November 30, 2022

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Case Update: Justifying a retrenchment and departure from LIFO

In this Case Update series, I share summaries of recent Malaysian court decisions to explore the current approach taken by the courts when deciding on employment-related issues. You can find all the posts in the series by clicking here, including case updates on other legal areas by TheMalaysianLawyer co-founder Lee Shih.

Malaysian courts recognise an employer’s right to organise his business in the way he thinks is best, provided that this right is exercised in good faith. The law gives an employer the right to decide on the number of employees his business employs based on business needs and efficiency. When it comes to retrenchments, the courts will be slow to intervene with an employer’s decision to retrench employees, unless there is evidence that the employer acted without proper reason, or otherwise acted in bad faith.

Employees who have been retrenched commonly challenge the legality of the termination on two points: (1) There was no genuine redundancy or other reason to carry out a retrenchment exercise. (2) Where there was a genuine need for a retrenchment, the selection criteria used by the employer in deciding which employees to dismiss was unfair.

Therefore, even though employers generally have the right to decide on their workforce numbers, any decision to retrench employees must be carefully considered and implemented. The recent Industrial Court award in Wong CP & 3 Others v. Taylor’s University Sdn Bhd (Award No. 342 of 2022) is worth considering as a reminder of the issues the Industrial Court will take into consideration where employees challenge the fairness of a retrenchment.

BRIEF FACTS

The Taylor’s University case involved four employees who were retrenched by the Company: Wong CP (“Claimant 1”), Low CK (“Claimant 2”), Loh PS (“Claimant 3”), and Geraldine RVR (“Claimant 4”). All four Claimants separately claimed that the Company’s decision to retrench them was male fide (in bad faith), and that their dismissals were without just cause or excuse. The Industrial Court consolidated the cases and heard them together.

THE THREE QUESTIONS THE COURT ASKED

In deciding the fairness of the Company’s retrenchment of the Claimants, the Court asked three crucial questions:

  1. Whether there was a genuine need for the reorganisation exercise.
  2. Whether a genuine redundancy situation had arisen which led to the retrenchment of the Claimants.
  3. Whether the Company had complied with the accepted standards and procedure when selecting and retrenching the Claimants.

All of the Claimants contended that their job functions and duties continued to exist when and after they were dismissed, and were taken over by other employees. The Court restated the established legal position from Stephen Bong v. FCB (M) Sdn. Bhd. [1999] 3 MLJ 411: “It is not the law that redundancy means the job or work no longer exists. Redundancy situations arise where the business requires fewer employees of whatever kind.”

The burden of proof was on the Company to prove (on a balance of probabilities) that the decision to reorganise and the subsequent redundancy of the Claimants were bona fide, and that the dismissal was with just cause or excuse.

JUSTIFICATION FOR REORGANISATION

The Claimants asserted that the Company was not in any process of cutting costs because there was no reduction of salaries, and the Company still gave out bonuses following the retrenchment. The Claimants also contended that the Company was not in financial difficulties, and had been making healthy profits.

The Company asserted that it had been experiencing a decrease in operating margin for several years, and had to restructure its business and manpower to boost profit efficiency. The Company decided to implement a Manpower Cost Rationalisation exercise and move towards digital automation to increase operational effectiveness. As part of this, the Company decided to restructure manpower in various departments, and merge departments, jobs and functions to reduce cost and ensure financial sustainability. Pursuant to this Manpower Cost Rationalisation exercise, the Company decided that that the job functions of 66 employees including the Claimants had become redundant or surplus to requirements.

The Court found that after a plunge in operating margin in 2016, the Company implemented a voluntary separation scheme in 2017 to reduce staff cost, and that there was no major upturn in the operating margin since then, with several faculties making losses. The Company gave evidence to show it had been going through financial difficulties for several years, and the Claimants did not raise any evidence to the contrary or attempt to rebut the Company’s evidence. The Court concluded that in view of the continued deterioration of profits and business slowdown, the Company’s decision to carry out the Manpower Cost Rationalisation exercise was “a sensible decision” and “the Company had genuine business reason to restructure its organisation”. The Court said that the Company’s retrenchment exercise “arose from a cogent financial consideration and there was no evidence that the Company had acted in bad faith”.

In response to the Claimants’ complaint that bonuses continued to be paid that year, the Court accepted the Company’s explanation that the continued payment of bonuses was to motivate the remaining employees and ensure that they did not leave the Company, and said that this was a valid reason for the payments. The Court said that even though a retrenchment exercise was being implemented, the Company still had ongoing operations and had the responsibility to continue to look into the best interests of the remaining employees.

WHETHER EACH CLAIMANT WAS REDUNDANT, AND THE COMPANY NOT USING “LAST IN FIRST OUT” (LIFO)

All of the Claimants also asserted that the Company had not followed the LIFO principle, as the existing employees who were retained and asked to manage their job functions and duties after their termination had worked in the relevant department for a shorter period.

Claimant 1: The Company asserted that Claimant 1’s job functions were taken over by her superior who had significantly different and upskilled job responsibilities compared to Claimant 1, and that Claimant 1’s role did not exist in the Company’s new organisation structure. The Company also asserted that Claimant 1’s remaining duties were efficiently redistributed for better operational efficiency. The Court agreed with the Company that the merging of the two departments was justified, and Claimant 1 did not dispute the rationale for the consolidation. The Court found that the consolidation was “a valid and viable business decision” and that as a result Claimant 1’s role had become redundant. Claimant 1 did not dispute that her responsibilities were taken on by her superior after her termination, and did not dispute that her superior had the required experience, qualifications, and skills to lead the newly-consolidated department, and significantly different and unskilled job responsibilities compared to Claimant 1. The Court said LIFO did not apply to Claimant 1, as she was the only person occupying the relevant position, so there was no other person in the same category, and as such she was not retrenched over someone else in the same category.

Claimant 2: For Claimant 2, the Company contended that it decided to consolidate three existing sub-departments, and therefore only one out of the existing three leaders was required. Claimant 2 and the other two leaders were evaluated according to a selection matrix based on job grade, length of service, performance ratings, academic qualifications and skills sets required to determine which employees would be retained in the newly consolidated sub- department. The Company contended that Claimant 2 scored the lowest based on the selection matrix. Claimant 2 did not dispute that only one of the existing three leaders was required, or challenge any of the Company’s evidence. The Court concluded that when deciding which leader to retain, it was “obvious for the Company to choose the employee who scored the highest” based on the selection matrix.

Claimant 3: For Claimant 3, the Company asserted that there was a move towards digital automation and information technology, and that it was crucial for employees in this department to be able to use new technology to effectively engage with customers. Prior to the restructuring, there were 11 employees including Claimant 3 in the department, and the restructuring required specific technology skill sets. The Company determined that 7 out of the 11 existing employees would be put through a selection matrix which incorporated numerous elements such as job grade, length of service, performance ratings, academic qualifications and skill set matching to determine which employees had the required competence. Through this selection process, the 4 lowest-scoring employees were selected for retrenchment, including Claimant 3. The Court found that it was reasonable for the Company to take the opportunity to transform and update its business systems, and that it was obvious that the Company would require employees that “possess the specific and requisite skill set in order to use the technology systems” with the department’s focus on digitalisation. The Court said that it was “viable and fair for the Company to hire new employees with the required background to suit its new need and to remove existing employees without the required skills and are not fit for the future of digitalisation of the department”. Claimant 3 did not dispute any of the Company’s evidence, and the Company’s decision to terminate Claimant 3 based on the selection matrix scores was justified.

Claimant 4: For Claimant 4, the Company contended that it was necessary to reduce staff members in the team from three to two, and that Claimant 4 was identified as redundant as the nature of her position was purely administrative in nature, and to support the other team members. The Company explained that Claimant 4’s role was not as substantive as the other two, who performed managerial functions. The Court found that Claimant 4’s position was “clearly redundant” and that her duties could easily be absorbed by her Manager.

The Court also commented that LIFO was only one of the objective criteria in the Code of Conduct for Industrial Harmony, and did not have force of law. LIFO is not mandatory, and “merely serves as a guideline to help ensure that a retrenchment exercise is carried out fairly”. In this case, the Court found that the Company “adopted an independent selection matrix based on a point system and adopting such independent selection criteria/matrix instead of the LIFO principle is the Company’s right”. The Court further said that “the Company’s decision of adopting an independent selection matrix based on a point system instead of the LIFO principles validated the departure of LIFO”. Neither Claimant 2 nor Claimant 3 challenged the selection matrix adopted by the Company, and their selection was proven to have been done fairly with an objective assessment.

CODE OF CONDUCT FOR INDUSTRIAL HARMONY

The Claimants submitted that the Company did not abide by the Code of Conduct for Industrial Harmony, as the Company did not consult them or provide early warnings on the potential retrenchment, and did not make any effort into exploring the possibility of transfers, redesignations, or redeployments.

The Company stated that the need to consult and explain the decision to employees was not a legal requirement, particularly as the decision was necessary for the sustainability of the business. The Court said that there was “no obligation on an employer to consult or warn employees before embarking upon retrenchment” as long as the Company acts bona fide. The Court found that the Company had in fact acted beyond the contractual requirement of giving two months’ written notice, as it gave the Claimants three months’ notice, and therefore the Claimants’ contention that the Company did not provide sufficient notice was baseless.

The Company had offered Claimant 4 another position in the Company with no changes to salary and benefits, and Claimant 4 rejected the job offer and accepted an enhanced severance package to proceed with the retrenchment. The Court found that it was Claimant 4 who acted in bad faith in bringing an unfair dismissal claim against the Company, when she had voluntarily chosen the severance package over the alternative job offer.

In respect of Claimants 1, 2, and 3, the Company’s evidence that they were told that the Company would, upon request, assist them to find alternative positions in the Company was not challenged. These three Claimants did not provide any evidence that they were fit for any alternative positions in the Company, and the Court further said that the Company had no legal obligation to offer alternative employment to them.

ADVERTISING AND HIRING POST-RETRENCHMENT

Claimants 2 and 3 contended that, after their retrenchment, the Company had advertised vacancies for functions similar to their previous roles, and which they would have been able to fill.

For Claimant 2, the Company explained that although there was a need for a new position in the department, Claimant 2 was not eligible as it was a different job grade and scope, and Claimant 2 was not suitably experienced to hold the position. The Court found that Claimant 2 failed to provide any evidence that he was eligible for the position.

For Claimant 3, the Company contended that the position was advertised due to a resignation in the department after Claimant 3’s termination, and that employees who were appointed after Claimant 3’s termination were for different positions and grades, requiring different work experience from that possessed by Claimant 3.

The Company’s evidence that no new employee was recruited to take over the positions and functions of any of the Claimants post-retrenchment was not disputed by the Claimants, and the Claimants did not adduce any evidence to show they were suited to any of the positions advertised.

TAKEAWAYS

The employer in the Taylor’s University case was in a strong position. The Claimants disputing the retrenchment were only four out of a total of 66 employees who were involved in the reorganisation, mostly made bare assertions with weak or no evidence, and did not even attempt to rebut most of the Company’s evidence. However, there are still valuable takeaways for employers in observing how the Court assessed the validity of the retrenchment.

It is important that any planned workforce reductions are carefully considered in consultation with experts, and employers must ensure that they are able to provide evidence to justify the decision to carry out a retrenchment exercise. Employers must also be able to explain to the Court the criteria and process used to select which employees would be retrenched. Employers should also be cautious when advertising vacancies and hiring in the period leading up to and following the retrenchment, as this could potentially be used as evidence that redundancies were not genuine. The Court will always review the overall actions of the employer in assessing whether the retrenchment was genuine and implemented fairly, and in this case the fact that the Company gave more notice than required, offered to assist to find alternative positions for some of the affected employees, and paid generous severance packages even though the Claimants were not entitled to any retrenchment benefits would have helped.

Check out our standalone Guide to Malaysian Employment Law. You can find all our previous posts on retrenchments by clicking on the tag here. Some of my earlier articles have also been very popular and should prove useful:

  1. Case Update: Another company’s retrenchment of employees due to COVID-19/MCO deemed unfair by Industrial Court
  2. Case Update: Industrial Court finds retrenchment due to effects of COVID-19/MCO was unfair
  3. Case Update: Court of Appeal sets out key legal principles for retrenchments
  4. Retrenchments in Malaysia — some recent cases
  5. Case Update: Insufficient justification and improper handling of Voluntary Separation Scheme may give rise to unfair dismissal
  6. Case Update: Relevant issues when an employer uses financial difficulties as a reason for retrenchment
  7. What you need to know about the law on retrenchment of employees

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