Case Update: Insufficient justification and improper handling of Voluntary Separation Scheme may give rise to unfair dismissal

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 are an ever-present issue in the Malaysian industrial relations landscape. The Malaysian Employers Federation has forecast that 30,000 employees will be laid-off this year. The proper handling of retrenchments is a constant challenge for employers, and disputes often arise. The Ministry of Human Resources recently announced that terminations due to retrenchment were the most common reason for unfair dismissal cases received by the Industrial Relations Department over the past 10 years, accounting for 30% of all cases.

Many employers make the mistake of assuming that implementing a retrenchment exercise is a straightforward way of getting rid of unwanted employees, or downsizing the workforce to cut costs. I’ve written about some of the legal issues related to retrenchment in two earlier articles:

  1. In “What you need to know about the law on retrenchment of employees”, I summarised the key Malaysian legal principles in relation to retrenchments. Essentially, it is the prerogative of the management to decide on the reorganisation of its business, and the courts will not intervene unless it is shown that the employer’s decision was not in good faith.
  2. In an earlier article in this Case Update series — “Case Update: Relevant issues when an employer uses financial difficulties as a reason for retrenchment” — I wrote about a case where the Industrial Court held that an employer relying on financial difficulties to justify retrenchment had to prove it was experiencing financial difficulties, and to show the financial savings it made through the retrenchment.

In the recent case of Suseela Devi Balakrishnan v. Inti International College Kuala Lumpur Sdn Bhd (Award No. 343 of 2019), the Industrial Court considered a scenario where the employment relationship ended based on a voluntary separation scheme (“VSS”) arising from a redundancy scenario, and the employee subsequently claimed that she was dismissed without just cause and excuse.

Brief background

The claimaint (“Employee”) in the Suseela case had been employed by the company (“Employer”) for several years, and at the time of the termination was the Acting Chief Executive of INTI International College Kuala Lumpur.

On 24 November 2015, the Employee was informed that the Employer was offering her the option of VSS. She claims that she felt professionally undermined and unappreciated, and had accepted the VSS involuntarily.

The Employer contended that the Employee was not dismissed, due to the following:

  • The company had initiated a VSS following an operational review, and extended the invitation to the Employee.
  • The Employee had voluntarily applied to participate in the VSS, and the application was subsequently accepted by the company. Under the VSS, the Employee was paid a total compensation of RM199,086.10.

The Employer’s position therefore was that the Employee’s employment had ceased pursuant to the mutually-agreed VSS.

The Employee contended that she was in fact dismissed without just cause or excuse due, inter alia, to the following:

  • There was no basis for the Employer’s excuse that there was no longer a need for the Employee’s position.
  • The Employee was not redundant or surplus to requirements.
  • The VSS was unjustified, as the Employee’s functions in the company continued to exist post-dismissal.

Issues to be considered

The Court found that there were two key issues in this case:

  1. Whether the implementation of the VSS was justified.
  2. If so, whether the VSS was carried out voluntarily or involuntarily.

If the VSS was carried out voluntarily, the Employee’s separation from the Employer was proper and in order.

If the VSS was applied involuntarily — ie it was carried out by force, or by coercion or duress, or by any unfair labour practice — then it may be an unfair dismissal.

Court findings

I summarise below the considerations and findings of the Court in the Suseela case that would be most relevant to an employer considering implementing a VSS or retrenchment exercise.

> Was the issuance of a VSS justified?

It is trite law that, where an employer offers a reason for terminating the services of an employee, the burden lies on the employer to show that he has just cause for the dismissal.

In this case, the Employer’s explanation was that the group of companies was “re-engineering its operations to be more efficient and better prepared for the increasingly competitive business environment”. The burden was therefore on the Employer to justify the following:

  1. What was meant by re-engineering the company’s operations and what did it entail?
  2. How the re-engineering would assist the company’s operations to be more efficient.
  3. In so doing, how would the company be better prepared for the increasingly competitive business environment?
  4. With this purpose in mind how would the issuance of VSS to the Employee enable the company to achieve the above mentioned objective?

Merely offering a reason without supporting evidence is insufficient, and the company failed “to demonstrate with sufficient cogent particulars […] the company’s genuineness in carrying out its business operational review”.

> Was the company able to prove actual redundancy of the Employee’s former position?

Evidence was provided by the company through a sole witness. During cross-examination, the witness explained that the decision to offer the Employee the VSS was made by a working committee of the Asean region, purportedly following a review of the business performance of the KL campus.

However, none of the working committee members testified to explain why the Employee was the sole employee in the KL campus who was made redundant. The witness also admitted that there was no evidence presented to the court that this review was even carried out, or that the business performance of the KL campus was not up to expectations. The witness was not a member of the working committee, and had no personal knowledge of the working committee’s report.

Having considered the above and all the evidence presented by the company through the witness, the Court concluded that the company could not prove the redundancy, and the company could not produce cogent reasons for offering the Employee the VSS, and therefore “the company has failed to prove with just cause or excuse for the claimant’s dismissal”.

The company’s witness also confirmed, when cross-examined, that on the Employee’s last date of service, the company announced that a new Chief Executive had been appointed and would start within 2-3 weeks.

The Court cited the cases of Chapman & Others v. Goonvean & Rostowrack China Clay Co Ltd [1973] 2 All ER 1063 and Bayer (M) Sdn. Bhd. v. Ng Hong Pau [1999] 4 CLJ 155 in stating that “it is clear that where someone else takes over the work function of the dismissed employee, redundancy cannot arise” and that in such a situation “dismissal for reasons of redundancy will become a dismissal without just cause or excuse”.

The Court concluded that, as —

  • the company failed to prove that the Employee was redundant in order for her to be offered the VSS; and
  • the company’s witness admitted that she did not know the criteria as to why the Employee was offered the VSS,

the Employee’s cessation of employment arising from the VSS offer amounted to a dismissal without just cause or excuse.

Despite this conclusion, the Court still went on to examine the other factors in respect of the VSS offer.

> Was the VSS offered to the Employee voluntary or involuntary?

Although the company’s position was that it did not dismiss the Employee, it admitted that it had initiated the VSS. The Court clarified that VSS is “an alternative to a retrenchment exercise” and “may only be applied in the context of redundancy and not used as a licence to terminate employees in any manner whatsoever and even to the extent of issuing VSS to employees without providing any justification”. Therefore, even if an employee’s employment is ended pursuant to a VSS (as opposed to a retrenchment), “the fact remains that the claimant’s employment had been brought to an end and it must be with just cause or excuse”.

As the VSS letter was prepared by the company and issued to the Employee, which led to the Employee signing the pre-prepared VSS form, the burden was on the Employer to prove what actually led to the offer of the VSS, and to show that the VSS was exercised in a bona fide manner.

The Court distinguished the current case from other cases involving VSS cited by the company, as in this case “it can be quite easily concluded that the VSS which was offered to the claimant was not voluntary” due to the following:

  • The claimant was the only one identified in the KL Campus as being redundant and was offered the VSS.
  • When she asked what would happen if she did not accept the VSS, she was told that she would have to wait and see if she will be confirmed in the position or not.
  • When she asked whether, if she was later not confirmed in the position, she would return to her former post, she was told this was not an option.
  • The VSS letter contained a clause enabling her to look for alternative employment.

Even though the offer letter contained the word ‘voluntarily’, it is the manner in which which the VSS was offered and executed that determines whether the VSS was offered voluntarily.

> The company’s proposition that the claimant’s acceptance of the VSS meant that the employment was mutually-terminated

The company relied on two cases to support its proposition that the Employee’s acceptance of the VSS meant that the employment relationship was mutually terminated: Telekom Malaysia Bhd v. Pg Morshide Pg Omar [1998] 3 ILR 1105 (Award No. 675 of 1998) and Birch & Anor v. University of Liverpool [1985] ICR 470 CA.

However, the Court deemed the cases inapplicable for the following reasons:

  • In Telekom, the employer conducted briefings with the claimant and communicated to employees that the VRP was voluntary, and that those who declined would not be retrenched. In the current case, the employee was clearly told that there was no certainty in her employment after her probationary period if she did not accept the VSS offer.
  • In Birch, the scheme was clearly stated not to be a redundancy scheme. In the current case, the company’s witness has admitted that the VSS was being offered due to her being identified as being redundant.

> Did the Employee voluntarily apply for VSS?

The Employer submitted that the Employee voluntarily applied for VSS, and that the Employer did not coerce or pressure her into doing so. There was also no evidence of duress or involuntariness on the part of the Employee.

However, based on the facts of the case, the Court concluded that it was obvious that the Employee was not redundant, and that she was put under pressure to accept the VSS.

The Employer further submitted that there could be no dismissal where the Employee had accepted the terms and conditions of the VSS and payments. To support this, the Employer cited Abdul Aziz Ismail & Ors v. Royal Selangor Club [2015] 2 ILR 546 (Award No. 327 of 2015). However, the Court distinguished Abdul Aziz Ismail from the current case, as in that case all employees were invited to apply for the VSS, whereas in the current case, the Employee was the only person offered the VSS.

The Court also clarified, with reference to Kumpulan Perangsang Selangor Bhd v. Zaid Mohd Noh [1997] 2 CLJ 11, that “accepting retrenchment benefits does not preclude or estop an employee from contending that his departure from his employment amounted to an unlawful dismissal”. I’ve previously written about Kumpulan Perangsang Selangor Bhd and these issues in “Case Update: Can an employee bring an unfair dismissal claim after accepting a severance payment?”.

> Was the company’s intention to replace the claimant?

The Court concluded that the evidence was “telling as to the company’s intention of wanting to replace the claimant”.

In particular, there was a public announcement on the Employee’s last day of service that a replacement would be hired, and a replacement was in fact hired within a month of her departure.

Conclusion

The Court concluded that “it is clear that the company has failed to prove the claimant’s redundancy which had resulted in the termination of her employment” and “the claimant’s dismissal was therefore without just cause or excuse”.

The Employee was awarded backwages of 24 months, with a deduction of 50% for post-dismissal earnings (she found a new job within 2-3 months of leaving the company, and at the time of the decision was earning a much higher salary than before), plus compensation in lieu of reinstatement of one month’s pay per year of completed service. The amount paid to her under the VSS compensation package was also deducted from the award.

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