Businesses frequently need to adjust to changing market demands, technology breakthroughs and organisational restructuring in a fast-changing global economy. Terminations on ground of redundancy are among the most significant, yet challenging, measures that employers can take in reaction to these developments. Whilst redundancy is a legitimate means of business realignment, it also touches on complex legal, ethical, and social issues. The law surrounding redundancy aims to strike a balance between the employer's right to manage their business efficiently and the employee's right to fair treatment and job security.
Understanding the legal framework governing redundancy is crucial for both employers, who must navigate the process carefully to avoid unfair dismissal claims, and employees, who need to be aware of their rights in such situations. This article explores the legal principles, and case law that shape the modern landscape of redundancy, offering insights into the responsibilities of employers and the protections afforded to employees under the law.
(A) Meaning of retrenchment
In William Jacks & Co (M) Sdn Bhd v. S Balasingam[1], the Court of Appeal explained the term 'retrenchment' and enunciated as follows:
‘Retrenchment means: "the discharge of surplus labour or staff by the employer for any reason whatsoever otherwise than as a punishment inflicted by way of disciplinary action" (per SK Das J in Hariprasad v. Divelkar AIR [1957] SC 121 at p 132).’
The recent judgment of the Industrial Court in Tam Shen May v. Taylor’s University Sdn Bhd[2] expounded on the distinction between the redundancy of a specific position held by an employee and redundancy due to a surplus of manpower. It was explained that when an employer contends that a specific position is no longer required or has ceased to exist in the company, the employer must prove that not only has the position ceased to exist, but also that the associated functions, duties and responsibilities had ceased to exist.
Nevertheless, in relation to redundancy due to a surplus of manpower, it is unreasonable to require the employer to prove that the functions, duties and responsibilities of the position held by the retrenched employee have ceased to exist altogether, in order to justify his retrenchment.
(B) Test: bona fide redundancy which constitutes just cause and excuse for dismissal
It is well-settled that an employer is entitled to organise his business in the manner he considers best[3]. In this regard, the test is two-fold, i.e. whether there was an actual and bona fide redundancy and if so, whether the proved redundancy constitutes just cause or excuse for dismissal under the circumstances.
As regards burden of proof, it is trite that the burden lies on the employer to prove redundancy. In Bayer (M) Sdn Bhd v. Ng Hong Pay[4], the Court of Appeal states as follows:
‘On redundancy it cannot be gainsaid that the appellant must come to the court with concrete proof. The burden is on the appellant to prove actual redundancy on which the dismissal was grounded. (See Chapman & Others v. Goonvean & Rostawvack China Clay Co Ltd [1983] 2 All ER). It is our view that merely to show evidence of a re-organization in the appellant is certainly not sufficient.’
As for the standard of proof, it is on a balance of probabilities, as was held by the Court of Appeal in Telekom Malaysia Kawasan Utara v. Krishnan Kutty Sanguni Nair & Anor[5].
In other words, the Court is duty bound to inquire whether the company has, on the balance of probabilities, provided concrete proof to show actual and bona fide redundancy.
(C) Financial loss is not a prerequisite
It has been established that it is not a requisite condition for a company to undergo financial losses before undergoing a reorganisation or retrenchment. In this context, reference is made to the judgment of the Industrial Court in Mohamad Sahrul Kahulan & Ors v. Lourdes Medical Services Sdn Bhd[6], where it was held:-
‘A scrutiny of the Financial/Profit and Loss statement produced by the company showing significant drop in the revenue of the company cannot be taken as acceptable ground for the retrenchment of the claimant.
...
It does not mean that the moment there is some reduction in the revenue of any company/companies, the company must quickly and immediately retrench its employees. There are many significant and meaningful ways in which a company can initiate financial austerity measures whenever the company experiences some business downturn and revenue dip without resorting to retrenching its employees as an immediate and first step in costs cutting measures.’
In other words, although it is not mandatory for a company to suffer financial losses before it can retrench its employees, the company should still initiate financial austerity measures without immediately resorting to retrenchment.
The recent judgment of the Industrial Court in Tam Shen May (supra) shed some light on the importance to adduce complete set of profit and loss accounts. In the case, the reasons relied on by the company in terminating the services of the claimants was to achieve cost efficiency. To support this, the company submitted that based the company's audited financial statements, the financial performance of the company had been deteriorating since 2014. The net sales revenue each year was generally stagnant whilst the cost incurred was increasing over the years. This caused the profit made by the company to decrease over the years.
The Industrial Court in Tam Shen May (supra) called in aid the case of Mat Desa Saad & Anor v. Langkawi Ferry Services Sdn Bhd[7], in holding that as the company had only produced the summary of the profit and loss account but failed to produce the full set of the accounts, the Court was deprived of the opportunity to assess what was the true financial position of the company. The Court proceeded to draw an adverse inference against the company under s. 114(g) of the Evidence Act 1950 upon its failure to produce the full set of the profit and loss accounts.
(D) Selection criteria
At the outset, it is pertinent to note that the Court of Appeal in Ng Chang Seng v. Technip Geoproduction (M) Sdn Bhd & Anor[8] has enunciated that the Code of Conduct for Industrial Harmony is a set of guidelines and principles for the employers and employers to follow on the practice of industrial relation. It was held that the aforesaid Code of Conduct serves as a benchmark by which a company's actions can be evaluated to determine if the retrenchment process was completed bona fide and whether all reasonable efforts were taken to explore alternatives prior to the termination due to retrenchment.
In Tam Shen May (supra), it was held that the Code of Conduct, despite not being the statute law, still retains some legal sanction as a document that this court should have regard to when making its award as stipulated in s. 30(5A) of the Industrial Relations Act 1967 as follows:
“(5A) In making its award, the court may take into consideration any agreement or code relating to employment practices between organizations representative of employers and workmen respectively where such agreement or code has been approved by the Minister.”
This means that whilst no penalty can be imposed on the employers for their failure to follow its provisions, a retrenchment is only justified if it is made in accordance with the accepted industrial relation standards, practices and procedures[9].
Clause 22(b) of the Code provides:-
‘The employers should select employees to be retrenched in accordance with an objective criteria. Such criteria, which should have been worked out in advance with the employees' representatives or trade union 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.’
Insofar as the length of service is concerned, the common practice adopted and applied in redundancy exercises is the principle of 'Last In, First Out' (LIFO). In the context of retrenchment, LIFO simply means that employees who were hired last would be the first to be let go.
In Tam Shen May (supra), it is the company's stand that LIFO principle is not applicable to the termination of the claimants. The decision to terminate the claimants were taken due to the consideration that their termination will result in a huge cost saving because of the high salary of both of the claimants. Based on this reason, the Court held that the company failed to give sound and valid reasons for it to depart from the LIFO principle.
The Court further noted that retrenchment based solely on high salary is unfair and discriminatory or biased against more experienced employees who have worked longer for the employer. The claimants had worked for the company for 7.85 years and 8.84 years respectively before being retrenched by the company due to their high salary. As such, the company's decision to target the claimants for retrenchment based on their higher salaries lacked good faith, improper and unfair.
(E) Conclusion
The case law above collectively highlights the intricacies of redundancy law and the balance between business needs and employee rights. Undoubtedly, these cases underscore that while employers retain the right to restructure their businesses, they must ensure that redundancies are bona fide, transparent, and in line with fair industrial relations practices. Failure to do so can result in findings of unfair dismissal and significant legal repercussions.
[1] [1997] 3 CLJ 235
[2] [2024] 3 ILR 71
[3] East Asiatic Company (M) Bhd v. Valen Noel Yap [1987] 1 ILR 363a
[4] [1999] 4 CLJ 155
[5] [2002] 3 CLJ 314
[6] [2021] ILRU 1295
[7] [2009] 1 ILR 15
[8] [2021] 1 CLJ 365
[9] Looi Tuck Keong v. New-Ell Stationery Products (M) Sdn Bhd [2010] ILRU 1527
Authored by Tan Zu Hao
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