Retrenchment deemed unfair due to flaws in selection process, lack of cost-cutting measures

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.

Retrenchments and redundancies have been a regular occurrence across the world in recent years, and Malaysia has not been exempted. In the past 6 months alone, we have seen employers across various industries implementing reductions-in-force or “right-sizing” exercises in two noticeable waves — one at the end of 2022, another one in the first quarter of 2023, and one more currently in the planning stage likely to be rolled out in April/May.

While the general legal position is that the Malaysian courts acknowledge an employer’s prerogative in organising its business in the manner it considers best, this prerogative must be exercised in good faith, and carried out with the proper process. As can be seen from the many retrenchment-related articles I have published, many employers still don’t get this right. Here are some of my previous articles on the subject:

The recent Industrial Court award in Collin Toh Mer Vin v Black & Decker Asia Pacific (Malaysia) Sdn Bhd (Award No. 578 of 2023) provides another example of potentially costly missteps when carrying out a retrenchment.

Brief facts

The employee in the Collin Toh case (“the Claimant”) was initially employed by a company named Newell Rubbermaid (M) Sdn Bhd (“Newell”) in March 2016. In October 2016, Newell transferred part of its business to Black & Decker Asia Pacific (Malaysia) Sdn Bhd (“the Company”), as a result of which the Claimant joined the Company.

On 28 December 2018, the Company informed the Claimant that his position has been deemed redundant, and his employment would be terminated on 1 November 2019. The Claimant contended that his dismissal was done in bad faith and/or amounted to unfair dismissal.

Court findings

The Court acknowledged that an employer is entitled to discharge surplus employees, and that —

the general position is that the courts would not intervene in a retrenchment “unless it is shown that the decision was capricious and without reason, or was mala fide or was actuated by victimisation or unfair labour practice”; and
the courts would also consider whether the retrenchment was carried out in accordance with “acceptable standards and principles of good industrial relations practice in accordance with the Code of Conduct for Industrial Harmony”.

The Court also explained that the case would be decided by asking the following questions:

Whether the retrenchment was justified in the circumstances.
Whether the Company had acted bona fide when retrenching the Claimant.

The Company stated that the retrenchment was part of a global restructuring and operational cost-cutting effort. In Malaysia, the restructuring focused on the Sales Department, where two of the existing three divisions were merged into one. Following this merger, there was a surplus of employees performing that function.

A key flaw in the process appears to be that the Company’s explanation that it used the “Last-In-First-Out (LIFO)” principle to select the Claimant for retrenchment. The Company claimed that the Claimant was the most junior as he had commenced employment in March 2017. However, the Claimant had joined the Company from Newell, and the joint notice issued stated that his years of service which commenced from April 2016 would be recognised.

Therefore, the Court found that the Company had used the wrong service period, and that in disregarding the Claimant’s tenure with Newell had unfairly applied the LIFO principle. Applying the LIFO principle correctly would have meant that there were two other employees more junior than the Claimant. This meant that the Claimant was incorrectly selected for redundancy.

The Court also found that although there were two divisions within the Company — the Global Shared Services Division (a shared financial hub which oversees the Asia Pacific region) and the Commercial Division (which oversees sales in Malaysia) — no evidence was provided that any retrenchment was carried out in the Global Shared Services Division. In fact, the Company admitted that the Global Shared Services Division was expanding.

Further, the Court noted that even though the Company attempted to show that there was a cost reduction in 2017-2018, in the same period there were significant increases in director remuneration, which the Court said cast doubt on the Company’s cost-cutting efforts.

The Court concluded that the Claimant’s retrenchment was exercised in bad faith, and found that the Company failed to show any real or significant cost-cutting measures were taken to avoid the retrenchment. The Court cited the Industrial Court in Kilby Jacobs Atticus v Halliburton Business Service Sdn Bhd [2022] 3 ILR 281, where the Industrial Court Chairman said that “[an employer] has to show that it has taken positive steps ie, cost cutting measures to avert or minimise reductions of workforce and there was real necessity for the retrenchment”.

Although the Code of Conduct on Industrial Harmony does not have the force of law, the Court said that the Company should have sought guidance from the Code on the steps that should be taken before implementing a retrenchment exercise, and that the Court would take any compliance or non-compliance with the Code into account. The Court here found that the Company acted too hastily without taking any cost-cutting measures.

The Claimant was awarded 24 months backwages (deducted 20% for post-dismissal earnings) and compensation in lieu of reinstatement of on month’s wages per year of service.

Takeaways

As can be seen from this case, and the many other previous cases where a retrenchment was deemed unfair, while the general legal position seems to favour the employer, in practice there are many potential mistakes and missteps.

I encourage employers to read my earlier article “Case Update: Court of Appeal sets out key legal principles for retrenchments”, and also remember the following key tips:

The burden is on the company to prove that there was an actual redundancy. It is crucial that the company can provide evidence to support this (for example, if the company is using financial difficulties as a reason for retrenchment, there must be evidence of the financial difficulties as well as evidence of the financial savings obtained from the retrenchment).
Once a redundancy is established, the company must use a fair and objective selection criteria to select the employees who will be retrenched. This does not have to be LIFO, but it is important that the company can show that the criteria was fair and objective. All assessments should be carefully documented.
As the Court of Appeal has pointed out, while the Code of Conduct for Industrial Harmony does not have force of law, the Code “is still the gold standard by which a company’s action may be measured against to see if the whole exercise of retrenchment had been carried out bona fide and that every attempt had been made to explore alternatives before the termination on account of retrenchment”.