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UNDERSTANDING EMPLOYMENT REDUNDANCY – A GUIDE FOR EMPLOYERS

Redundancy - Meaning

In business, redundancy is referred to as a surplus of labour from the result of reorganisation in any manner, for the purpose of economy or convenience or if there is a reduction, diminution or cessation of the type of work the employee is performing.

In the case of WOO VAIN CHAN v. MALAYAWATA STEEL BHD [2016] 10 CLJ 176, the Court of Appeal defined redundancy as follows:

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 be redundancy or surplus of labour before there can be retrenchment or termination of the surplus.

Another essential feature that needed to be considered in determining whether redundancy existed in an organisation, would be to see whether "the work continues to exist or whether the work although continuing to exist requires fewer employees to carry it out. The restructuring or reorganisation that is carried out must result in redundancy, that is, it must result in a situation of cessation of work carried out by the employee(s) or a surplus of employees to carry out the particular job function.

It is settled law that an employer is entitled to discharge the services of employees which become excess after a reorganisation. (see: SAW KONG BENG v. MAHKAMAH PERUSAHAAN MALAYSIA & ANOR [2016] 8 CLJ 891). The common principle that runs through the authorities is that although it is the employer's power and prerogative to retrench, the exercise of the said right must be done bona fide. It is equally clear that the burden is cast upon the employer to prove that retrenchment from redundancy must be due to a surplus of labour.

Under Common Law, 'redundancy'is defined as:

  1. the fact that the employer has ceased, or intends to cease, to carry on the business for the purposes for which the employees was employed by him; or

  2. the fact that he has ceased, or intends to cease, to carry on that business in the place where the employee was so employed; or

  3. the fact that the requirements of the business for employees to carry out work of a particular kind, or for employees to carry out work of a particular kind in the place where the dismissed employee was so employed, have ceased or diminished or are expected to cease or diminish.

Redundancy of Employment

Employerscarry the burden to prove on a balance of probabilities that the case for redundancy was made out so as to justify any dismissal or termination of their employees. Otherwise, it would tantamount to unfair dismissal, thereby rendering the dismissal or termination to be an unfair labour practice, invalid and without lawful excuse.(see: WOO VAIN CHAN v MALAYAWATA STEEL BHD [supra]).

If an employer fails to establish that the principal reason for dismissal was redundancy, the dismissal or termination will likely be considered unfair under the law and the employee may be able to initiate a claim against the employer at the Industrial Court for unfair dismissal.

It should be noted that even if there was in fact redundancy, the employer must implement a fair and reasonable selection process.

Common Factors for Redundancy

There are numerous situations where employees might become redundant and these situations normally do not reflect their ability or performance. The list of circumstances that could cause redundancy is not exhaustive but some of the common factors for redundancy are:

  1. Closure of employer’s business or division;

  2. Loss of income or reduced profit;

  3. Relocation of employer’s place of business;

  4. Cost-cutting measures by the employer;

  5. Re-organisation of employer’s business;

  6. Changes in policy;

  7. Reduction in work/requirements for employees.

Test on Genuineness of Redundancy

Among others, in determining whether the termination or dismissal on the grounds of redundancy is fair and reasonable, the court delve into inter-alia:

  1. Whether there was a genuine redundancy made out by the employer;

  2. Whether the employer had complied with the rule of 'last in, first out' (LIFO).

  3. Whether the selection process was fair and reasonable and:

    1. Whether the employer consulted the employee beforehand; and

      Whether the employer made reasonable efforts to resort to alternative measures (i.e. transfer, reduction of salary, unpaid leave or temporary lay-off) before termination or dismissal.

  4. Whether a reasonable termination benefit or compensation is given to the employee.

It is the duty of the Industrial Court to closely scrutinize the reason given by an employer in deciding redundancy. Redundancy may be said to be genuine inter-alia if:

  1. Employer’s business ceases (see: HOTEL JAYA PURI BHD v NATIONAL UNION OF HOTEL, BAR & RESTAURANT WORKERS & ANOR [1979] 1 LNS 32);

  2. Employer requires fewer workers, either due to financial hardship or simply because business is not doing well (see: SHAHIRMAN SAHALAN & ORS v NATSEVEN TV SDN BHD & ANOR [2010] 1 LNS 1333, SYKT. E-RETE (M) SDN. BHD. v. KESATUAN SEKERJA PEMBUATAN BARANGAN GALIAN BUKAN LOGAM & ANOR. [1991] 4 CLJ Rep 50);

  3. Employer had reorganised the business and the employee’s post is no longer required (see: BAX GLOBAL (MALAYSIA) SDN BHD v SUKHDEV SINGH PRITAM SINGH & ANOR [2011] 2 CLJ 534, WILLIAM JACKS & CO. (M) SDN. BHD. v. S BALASINGAM [1997] 3 CLJ 235 [COA], EQUANT INTEGRATION SERVICES SDN BHD (IN LIQUIDATION) v. WONG WAI HUNG [2012] 1 LNS 1296 [COA]).

In the event that an employer fails to make up a genuine reason for redundancy, any termination or dismissal based on it would therefore be unfair.

LIFO Rule

The LIFO (Last In, First Out) principle simply means that the most junior employee shall be retrenched first. It is not the most junior employee in the entire company which has to be retrenched first, but the most junior employee in the relevant category. For example, if the retrenchment is due to the outsourcing of accounting services, employees in the legal department would not be included in the pool.

In the case of AMZ CORP SDN BHD V SYE AH CHAI [1989] 1 MLJ 238, Abdul Malek J (as he then was) held that employers must also adhere to the principle of “last in first out” (LIFO) in any retrenchment exercise.

It is also trite law that the Industrial Court has the power to award compensation in lieu of reinstatement in addition to back wages to the employee should the employer fail to adhere to the LIFO rule under redundancy. (see: MAA Services Sdn Bhd v Marlin Rajiman & Ors [2000] 8 CLJ 362 [HC])

Employers must implement a fair and reasonable selection process

When it is necessary for employees to be discharged because of redundancy, an employer is required to be fair and reasonable in its selection. An employer is required to show how, by whom, and on what basis the selection of an employee was made.

In the case of National Union of Cinema & Places of Amusement Workers v Shaw Computer & Management Services Sdn. Bhd. Award 22 of 1975, the 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, by 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.

It is advisable for an employer to employ the following process and procedure before terminating or dismissing an employee to avoid unfairness or unreasonableness:

  1. Employer must inform the employee about the possible redundancy at the soonest opportunity;

  2. Employer must consult all employees about ways to avoid redundancy before making a selection of employee(s) for termination or dismissal; and

  3. Employer must first take reasonable efforts by resorting to alternative measures (i.e. transfer, reduction of salary, unpaid leave or temporary lay-off) before termination or dismissal.

Termination benefits or compensation

If termination or dismissal is unavoidable after reasonable efforts have been taken by the employer, it is expected for the employer to provide the employee with reasonable termination benefits.

According to Regulation 6 of the Employment (Termination and Lay-Off Benefits) Regulations 1980, employees whose monthly salary is RM2000 and below, who falls within the purview of the Employment Act 1955 (“EA 1955”) shall be entitled to termination benefits pursuant to the calculation under the said Regulation.

For employees who are not covered by the EA 1955, their termination benefits due to redundancy would be based on their employment contract or contract of service. If the contract is silent, it is for the employer to decide whether or not to provide termination benefits, and on the amount to be given.

In the case of EQUANT INTEGRATION SERVICES SDN BHD (IN LIQUIDATION) v. WONG WAI HUNG [2012] 1 LNS 1296, the Court of Appeal held inter alia that a standard industry labour practice is to compensate the employee with a salary of one month to one year of service.

Conclusion

It is advisable for employers to adhere with the well settled principles under redundancy as stated above in terminating or dismissing any employee due to redundancy. In the event that an employer fails to adhere to the principles, the employer may not be able to make out its case for redundancy so as to justify any termination or dismissal on the stated ground of redundancy. The termination or dismissal may then be considered unlawful. (see: WOO VAIN CHAN v. MALAYAWATA STEEL BHD [supra] [COA]).

Apart from that, failure to adhere to the principles of redundancy would attract an unfair dismissal action and in consequence thereof, the Industrial Court has the power to award compensation in lieu of reinstatement in addition to back wages to the employee. (see: MAA Services Sdn Bhd v. Marlin Rajiman & Ors [2000] 8 CLJ 362 [HC]).

It is further advisable for employers to compensate redundant employees with reasonable termination benefits or compensation to ensure their smooth and amicable departure from the company.

For further advice on the above, you may contact Encik Mohd Saiful Hadi and Encik Ahmad Imran Azlan at 03-2171 1484 or at mail@azamlaw.com.

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