Retrenchment: last in, first out

is regarded as still being under the employment of the original employer although the employee is instructed to carry out his service for another person or entity. There is essentially no change of his employer. Hence, a secondment does not amount to a transfer.

On the other hand, where a secondee company intends to carry out retrenchment exercises, it may “retrench” the employee on secondment by virtue of the fact that the secondee company is not the employer. In this case, the “retrenchment” simply means that the employee on secondment will be reverted back to his original employer.

Requirement to retrench foreign workers first Notwithstanding the LIFO principle, employers are required to comply with Section 60N of the Employment Act 1955 when carrying out retrenchment exercises. With effect from 1998, where an employer is required to reduce his workforce by reason of redundancy, the employer shall not terminate the services of a local employee unless he has first terminated the services of all foreign employees employed by him in a capacity similar to that of the local employee.

Should there be a breach of Section 60N, a local employee has the option of lodging a complaint claiming that he is being discriminated against in relation to a foreign employee.

Departures from the LIFO principle In Malaysia Shipyard & Engineering Sdn Bhd Johor Baru v Mukthiar Singh & 16 Ors (1991), the employer based its selection of employees for retrenchment on a point system that took into account age, performance, medical and disciplinary records of the employees in the organisation. The Industrial Court expressly endorsed the selection criteria adopted by the company and held it to be fair and objective.

Departure was also allowed in the case of Plantation Agencies Sdn Bhd v National Union of Commercial Workers (1983) where the more senior employees were retrenched on the grounds of poor performance. It is noted that the requirement of giving warnings is mandatory if the employer attempts to depart from the LIFO on these grounds.

Where it can be established that a more junior employee was retained in favour of a more senior employee because he/she has special skills or qualifications required by the employer, departure from LIFO may be permitted.

The circumstances laid out above are not exhaustive but it should be noted that the industrial courts have consistently insisted on strict adherence to the LIFO principle and only on very exceptional circumstances have departures been allowed.

Remedies for breach of LIFO principle Case laws have illustrated that failure to comply with the LIFO principle will render the retrenchment unfair and prima facie invalid, unless the employer is able to show reasonable and cogent excuse for departing from the principle. In the event that the retrenchment is held to be invalid, the Industrial Court may either order the reinstatement of the employee to his former position, which is the primary remedy available under Section 20 of the Industrial Relations Act 1967 (“IRA”), or award compensation in lieu of reinstatement. Backwages may be awarded irrespective of whether the employee is reinstated or compensated in lieu of reinstatement. As to the quantum of backwages that may be awarded, Item 1 in the Second Schedule of the IRA provides that an employee who was unfairly retrenched or dismissed may recover not more than 24 months backwages (based on their last-drawn salary), calculated from the date of dismissal.

Conclusion Employers should, to the best of their ability, comply with the LIFO principle and any guidelines that may be issued by the Ministry of Human Resources. This would deter or reduce potential claims from dissatisfied exemployees. In instances where a legal suit is inevitable and the employer is brought to the industrial court by their employee, the employer will be able to defend itself based on the evidence of having done a fair selection in the retrenchment exercise from the outset. It is important for employers to understand that adopting the LIFO principle is not just a move to pre-empt the likelihood of a retrenchment exercise being successfully challenged in court, but to also ensure that employers adopt practices and policies that are in accordance with fair and equitable principles as required by the labour laws in Malaysia.

Contributed by Teo Sin Yee of Christopher & Lee Ong (www.christopherleeong.com).