Introduction
It is trite law that employers have the right to organise their business and operations as they see fit.[1] In that process, employers may realise that there is a surplus of labour and consequently a need for a retrenchment exercise.
Provided that there is a genuine surplus and the due process is followed, an employee can be lawfully retrenched.
However, in some cases, employers misuse “retrenchment” as an excuse to dismiss employees, when there was no genuine surplus or redundancy. In these circumstances, the retrenchment would be deemed not bona fide, and wrongful. Some employers are even on the mistaken belief that by merely paying employees their salary in lieu of notice is, by itself, sufficient in a retrenchment exercise.[2]
This article discusses what is retrenchment and the 5 signs to look out for as to whether a retrenchment is genuine or just a wrongful dismissal in disguise.
What is Retrenchment
As mentioned earlier, retrenchment refers to the termination of employees due to a surplus of labour, commonly known as redundancy.
In Bridgecon Engineering Sdn. Bhd. v. Toh Yuan Kait [2000] 3 ILR 512, the Industrial Court adopted the definition of redundancy from Dunston Ayadurai’s book “Industrial Relations in Malaysia”, which states:
Redundancy refers to a surplus of labour and is normally the result of a reorganisation of the business of an employer; and its usual consequence is retrenchment, ie the termination by the employer of those employees found to be surplus to his requirements after the reorganisation. Thus, there must first be redundancy or surplus of labour before there can be retrenchment or termination of the surplus.
Given this definition, employers are reminded that the burden of proof lies with them to show that a retrenchment exercise is genuine by establishing actual redundancy[3].
This may include situations where the entire business has shut down, a particular branch is being shut while others remain operational, or that the specific role or function performed by the employee is no longer required[4].
5 Signs Your Retrenchment is a Wrongful Dismissal in Disguise
In some cases, what is presented as a retrenchment may actually be a disguised wrongful dismissal — here are 5 signs to look out for that may indicate your retrenchment is not genuine.
- You Hold an Important Post in the Company
In Chan Seng Wah v. Securicor (M) Sdn Bhd / Safeguards Securicor Sdn Bhd [2007] 2 ILR 157, the Claimant was the Company’s Head of Business Development and was retrenched following a merger exercise. The Industrial Court held that the Company had failed to establish the Claimant’s job functions were redundant. It was further observed that the Claimant held a key and important portfolio within the business, and that the Company’s business profile significantly deteriorated following his departure.
Therefore, unless there are strong and genuine business reasons, it is highly unlikely that a role occupied by a key employee, especially one central to the company’s core operations, would suddenly become redundant.
- Your Role Still Exists or Was Quickly Refilled
In Limton Parts Manufacturer Sdn Bhd v. Chandramalar Nagarajah [2001] 1 ILR 798, the Industrial Court held that the Company had acted in bad faith by retrenching the Claimant under the guise of redundancy, as there was simply no redundancy. The reality was that the Claimant’s position remained in existence after her termination and was filled by another employee barely 3 months later.
It is very obvious that a retrenchment is carried out in bad faith when your position still exists and is filled by someone else shortly after you are “retrenched”. That said, it is worth noting that in some cases, even if the position technically still exists, a redundancy may still arise if the role has been absorbed by existing staff as part of a bona fide restructuring exercise.
- You Were Retrenched as a Local, But Foreign Workers Stayed
Generally, employers are expected to conduct retrenchment exercises in good faith and the 2 key principles that guide this process is the “Last-In First-Out” and the “Foreign Workers, First Out” principle when selecting employees for retrenchment.
Although these principles are not rigid and can be departed[5], employers must provide valid reasons for doing so. If you, as a local employee, were retrenched while foreign workers in the same role were retained, this could be a sign that your retrenchment was not genuine or carried out in good faith.
Additionally, these principles are in line with the Code of Conduct for Industrial Harmony (“Code”), which contain guidelines for employers to follow when carrying out retrenchments.
Whilst the Code is not legally binding, employers are still expected to refer to it and its provisions can be considered by the Industrial Court to assess whether a retrenchment was carried out fairly and in good faith[6].
- You Were the Only Employee Retrenched / You Were Targeted
While it is legally possible for an employer to retrench only one employee, an employer must be able to prove that the retrenchment was necessary and genuine. As mentioned earlier, retrenchment is meant to address surplus of labour and is typically carried out as a broader exercise rather than targeting a single individual.
In Penas Food & Beverages Sdn Bhd v. Magimay Doss AS Doss [2004] 2 ILR 873, the Industrial Court held that the Claimant’s termination was not part of a genuine retrenchment exercise as he had been singled out for termination and the Company’s reliance on the Claimant’s alleged poor performance suggested that the Claimant’s termination was motivated by other reasons than reorganisation.
- You Were Retrenched but the Company is Still Hiring
Usually, companies resort to retrenchment when faced with financial constraints making the exercise necessary and unavoidable.
However, if employees are being retrenched and the company continues to hire new staff (indicating no apparent cash flow issues), this will raise doubts over the legitimacy of the retrenchment exercise.
The onus is on the employer to demonstrate that the affected employees’ position and responsibilities were made redundant to justify the retrenchment.
This is precisely what transpired in Suhaila Talib v. Pearl Discovery Development Sdn Bhd [2024] ILRU 1188, where the Company claimed to be facing financial and cash flow constraints, yet continued to hire new employees after the Claimant was terminated. The Industrial Court held that the purported retrenchment exercise by the Company was not made bona fide and was without proper procedure because the Company should have explored alternative cost cutting measures such as reduction of working hours, salaries and benefits before terminating the Claimant. As such, the Claimant was found to have been dismissed without just cause or excuse.
Conclusion
Retrenchment is a delicate and serious exercise that carries significant legal implications.
Employers intending to carry out a retrenchment exercise should do so transparently and with careful planning by following established legal principles especially those outlined in the Code. Compliance with procedural requirements is also essential, including the submission of the PK form to Jabatan Tenaga Kerja, proper notice to the affected employees and the payment of termination benefits, if applicable.
Employers who do not act in good faith and observe procedural fairness in a retrenchment exercise risk facing legal consequences, as aggrieved employees may file a claim in the Labour Court for statutory entitlements such as unpaid termination benefits or salary in lieu of notice and separately pursue a claim in the Industrial Court for unfair dismissal, seeking backwages and compensation in lieu of reinstatement.
PS: Should you require any advice or assistance relating to the above, please feel free to contact us.
This article is written with the assistance of our able pupil-in-chambers, Ms Amelia Lo.
[1] William Jacks & Co. (M) Sdn. Bhd. v. S Balasingam [1997] 3 CLJ 235
[2] Suhaila Talib v. Pearl Discovery Development Sdn Bhd [2024] ILRU 1188
[3] Bayer (M) Sdn Bhd v. Ng Hong Pau [1999] 1 MELR 7
[4] Ashgar Ali and Farheen Baig, Retrenchment: The Law and Practice in Malaysia (2nd Edn, Sweet & Maxwell Asia
2020) 63.
[5] Ganda Oil Industries Sdn Bhd v. Mohana Naidee [1984] 1 ILR 5
[6] Section 30(5) Industrial Relations Act 1967