Case Update: Relevant issues when an employer uses financial difficulties as a reason for retrenchment
March 1, 2018
In this Case Update series, this were summaries of recent Malaysian court decisions to explore the current approach taken by the courts when deciding on employment-related issues.
As explained in an earlier article (What you need to know about the law on retrenchment of employees), the basic legal position in Malaysia in relation to retrenchments is clear and settled: It is the prerogative of the management to decide on the reorganisation of it business, and the courts will not intervene unless it is shown that the employer’s decision was not in good faith.
One of the accepted reasons for a retrenchment is where the business is experiencing financial difficulties, or where a reorganisation of the workforce is deemed necessary to increase efficiency or cut costs.
What are the factors to be considered when assessing whether cost-effectiveness or financial reasons are sufficient to constitute a genuine reason for retrenching employees?
The Industrial Court considered this in Mohd Azhan Ariffin v. Ranhill Berhad (Award No. 920 of 2017). The claimant (Employee) was retrenched, and paid retrenchment benefits, on the basis that the respondent (Employer) could no longer sustain him in the business due to financial constraints.
The Employee was served with a notice of retrenchment by the Employer, informing him that the Employer could no longer sustain the employee in its establishment due to its financial situation. The Employer paid the Employee retrenchment benefits including compensation in lieu of notice amounting to RM59,143.85.
The Employer claimed that the serious financial problems faced by the employer entity and two of its subsidiaries had caused the Employer to review and reorganise its operations in all three companies, and made the retrenchment of the Employee a genuine necessity.
The Employer stated that the Employee’s retrenchment was part of a broader retrenchment exercise also involving other employees.
The Employer also stated that the entire exercise was carried out in good faith and that the retrenchment was a genuine exercise of managerial prerogative to run the business operations as it deemed fit in order to successfully continue the Employer’s overall business operations.
The Employer called three witnesses to support its case, adducing evidence including the following:
The Employer was facing serious cash flow constraints due to a high interest rate payment for a USD220.0 million loan which exposed the Employer to a yearly interest payment of USD27.5 million.
Various cost-cutting measures had been taken, but the measures failed to resolve the financial situation and therefore the Employer had to no choice but to undertake a workforce reduction.
The financial constraints were so serious that the payment of salaries were delayed for several months prior to the retrenchment.
After the Employee was retrenched, his position was not replaced.
The Employer also contended that it had taken measures to avoid retrenchment, including —
not renewing the contracts of contract employees, including expatriates;
initiating a job placement exercise to try and place affected employees in other group subsidiaries (however, there was no position available for the Employee);
not giving annual increments to the remaining employees, and carrying out another round of retrenchments the following year.
The Employee disputed the Employer’s representation of its financial situation, and produced a financial statement as evidence that the Employer was in a sound financial situation.
The Employee stated that the majority of other employees retrenched were employees of the subsidiaries, and gave evidence that those retrenchments were because the main project those employees were working on had been concluded.
The Employee also stated that the Employer continued to employ expatriates and ran trainings for its employees after his retrenchment, and that the senior management and directors continued to enjoy benefits such as company cars and drivers.
Legal issues to be considered
When considering a retrenchment, the court would usually consider the following two issues:
Whether there was a dismissal.
Whether the dismissal was with or without just cause or excuse.
As in this case there was no dispute regarding the first issue, the court was left to consider the second issue.
The court cited several cases as authorities for the principle that an employer’s right to reorganise its workforce, including the number of employees, is a managerial prerogative provided it is in good faith. The following are some relevant extracts:
“So long as the managerial power is exercised bona fide, the decision is immune from examination even by the Industrial court. However the Industrial Court is empowered in fact duty bound to investigate the facts and circumstances of the case to determine whether the exercise of power is in fact bona fide.” (Hariprasad v. Divelkar AIR  SC 121)
“It is not the function of the Tribunal to examine the propriety of the scheme or reorganisation adopted by the employer because it is essentially for the employer to decide whether a policy of running its business will be profitable, economic or convenient. It is no doubt competent for the Tribunal to investigate into the question whether the policy of reorganisation of business relied on by the management as the ground for retrenchment was bona fide and true or whether it was actuated by any motive of victimisation or unfair labour practice.” (United Services & Automative Industries Sdn Bhd v. Khong Peng Kee & Ors  2 1LR 52, quoting from “Dismissal, Discharge, Termination of Service and Punishment” (9th edition) by LC Malhorta)
The court stated it is the Employer who must prove, on a balance of probabilities, that the termination was carried out with just cause or excuse.
Findings of the Court
Upon consideration of the evidence provided by the Employer, these were some of the court’s findings:
Although the Employer presented evidence to show that it was facing financial difficulties, it was revealed that the Employer was still making profits and had declared dividends to its shareholders that year. The Employer was not running at a loss.
The financial exposure resulting from the USD220.0 million bond would have been anticipated, evidence showed that the liability was later settled by acquiring another RM800.0 million bond. The ability to acquire this latter bond inferred that the Employer was considered to be financially-sound. The need to acquire the latter bond also indicated that “the exercise of retrenchment had obviously not contributed in lifting the burden off the respondent in terms of settling the bond which the respondent had claimed to have caused the serious cash flow in the first place.”
The financial difficulties encountered by two of the Employer’s subsidiaries did not have conclusive impact on the Employer, as there were other subsidiaries which also paid management fees to the Employer.
The Employer failed to provide evidence that the delay in paying out the monthly salaries was due to financial constraints. The court concluded that this instead could be attributed to poor accounting and management.
Although some cost-cutting measures were taken prior to retrenchment, these did not include measures such as reduction of normal working days, reduction of benefits including car benefit, reduction of salaries and reduction of allowances. These measures were not made compulsory, but were merely an advisory. The court reiterated the position inSaid Dharmalingam Abdullah v. Malayan Breweries (Malaya) Sdn Bhd  1 MLJ 352: “A blatant disregard of the terms agreed in the Code of Conduct for Industrial Harmony would tantamount to the perpetration of unfair labour practice or even to connote mala fide [acting in bad faith].”
The Employer was also deemed to have failed to discharge its burden of providing documentary evidence to show how much financial savings it had made by terminating the employment of the Employee and other employees.
The court concluded that, on a balance of probabilities, the Employer’s plea that it was facing financial constraints which made the Employee’s employment unsustainable is “unconvincing and unjustified” and that the Employer had “failed to discharge its burden of proof to establish actual financial difficulties”.
The court reaffirmed the position that “the right of an employer to reorganise his business must be limited by the rule that he must act bona fide [in good faith] and not capriciously or with motives of victimisation or unfair labour practice” and concluded that the Employee’s termination was without just cause or excuse.
The court calculated the financial award as follows:
Backwages based on the maximum of 24 months. [RM16,480 x 24 = RM395,520]
No evidence of post-dismissal earnings was produced, and therefore the only deduction from the backwages would be the retrenchment benefit previously paid. [RM59,143.85]
Compensation in lieu of reinstatement calculated at one month per year of completed service. [RM32,960]
The total award was RM369,336.15. [RM395,520 + RM32,690 – RM59,143.85]
Some takeaways for employers when using financial difficulties as a reason for retrenchment:
The employer must be able to present evidence of the financial difficulties
The employer must also be able to present evidence of the financial savings obtained from the retrenchment exercise.
It may be difficult to justify the retrenchment if the business is not loss-making, or where the business has not taken sufficient cost-cutting measures and is continuing to pay dividends, increments, bonuses and provide other discretionary allowances.
The court will consider the evidence provided and all relevant facts in detail before coming to a decision whether the employer has, on the balance of probabilities, managed to establish actual financial difficulties which constitute “just cause or excuse” for the termination of employment.
Employers are also reminded to comply with the Code of Conduct for Industrial Harmony where possible before making a decision to retrench employees on any grounds. Although the Code has no force in law, as has been shown in many cases, a blatant disregard for the Code is often seen by the courts as an indication that the employer is acting in bad faith.