Retrenchment is basically the termination of a contract of service for reasons of redundancy. The industrial court confined the usage of the term “retrenchment” to mean a discharge of surplus labour and established tht the term does not include termination of contract of employment arising from other causes. It is for the mangement to decide the strenght of the workforce which h is considers necssary for efficiency in its undertaking and for the purpose of economic viability or profitability as employers are not charitable institutions. When the mangement decides that the workmen are surplus (redundant), the employer is entitled to discharge the excess.
Nevertheless, there are certain important procedures/ principles tht need to be observed by employers in retrenching redundant employees aprat from the fact that there should be valid reasons for redundancy, and retrenchment must be conducted fairly and untainted by any unfair labour practice. The court will not intervene unless it is hsown that the decision was capricious or without reason, mala fide or actuated by victimisation. These principles are important in ensuring that propoer retrenchment has been carried out, thus protecting the employees from wrongful retrenchment.
It is well settled in industrial law that the employer should comply with the Code of Conduct of Industrial Harmony 1975 if retrenchment becomes necessary. The code under clauses 20 to 24 enshrines certain principles to adhere to when implementing a retrenchment exercise. These principles have received recognition by the industrial court ever since and as such have generally been accepted as good industrial relations practice in undertaking a retrenchment exercise.
Clause 20 of the code provides that in circumstances where redundancy is likely, an employer should, in consultation with his employees’ representatives or their trade union, as appropriate, and in consultation with Human Resource Ministry, take positive steps to avert or minimise reduction in the workplace by the adoption of appropriate measure such as:
• Limitation on recruitment;
• Restriction of overtime work;
• Restriction of work on weekly day of rest;
• Reduction in number of shifts or days worked a week;
• Reduction in the number of hours of work; and
• Retraining and/or transfer to other department/work.
Austerity drive or cost-cutting measures should also be taken to help the company sail through the business downturn. The recommended cost-cutting measures are as follows:
• Reduce non-essential expenses such as entertainment, sports and recreation and donation;
• Restrict overseas training and travel expenses;
• Prudent use of electricity and water, company’s materials and equipment;
• Request supplier to further cost down in material/ equipment supplied or services rendered;
• Use recycle paper in photocopying;
• Consensus withdrawal of benefits such as company’s car, handphone, pager, etc.; and
• Consensus reduction in salary or allowance.
Clause 21 of the code provides that the ultimate responsibility for deciding on the size of the workforce must rest with the employer but before any decision on reduction is taken, there should be consultation with the workers or their trade union representatives.
The employer has the right to determine the volume of his staff is consistent with his business was held by the industrial court in the case of Cycle & Carriage Bintang Bhd versus Cheah Hian Lim, Award No: 342 of 1992 in  2ILR, p400-404.
Layoff means the failure to provide paid work under the contract of service. Layoff is an alternative to retrenchment and it should be referred to in light of retrenchment. The employer practicing layoff is necessary for industrial harmony. If the employer is moving towards a retrenchment, he is required to practice layoff first and if he is unable to continue layoff, only then to retrench the affected employees.
The code, under clause 22(a), suggests that if retrenchment becomes necessary, despite having taken appropriate measures, the employer should take the following measures:
• Give as early a warning, as necessary, to the works concerned;
• Introduce schemes for voluntary retrenchment and retirement, and for payment of redundancy and retirement benefits;
• Retire works who are beyond their normal retiring age;
• Assist, in co-operation with the Human Resource Ministry, the works to find work outside the undertaking;
• Spread termination of employment over a longer period; and
• Ensure that no such announcement is made before the works and their representatives or trade union have been informed.
As far as selecting the employees for retrenchment, the code under clause 22 (b) suggests that the employer should adopt an objective criterion. Such criterion, which should have been worked out in advance with the employees’ representatives or trade union, as appropriate, may include:
• Need for the efficient operation of the establishment or undertaking;
• Ability, experience, skill and occupational qualifications of individual workers required by the establishment or undertaking under the above;
• Consideration for length of service and status (non-citizen, casual, temporary, permanent);
• Family situation; and
• Such other criteria as may be formulated in the context of national policies.
In National Union of Cinema & Places of Amusement Workers versus Shaw Computer & Management Services Sdn Bhd (Award No: 22 of 1975), the industrial court observed: “ Where it is necessary for some employees to be discharged because of redundancy, the Court will ordinarily require the employer to show how, whom, and on what basis that selection was made. The burden of proof is on the employer and he must discharge it to the satisfaction of the Court”.
The industrial court had emphasized the status of an employee to be taken into consideration when selecting employees to be retrenched. In the case of Seong Thye Plantations Sdn Bhd versus All Malayan Estates Staff Union (Award No 124 of 1981), the industrial court held that: “…the Estate is legally bound to observe the Code of Conduct for Industrial Harmony. That being so, the Estate is obliged to take into consideration the status of the employees when it selects employees to be retrenched and the order of selection is non-citizen, casual, temporary and permanent”.
The Employment Act 1955 (EA) under Section 60N: Termination of employment by reason of redundancy amended in August 1, 1998, stipulated: 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 all foreign employees employed by him in a capacity similar to that of the local employee.
The basic principle of “ last in, first out” (LIFO) is an accepted industrial practice in selecting employees for retrenchment. However, it is not a rigid principle, and a departure from the principle must have sound and valid reasons. The onus of justifying a departure from the LIFO is cast upon the employer.
Retrenchment does not mean that the employer is barred from recruiting more workers. The employer’s business may change for the better in due course and circumstances may arise where further recruitment of workers may be essential for increasing the profitability of the business. The code suggests, under clause 23, that employees who are retrenched should be given priority of engagement/ re-engagement as far as possible when the employer engages workers.
Clause 24 of the code suggests that the appropriate measures and objective criteria should comprise part of the establishment or undertaking’s employment policy. Apart from complying with the above, employers are also bound by the statutory provision (Section 12 (3) of the EA) in dealing with notice requirement in circumstances leading to retrenchment of workers. All employers are required to comply with this provision notwithstanding anything to the contrary that may be contained in the employee’s employment contract (unless of course the contractual termination clause is more favourable than that stipulated in the EA).
Failure to give the required statutory notice to those employees who are covered by the EA will render the employer liable for prosecution under Section 99A, and on conviction, the employee may subject to a fine of not more than RM10,000.
Employers are also required to submit a report of the impending retrenchment exercise to the nearest Labout Department vide the prescribed Form PK 1/98 at least one month before each retrenchment is carried out. The purpose of the retrenchment report is to furnish all the relevant information pertaining to the proposed retrenchment exercise.
In cases where redundancy has been justified and the redundant workers are retrenched, the law preserves the right of the employees to receive retrenchment benefits. The statutory retrenchment benefit is provided for in the Employment (Termination and Layoff Benefits) Regulations 1980, a subsidiary legislation enacted under Section 62J if the EA, or else the provision on the benefits may be provided for in the collective agreement between employer and the employees’ union.
The provision of retrenchment benefits serves as a cushion against the hardship faced by an employee who bas to contend with the loss of his employment and the consequential loss of his immediate means to earn an income to support his family’s basic needs.
It is trite law that even if the company is able to satisfy the court that a redundancy situation had risen which led to the retrenchment of the workmen, the onus still lies on the company to show that the consequent retrenchment exercise complied with accepted norms or procedures of good industrial relations practices. The importance to observe the code was emphasized by the federal court in the case of Said Dharmalingam Abullah versus Malayan Breweries (Malaysia) Sdn Bhd (1997) 1 CLJ 646.