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Understanding Retrenchment Laws and Guidelines for Employers

Learn about retrenchment in employment law, guidelines for industrial harmony, steps for retrenchment, notice requirements, VSS, choosing who to retrench, benefits, and the Employment Act.

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Understanding Retrenchment Laws and Guidelines for Employers

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  1. EMPLOYMENT LAW WEEK 9: DISMISSAL

  2. LEARNING OUTCOME • The students will be able to;

  3. RETRENCHMENT • Retrenchment occurs when an employer terminate the services of one or more employees because there is no work available, or insufficient work for these persons in the organisations. • The reason for termination not due to quality of his work.

  4. Reasons for retrenchment

  5. The laws recognize the right of employers to retrench employers. • However, the employers are expected to take all possible measures to avoid retrenching workers. This is a social obligation than a legal one. • There is no legal requirement that an employer need to consult the employees affected by a retrenchment exercise.

  6. CODE OF CONDUCT FOR INDUSTRIAL HARMONY • Parliament has never passed a law on retrenchment. • However, a guideline which is known as Code of Conduct for Industrial Harmony was passed in 1975. • It lays down the principle that the retrenchment should be the last resort . It outlines steps to be taken when the employer becomes aware of a redundancy situation. Where the outline is not followed, the court will find that the retrenchment to be without just cause or excuse.

  7. The steps taken; • Take positive steps to avert or minimise reductions of workforce by the adoption of appropriate measures such as: • (a) Limitation on recruitment • (b) Restriction of overtime work • (c) Reduction in number of shifts or days worked a week • (e) Reduction in the number of hours of work • (f) Re-training and/or transfer to other department/work.

  8. STEPS TAKEN If retrenchment becomes necessary, despite having taken appropriate measures, the employer should take the following measures: • (i) Giving as early a warning, as practicable, to the workers concerned • (ii) Introducing schemes for voluntary retrenchment and retirement and for payment of redundancy and retirement benefits • (iii) Retiring workers who are beyond their normal retiring age • (iv) Assisting, in co-operation with the Ministry of Human Resources, the workers to find work outside the undertaking • (v) Spreading termination of employment over a longer period • (vi) Ensuring that no such announcement is made before the workers and their representatives or trade union has been informed.

  9. Notice of retrenchment • When employees’ services are terminated on the grounds of redundancy, they must be given appropriate notice. • The length of the notice must depend on the status of the employee. • Less than 2 years of service – 4 weeks • 2- 5 years – 6 weeks • Employees with more than 5 years’ service 8 weeks. • Sometimes, the employer can pay wages in lieu of notice.

  10. Voluntary Separation Scheme • Workers can be encouraged to leave voluntarily by offering them sufficient inducement – a monetary incentive. • VSS has the following characteristics; • An offer letter is issued to all employees inviting theme to apply the scheme. • Explanation are provided as tom why the VSS is necessary and the benefits each applicant will receive.

  11. C) The dateline or closing date for applications to be submitted is established. • d) A date for informing applicants whether they have chosen to join the scheme or not is set. • e) An advisory-counselling service for all employees to help them make decisions concerning their future is provided. • F) Any employer intending to implement a VSS must inform the nearest Office of the department of labour, at least one month before the exercise takes place.

  12. CHOOSING WHOM TO RETRENCH • 1. Foreigners out first. • Section 60N of the Employment Act; • “Where an employer is required to reduce his workforce by reason of redundancy necessitating the retrenchment of any number of employees, the employer shall not terminate the services of a local employee unless he has first terminated the services of all foreign employees employed by him in a capacity similar to that of the local employee.” • However, it does not include a foreign employee who is a permanent resident of Malaysia.

  13. 2) Last in, First out An employer must choose the most junior employees, i.e. The ones who have most recently joined the organisation, the more senior must be retained.

  14. RETRENCHMENT BENEFITS • Employees are entitled to termination benefits if they have completed one year of service with the employer. • According to the Employment Act, the amount of the benefit depends upon their length of service; • 0ne to two years’ service – 10 days’ wages for each year of service • More than two years, but less than five years- 15 days’ wages for each year of service • More than 5 years’ service - 20 days’ wages for each year of service

  15. The formula under the Employment Act; The annual earnings in the previous 12 months should be divided by 365 to arrive at a day’s wages. This amount is then multiplied by the appropriate figure. The termination benefit provided by the Employment Act is a minimum benefit.

  16. THE EMPLOYEE IS NOT COVERED BY THE EMPLOYMENT ACT If an employee is not within the scope of EA, he is only entitled to a retrenchment benefit if his contract of employment includes a clause to this effect. The amount is at the discretion of the employer. There have been decisions by the Industrial Court that the employer should pay a reasonable benefit to a retrenched employee.

  17. Doctrine of estoppel • Acceptance of retrenchment benefits does not operate as estoppel to bar him from raising further claim. • Having accepted the payment and signed the acceptance letter, they are still free to make a claim against the employer.

  18. INDUSTRIAL COURT DECISION • When dealing with a termination on the grounds of redundancy, the Court will want evidence that a genuine redundancy situation existed. It is not enough for a company and assert that there was a problem of surplus labour, he must provide proof. • If not, the court will declare the retrenchment to be without just cause or excuse.

  19. PRIORITY OF RE-ENGAGEMENT • According to the Code of Conduct, the retrenched employees should be give the priority of engagement by the employer when he engages workers in the future even though the employees had not applied for the said post.

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