COVID-19 Impact on Employers

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COVID-19 has become a global pandemic. The outbreak of COVID-19 deadly virus is an unfortunate crisis and the situation we are now facing is unprecedented in history. On 16 March 2020, Prime Minister had announced a Movement Control Order (“MCO”) throughout the country effective March 18 to 31. With the escalating COVID-19 outbreak, the MCO has been extended for another 2 weeks until April 14.

It was reported that the country might see the number of COVID-19 cases increase to over 6,000 by mid-April and the Ministry of Health (MOH) has taken all steps to curb the spread of COVID-19. These are trying and uncertain times. We do not know whether the MCO will be further extended come mid-April 2020.

Only limited commercial premises providing essential services are allowed to open in the interim. Many employers have suffered the brunt of COVID-19 crisis in recent weeks and are experiencing financial constraints during this challenging period. In light of the pressing circumstances, many employers faced with financial adversities might be considering to reduce the heavy overheads would be to downsize the workforce in order to survive and weather the COVID-19 storm.

Below are some of the common questions regarding reduction of workforce by retrenchment and voluntary separation scheme.

Retrenchment

Q: What is retrenchment?
A: Generally, retrenchment is termination of the services of surplus employees.

Q: Can an employer undertake a retrenchment exercise due to outbreak of COVID-19?
A: If an employer suffers financial hardship due to business losses or declining profits or business and is experiencing adverse business condition and reduced productivity or low production as a result of COVID-19 outbreak, the employer may undertake a retrenchment exercise. While it is the prerogative of employer to reorganise its business and decide on the number of employees required, there must be actual redundancy and good faith in retrenchment exercise. A closure of one of the department or business section of an enterprise may be an acceptable justification for reorganisation.

Q: Can an employer arbitrarily select any employee for retrenchment?
A: Generally, an employer shall comply with Last In First Out (LIFO) principles which requires the employer to select the more junior employee in the category of employment for retrenchment. There is also a requirement to retrench all foreign workers first in a capacity similar to that of the local employee.

Q: Can an employer not follow the LIFO principle?
A: Yes but the employer must have sound and valid reasons.

Q: What are the common reasons for not following the LIFO principle?
A: Generally, the employer must show that among others, the alternative selection criteria is fair, objective and reasonable; a more senior employee is incompetent, unreliable and has a record of poor performance; and a more junior employee has special skill or qualification.

Q: Does an employer need to give a notice of termination to the employee?
A: Yes.

Q: How long is the length of notice?
A: For non-unionised employees covered by Employment Act 1955 (“EA”) (namely those workers whose wages do not exceed RM2,000.00 a month or manual labour or such other persons listed in First Schedule of EA), follow EA (summarised below) or such longer notice under contract of employment:

Period of EmploymentLength of Notice
Less than 2 years4 weeks
2 years or more but less than 5 years6 weeks
5 years or more8 weeks

For non-unionised employees not covered under EA, refer to contract of employment.
For unionised employees, refer to collective agreement.

Q: Does an employer need to pay retrenchment benefit to the employee?
A: For non-unionised employees covered by EA, follow EA (summarised below) or such higher amount under contract of employment.

No. of years of continuous serviceNo. of days’ wages for each year of employment
One year or more but less than 2 years10 days’ wages
2 years or more but less than 5 years15 days’ wages
5 years or more20 days’ wages

* pro-rata in respect of incomplete year

For non-unionised employees not covered under EA, refer to contract of employment.
For unionised employees, refer to collective agreement.

Q: What should an employer do before undertaking retrenchment?
A: Prior consultation should be made with the employees and trade union (if any).

Q: Does an employer need to notify labour office?
A: Yes. An employer must notify the nearest labour office at least 30 days before undertaking a retrenchment exercise. Need to fill up and submit a prescribed form. Failure to do so is an offence.

Q: What is the consequence of unjustified retrenchment?
A: If there is no justification for a reorganisation or if the retrenchment procedure is unfair, retrenched employees may make a claim of unfair dismissal to industrial court for reinstatement (compel employer to re-engage the employee) or compensation in lieu of reinstatement (usually one month’s salary for every year of service) and back wages (from date of dismissal to the last date of hearing at the industrial court capped at maximum 24 months).

Voluntary Separation Scheme

Q: Under retrenchment exercise, some key employees may have to leave resulting the company losing talent. What alternative does an employer have to get rid of some employees?
A: The employer may implement a Voluntary Separation Scheme (“VSS”).

Q: What is VSS and how does it work?
A: Under VSS, employer will come out with a severance package and then invite employees to participate in the plan on a voluntary basis. Normally, the employer will conduct briefings and issued circulars about the VSS to the employees. Once an employee applies for the VSS, the employer has the discretion to accept or reject the VSS application.

Q: What is the benefit of VSS?
A: VSS will allow the employer to retain the key employee that it requires and therefore reduce the possibility of “talent drain”. VSS will also reduce the risk of being exposed to a claim for unlawful dismissal.

Q: What should an employer do before implementing VSS?
A: Prior consultation should be made with the employees and trade union (if any).

Q: Does an employer need to notify labour office?
A: Yes. An employer must notify the nearest labour office at least 30 days before undertaking a VSS exercise. Need to fill up and submit a prescribed form. Failure to do so is an offence.

Soft Approach to Tackle the Issue

Employee is an appreciating asset of a business entity. The business efficacy and efficiency would very much depend on the performance of employees. Retrenchment should be the last resort. If the company is facing losses and is trying to fight off closure of its business or retrenchment of its employees, the company can appeal to the employees to ride though the rough times with it and takes a salary cut which then be reinstated and increased when the business picks up again. Such measure will not only increase the chances of retaining key employees in the long run but also maintain the morale and confidence of the employees.

Covid-19 Employment/Contractual Disputes. Please click HERE
Email: Covid19@LowPartners.com
Covid-19 Legal Hotline: 017 – 490 5293

This article is written by our Partner, Wai Chong Khuan

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