Case Update: Industrial Court finds retrenchment due to effects of COVID-19/MCO was unfair

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.

The Industrial Court recently decided that the retrenchment of an employee, which the employer said was due to the challenges caused by the COVID-19 pandemic, was an unfair dismissal. This decision shows that, while the courts will uphold genuine retrenchments as an option available to employers to ensure the financial viability and survival of their businesses, employers cannot simply cite the pandemic as an excuse to retrench employees without proper justification.

The award in Joseph Lim Chien Shiuh v. DTTLT Sdn Bhd (Award No. 1052 of 2021) dated 19 May 2021 should serve as a cautionary tale for employers. I expect we will see many more employees successfully challenging terminations carried out in 2020 and 2021 by businesses claiming to have been affected by the various lockdowns or Movement Control Orders (MCOs) and related restrictions.

Brief facts

In Joseph Lim, the employee (“Claimant”) started working as the General Manager for DTTLT Sdn Bhd (“Company”) on 19 July 2017.

On 12 May 2020, the Company issued an internal memorandum to all employees informing them that the Company would be implementing austerity measures from 1 April 2020 to 30 June 2020. On 1 June 2020, the Claimant was informed that he would be terminated from employment with effect from 31 July 2020 on the basis of austerity initiatives to ensure the sustainability of the Company’s business.

The Claimant lodged an unfair dismissal claim, stating that the Company had dismissed him without just cause or excuse, as his position was not redundant and his job functions still remained in existence at the time of his dismissal.

In short, the Company’s position was as follows:

  • At the time of the Claimant’s dismissal, he was Acting General Manager – Operations for the Apple Beats Division.
  • The Company was facing financial challenges which resulted in the Company downsizing and merging its departments, which resulted in the Claimant’s position becoming redundant.
  • The Company was facing an unprecedented business slowdown and financial difficulties due to the COVID-19 pandemic since March 2020.
  • The whole of the Apple Beats Division was absorbed and consolidated into Apple Core Division. The Claimant’s position as the Acting General Manager of the Apple Beats Division became redundant as the Apple Core Division covers a wider range of products which was already headed by an existing General Manager and as such the company would not require two General Managers to head one Division.

In short, the Claimant’s position was as follows:

  • His position was not redundant and that his job scope and functions remained in existence at the time of dismissal.
  • The Company had made various attempts to sideline or marginalise the Claimant before eventually resorting to dismissing him.
  • The dismissal premised on the alleged austerity initiatives or workforce rightsizing had no substantive or procedural justification.

Court’s findings

In determining whether the Claimant was dismissed with just cause or excuse by the retrenchment exercise undertaken by the Company, the Court asked these questions:

  1. Whether there was a genuine need for the reorganization exercise.
  2. Whether a genuine redundancy situation had arisen which led to the retrenchment.
  3. Whether the Company complied with the accepted standards and procedure when selecting and retrenching the Claimant.

The Company stated that it was badly affected by the MCO which had been imposed since March 2020, and therefore needed to restructure to sustain itself. The Company gave evidence that it undertook austerity measures where employees earning above RM10,000/month had to take a 10% pay cut. A few business units were merged, and some staff had to be terminated, including the Claimant. The Claimant was the General Manager of the Apple Beats Business Division which is a smaller business portfolio of the Company which had to be merged with Apple Business Division, and as a result the Apple Beats Business which the Claimant was heading no longer existed, and the Claimant became redundant. The Company also gave evidence that the Claimant’s performance over a period of 3 years had not been promising, and the Claimant was argumentative, uncooperative, and ill-tempered which made other staff uncomfortable, and also that the Claimant had been dishonest in not making full and frank disclosures about his past employment matters.

The Claimant denied the allegations made by the Company, and said he wasn’t aware of any austerity measures or downsizing. He gave evidence that he had performed many duties including overseeing the profitability of the Company’s business. The Claimant’s evidence pointed to the fact that his job scopes and responsibilities existed at the time of his dismissal.

The evidence also showed that, shortly before the Claimant’s dismissal, the Company was systematically taking away many of the Claimant’s job scope and placing them with other General Managers.

The following are some of the relevant findings of the Court, having considered the evidence:

  • There was no evidence that the Company had undertaken any assessment of the status of recovery of the Company’s business.
  • The decision of the Company to seize the COVID-19 pandemic as an opportunity to terminate the Claimant from his employment “smacks of a rash and ill thought exercise”.
  • The method, manner and the persons who made the decision to select the Claimant for retrenchment on grounds of redundancy were not adequately explained. How the selection process was carried out was unclear, and none of the people who participated in the selection process were called to give evidence.
  • The Company failed to adduce proper and adequate evidence on the alleged financial difficulties leading to the austerity measures or the retrenchment exercise.
  • It was clear that the Company had been dissatisfied with the Claimant for many reasons ranging from his alleged poor performance over a period of 3 years, and his purported behaviour which made other staff uncomfortable, and that these issues may have been the real reason for the dismissal. Instead of investigating this alleged misconduct, the Company “used the alleged restructuring and downsizing of the Company as a reason to dismiss the Claimant”.
  • The evidence of the Company’s witness that this was a genuine restructuring and reorganisation of the Company’s business that led to the retrenchment of the Claimant was not convincing. The selection of the Claimant for retrenchment due to redundancy remains unclear and revealed unfair labour practices.

The Court found that the Claimant was dismissed without just cause and excuse, and ordered the Company to pay the Claimant RM183,416.25 comprising backwages and compensation in lieu of reinstatement, less termination benefits already paid.

Key takeaways

As I stated at the start of this article, employers cannot expect that courts will automatically accept that the pandemic and MCO has caused sufficient challenges to justify any decision to retrench employees. Some key points that employers should always bear in mind include the following:

  • Whether or not a retrenchment was a genuine exercise by an employer of its managerial power and prerogative to organise its business in the manner it considers best must be supported by convincing evidence.
  • If an employer wants to rely on financial reasons for reorganisation or retrenchment, it must be supported by evidence. This includes evidence of the financial difficulties and evidence of the financial savings from the retrenchment. I previously wrote about this here: Case Update: Relevant issues when an employer uses financial difficulties as a reason for retrenchment.
  • An employer must always be able to support the selection criteria used when selecting a particular employee to be retrenched. This selection criteria must be fair and objective.

You can read my previous retrenchment-related articles by clicking on the tag here. These earlier articles have also been very popular and should prove useful:

  1. Case Update: Court of Appeal sets out key legal principles for retrenchments (10 February 2021).
  2. Retrenchments in Malaysia — some recent cases (29 May 2020).
  3. Case Update: Insufficient justification and improper handling of Voluntary Separation Scheme may give rise to unfair dismissal (20 March 2019).
  4. What you need to know about the law on retrenchment of employees (22 January 2016).

Leave a Reply

Your email address will not be published. Required fields are marked *