The challenging Covid-19 situation has hugely impacted many companies negatively and some companies have to retrench their employees in order to survive.
It is a well accepted principle that a company is at liberty to reorganize its business and workforce, especially when there is a downturn in its business.
However, a company has to ensure that the retrenchment was made in compliance with the accepted standards of procedure, or the company may expose itself to legal suit(s) for wrongful dismissal.
The ‘Last In First Out’ Principle
The employer should select employees to be retrenched in accordance with objective criteria, which may include:-
(a) need for the efficient operation of the establishment or undertaking;
(b) ability, experience, skill and occupational qualifications of individual workers required by the establishment or undertaking under (a);
(c) consideration for length of service and status (non-citizens, casual, temporary, permanent);
(e) age; and
(f) family situation.
Although the LIFO principle is not a statutory provision, it is an accepted practice in Industrial Law. The Code of Conduct for Industrial Harmony (“Code of Conduct”) was recognized by virtue of Section 30(5A) of the Industrial Relations Act, 1967 where the Industrial Court in making its award may take into consideration the provisions in the Code of Conduct.
The Last In First Out (“LIFO”) principle is subject to two (2) limitations:-
(i) the rule operates only within the establishment in which the retrenchment is to be made i.e. the place at which the staff/ workmen are employed (and not the branches); and
(ii) the rule applies only to the category to which the retrenched workmen belong.
Retrenchment Benefits under the Employment (Termination and Lay-off Benefits) Regulations 1980
Employees who are covered under the Employment Act, 1955 (those who earn not more than RM2,000.00 every month) are statutorily entitled to termination/retrenchment benefits according to their length of employment in the company:-
| Length of Employment | Termination Benefits |
| Less than 2 years | 10 days wages for every year of employment |
| More than 2 years but less than 5 years | 15 days wages for every year of employment |
| More than 5 years | 20 days wages for every year of employment |
For employees who are not covered by the Employment Act, 1955, the termination benefits will be dictated by their contract of employment. If the contract of employment is silent, prima facie the employee is not entitled to any termination benefits. However, the company may consider providing some form of termination benefits to employees in a retrenchment exercise to avoid disputes/claims in the Industrial Court for wrongful dismissal.
Voluntary Separation Scheme (“VSS”)
Retrenchment can also be done by way of the company introducing a Voluntary Separation Scheme (“VSS”) to its employees, where the parties mutually agree to discontinue their employer-employee relationship with the payment of a compensation package.
This is different to the retrenchment exercise as stated above as the employee voluntarily participates in the VSS by accepting the termination benefits offered by the company.
Example of Termination letter pursuant to Voluntary Separation Scheme
Relevant Case Law
NG CHANG SENG V TECHNIP GEOPRODUCTION (M) SDN BHD & ANOR [2021] 1 MLJ 447
In this case, the employee (“claimant”) had served the company for about 13 years before being retrenched. On appeal by the claimant to the Court of Appeal (Putrajaya), the issues for consideration were:
(a) Whether the company had proved that the claimant had became redundant in the company in the retrenchment;
(b) Whether the company had followed the LIFO principle or had valid reasons to depart from it in the retrenchment;
(c) Whether the company had preferred to retain foreign workmen in preference to local workmen in the retrenchment;
(d) Whether the company had preferred to retain contract workmen in preference to permanent workmen in the retrenchment; and
(e) Whether the company’s retrenchment exercise where the claimant was selected for retrenchment was done in bad faith.
The Court of Appeal allowed the appeal, setting aside the decision of High Court and affirming the award of the Industrial Court and held that:-
(1) The burden of proof is on the company to show that the termination on ground of retrenchment arising out of redundancy was for a just cause or excuse or that it was not done mala fide.
(2) In proving so, the company must comply with certain established principles in retrenchment in showing that there is redundancy and that the LIFO principle has been followed.
(3) The finding of fact of the Industrial Court was that the company had not proved that the claimant had been rendered redundant and could not be re-assigned to any other projects or works.
(4) The company had not discharged its burden to prove that the claimant had been rightly selected to be retrenched as compared to the 11 foreign workers and five locals holding a similar position and presumably skill sets and competencies as the claimant.
(5) The company had not led any evidence to show that the 11 foreign workers and 5 local workers holding similar position like that claimant had longer terms of service with the company.
(6) The LIFO principle provides that if the retrenchment exercise is necessary the company must retrench the staff starting with those who are foreign workers.
(7) The company must phase out permanent staff in a proper manner either by offering a mutual or voluntary scheme that is rewarding enough or that the work of the permanent staff has become redundant.
(8) The Court of Appeal agreed with Industrial Court that the company had not shown that it was justified not to follow the LIFO principle and arrived to the conclusion that the company had not terminated the claimant for a just cause and excuse on account of a valid redundancy.
Conclusion
While the company has a right to reorganize/downsize its workforce in order to sail through this tough time, such right cannot be used as a method to get rid of staff/employee who are deemed by the company to have performed poorly. The company must ensure that such retrenchment was made bona fide and in accordance with the legal principles set out above.