retained in employment and another employee, Chew Siew Chu, junior in length of service retrenched in place of the claimant. The said Chew Siew Chu was carrying out the duties and functions of the claimant. The Industrial Court in giving its judgment pointed out:

The court is of the view that the company did not violate the principle of LIFO in selecting the claimant for retrenchment. The principle concerns employee with similar category or class doing similar or like work. Chiew Siew Chu was an assistant accountant performing a different job function in the company unlike the claimant who was the corporate planning executive. Moreover, the LIFO principle is not immutable and for valid and sufficient reasons an employer may depart from it. This rule is not inflexible and extraordinary situations may justify variations. For instance, a junior recruit who has special qualifications needed by the employer may be retained even though a more senior employee is retrenched.

There is no allegation of victimization. In the absence of mala fide and the necessity to survive due to the financial situation of the company at the time, its right to retrench the claimant was within its discretion and justified. Based on the reasons stated above it is the finding of this court there was justification for the company to retrench the claimant and it further holds that the principle of “last in, first out” has no application in this case.


The court therefore upheld the retrenchment of the claimant and ruled that his dismissal was with just cause and excuse.


7.3 Fair/Reasonable Selection

Obviously, in deciding to select a particular employee for retrenchment, the employer must be prepared to reveal to the court that he has taken relevant factors into account. There is no limit to the factors which may be relevant such as qualifications, skills and experience, job performance (especially in situations where the employer wishes to depart from the LIFO principle), attendance records, ages and other personal characteristics of the employees in the selection group, etc. The court observed in National Union of Cinema & Places of Amusement Workers v. Shaw Computer & Management Services Sdn. Bhd. Where it is necessary for some employees to be discharged because of redundancy, the court will ordinarily require the employer to show how, by whom, and on what basis that selection was made. The burden of proof is on the employer, and he must discharge it to the satisfaction of the court.


Federal Transport Service Co. Ltd. v. Transport Workers’ Union was a case involving a driver where the company, as a step towards implementing the decision to economies, selected him as one of the other drivers to be retrenched. It was alleged that of the other drivers in the service, he was the only one to have had bad record. In the case of the other driver, the reason given for his dismissal was that he had stopped work over a period without obtaining permission or without obtaining a certificate for sick leave. The tribunal commented:

The tribunal is of the view that, in all the circumstances of the case and in the light of what transpired, the company was not justified in holding the past record of Osman bin Taib (one of the drivers affected) against him in arriving at a decision as to which driver in Kuala Kangsar should be retrenched.

The tribunal also awarded that in all future cases of retrenchment where any worker in a particular category of workmen is to be retrenched, the company shall, unless exceptional circumstances or reasons present themselves, ordinarily retrench the workman who was the last person to be engaged by the company in that category.

In Sykt. E-Rete (M) Sdn. Bhd. v. Kesatuan Sekerja Pembuatan Barangan Galian Bukan Logam & Anor.

The Industrial Court pointed out:

It is pertinent to note that the company was practicing a blatant form of victimization in dismissing the 65 unionized workmen. No clerks, storekeepers, drivers, supervising staff or kepalas were retrenched. The lowest paid, general and production, unionized workers, was the sole and single target of retrenchment by the company, under the pretext of losses. Upon all the evidence and an objective and dispassionate assessment thereof, this court finds as a fact that the company has failed to discharge its burden of proof upon the pleadings and upon the evidence that it retrenched the 65 employees because it suffered losses in 1986 and 1987;

7.4 Lay-off

Lay-off means the failure to provide paid work under the contract of employment. Under the Employment (Termination and Lay-off Benefits) Regulations 1980, where an employee is employed under a contract on such terms and conditions that his remuneration there under depends on his being provided by the employer with work of the kind he is employed to do, he shall, for the purposes of reg. 3(b), be deemed to be laid-off if:

(a) the employer does not provide such work for him on at least a total of twelve normal working days within any period of four consecutive weeks; and

(b) the employee is not entitled to any remuneration under the contract for the period or periods (within such period of four consecutive weeks) in which he is not provided with work.

Practicing lay-off by the employer is necessary for industrial harmony. If the employer is moving towards a retrenchment, he is required to practice lay-off first and if he is unable to continue with the lay-off, then only he should choose to retrench the affected employees.


Goodyear Bhd v. National Union of Employees in Companies Manufacturing Rubber Products (Award 176 of 1982), the court stated:

The company has the right to shut down its plant at any time. It also has the right to lay off its workers for proper cause. We hold that installing new machinery is proper cause for a layoff.


7.5 Offer of Alternative Employment

In the absence of any express agreement on the point, an employer is not obliged to find suitable employment for redundant workers, although it may be a good industrial relations policy to attempt to do so.57 Clause 22(a), Areas for Cooperation and Agreed Industrial Relations Practices under the Code of Conduct for Industrial Harmony provides that if retrenchment becomes necessary … the employer should assist the workers, in cooperation with the Ministry of Human Resources, to find work outside the undertaking. Clause 23 requires the employees who are retrenched, be given priority in engagement/re-engagement, as far as is possible, by the employer when he engages workers.

In Antah Drilling Sdn. Bhd. v. Boey Sow Foong58, the court noted:

While what constitutes redundancy in England and Malaysia may be the same, the duty of the employer to try to find alternative employment is not. In England, there is a duty to try to find alternative employment – Section 57(3) Employment Protection (Consolidation) Act 78. In Vokes Ltd v. Bear [1974] ICR I the suggested standard was to take all reasonable steps. However in this country, in s. 23 of the Code of Conduct for Industrial Harmony, the employer needs only give priority of engagement/reengagement to retrenched employees.


7.6 Employees’ Right to Redundancy Payments/Retrenchment Benefits

In cases where redundancy has been justified and the redundant workers are retrenched, the law preserves the right of the employees to receive redundancy payments or retrenchment benefits. The intention is to compensate employees for the loss of job security. The statutory redundancy payment is provided for in the Employment (Termination and Lay-off Benefits) Regulations 1980 or else the provision on the benefits may be provided for in the collective agreement between the employer and the employees’ union.


Bethlehem Singapore Pte Ltd v. Ler Hock Seng & Ors.62

The respondents were employees of a company engaged in shipbuilding and marine business. They were ununionised and their letters of appointment stated that they were entitled to retrenchment benefits in accordance with the company’s ‘current’ or ‘prevailing’ policies and practices. When the company decided to close down their operations, they signed a collective agreement with the Shipbuilding Marine and Engineering Employees’ Union and agreed to pay all unionized employees with more than three years of service, half a month’s wages for each year of service pro-rated for any incomplete year of service, subject to a maximum of five months’ basic wages or $6,250, whichever was less. Later, the respondents were sent retrenchment notices by the company, informing them that they would be retrenched and paid benefits at the same rate as the company had agreed with the union. On previous retrenchment exercises, the company had consistently paid employees with more than three years’ service, retrenchment benefits at the rate of one month’s basic wages for each year of service, with no maximum limit. Thus, the respondents claimed that such exercise was the ‘current’ or ‘prevailing’ practice and was a term of the contract of employment. On appeal, the company submitted that they had an unfettered discretion in deciding the amount of retrenchment benefits payable and that their ‘current’ or ‘prevailing’ practice was to pay the same rate as the collective agreement they had negotiated with the union.

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