The Employment Law Review: Malaysia

Introduction

There are three broad categories of employment relationships in Malaysia.

The most common category is the employment relationship in the private sector between an employer and an employee. Given that this is a contractual relationship, the terms of the employment contract determine the rights and duties of the employer and the employee thereunder. Malaysian case law also recognises employees' implied rights and duties, including the implied terms of mutual trust and confidence, and the implied duty of fidelity. Private sector employment relationships are also regulated by statutory law in respect of many of the terms of employment, such as working hours, overtime, minimum wages, dismissal benefits, holidays, retirement age, statutory pension and social security insurance benefits. Employees have a right to register a trade union, which, upon recognition by the employer, may commence collective bargaining on behalf of the employees. A registered trade union may also take industrial action, such as engaging in strikes and picketing. However, strikes are rare as there are many statutory restrictions to these actions.

Another category is employment relationships within the public sector, for those who hold public offices, such as members of the armed forces, the judicial and legal service, the general public service of Malaysia, the police force, the joint federal and state public services, and the education service and public service in each state. Employees who are in this type of employment relationship are afforded special protection under Article 135 of the Federal Constitution. Public officers are protected from dismissal or reduction in rank without being given a reasonable opportunity to be heard under Article 135(2) of the Federal Constitution.

The third category of employment relationship is a hybrid of the first two categories and applies to employees of statutory authorities, such as those under a statutory body corporate or a local council. They are not employees as provided in the definition of public service under Article 132 of the Federal Constitution and as such cannot be regarded as public servants under the Constitution. They are not regarded as private sector employees either, as they are employed by statutory bodies or authorities and perform 'public' functions. Nevertheless, this type of employee has the right to apply for certiorari to challenge a dismissal from employment.2

Jurisdiction to determine employment disputes

The civil courts of first instance consist of magistrates' courts, the sessions courts and the high courts. If a claim is for monetary compensation for breach of an employment contract, these civil courts have the jurisdiction to hear the case. For example, if the claim is for salary in lieu of notice for dismissal on short notice or resignation given, respectively, by an employer or an employee, the civil courts can hear the case and award damages.

Apart from the civil courts, under the Employment Act 1955 (EA), the Director General of Labour (DGL) can hear employment disputes relating to the terms of a contract of employment or disputes relating to a breach of a provision of the EA or Wages Council Act 1947.3 These disputes are brought before the Labour Court, which is presided over by the DGL; however, the DGL can hear cases only for employees earning 5,000 ringgit or less.

The civil courts and the Labour Court cannot order specific performance of an employment contract, which is prohibited under Section 20(1)(b) of the Specific Relief Act 1950. The courts that may order specific performance of an employment contract are the industrial courts, established under the Industrial Relations Act 1967 (IRA). The industrial courts have the power to order reinstatement,4 grant back wages and grant compensation in lieu of reinstatement.

Public servants and employees of a statutory authority cannot file claims for reinstatement in an industrial court.5 The only available remedy for a public servant or employees of a statutory authority is to apply for a judicial review and to challenge the dismissal in a high court. The usual remedy is a certiorari 6 to quash the decision for dismissal.

The high courts also exercise a supervisory function over the industrial courts and an appellate function over the Labour Court. Thus, the high courts have the power to hear judicial review applications to quash decisions by the industrial courts.7 Furthermore, with effect from 1 January 2021, they also have the power to hear appeals from the industrial courts.8 In the past, the high courts had limited powers to hear applications from the industrial courts on questions of law only. Now they can hear appeals on questions of both law and fact. The high courts can also hear appeals of decisions by the Labour Court.9

Year in review

The Employees' Minimum Standards of Housing, Accommodations and Amenities (Employees Required to be Provided with Accommodations) Regulations 2021 came into force on 26 February 2021. They provide that a foreign employee (a holder of a Visit Pass (Temporary Employment) issued under the Immigration Regulations 1963 and not a domestic servant) shall be provided with accommodation under Part IIIA of the Employees' Minimum Standards of Housing, Accommodations and Amenities Act 1990. The Employees' Minimum Standards of Housing, Accommodations and Amenities (Compounding of Offences) Regulations 2021, which came into force on 26 February 2021, set out a list of offences that may be compounded with the written consent of the Public Prosecutor.

The Pembangunan Sumber Manusia Berhad (Amendment of First Schedule) Order 2021, which came into effect on 1 March 2021, amends the First Schedule to the Pembangunan Sumber Manusia Berhad Act 2001 by updating the list of industries, which now includes 48 new industries for which the levy to the Human Resources Development Fund is payable.

On 1 June 2021, the Employees' Social Security (Amendment of First Schedule) Order 2021 and the Employment Insurance System (Amendment of First Schedule) Order 2021 came into force to extend coverage to include domestic servants.

The Employment (Amendment) Bill 2021 (the Bill) was tabled for first reading at the House of Representatives on 25 October 2021. The Bill seeks to amend the EA to comply with international standards and practices as required by the Trans-Pacific Partnership Agreement, the Malaysia-United States Labour Consistency Plan and the International Labour Organization. The key changes proposed by the Bill are, among others, to increase paid maternity leave from 60 days to 90 days, to provide greater protection to pregnant employees from being dismissed from their employment, to introduce paternity leave, to empower the Director General of Labour to enquire into and decide any dispute relating to discrimination in employment, and to reduce the maximum working hours. Once the Bill becomes an Act, it will come into operation on a date to be appointed by the Minister of Human Resources by notification in the Official Gazette.

Significant cases

i Maritime Intelligence Sdn Bhd v. Tan Ah Gek

In this case,10 the respondent was dismissed on the grounds of misconduct. When the dismissal was referred to the industrial court, the company raised for the first time in the pleading that the postgraduate degree of the respondent was not from an accredited university. This was not the ground for dismissal.

The Federal Court had to consider the important question of law as to whether the industrial court has the right to enquire into reasons subsequently put up by the employer via pleading to justify the dismissal, even if those reasons were not given at the time of the dismissal. The Federal Court's response was that the employer could not do so. This is because the jurisdiction of the industrial court is tied inextricably to the representations of the worker who is dismissed without 'just cause or excuse'. The focus of the enquiry of the industrial court under Section 20(3) of the IRA is premised on matters and events as they occurred at the time of the dismissal. As such, any 'just cause or excuse' for dismissal can only refer to the reason resonating in the employer's mind prior to the decision to dismiss and not post-dismissal.

ii Crystal Crown Hotel & Resort Sdn Bhd (Crystal Crown Hotel Petaling Jaya) v. Kesatuan Kebangsaan Pekerja-Pekerja Hotel, Bar & Restoran Semenanjung Malaysia

In this case,11 the workers were employed under individual contracts of employment with the hotel where their remuneration comprised a basic salary and a service charge. In October 2011, the National Union of Hotel, Bar and Restaurant Workers (the Union) invited the hotel to commence collective bargaining. The hotel was not willing to do so and the dispute was referred to the industrial court for adjudication, where the Union proposed the retention of the service charge system with a salary adjustment of 10 per cent. The lower courts held that a service charge cannot be utilised to pay minimum wages, primarily because 'minimum wages' are defined in the National Wages Council Consultative Act 2011 (NWCCA) as 'basic wages' that do not encompass any element of service charge.

The Federal Court considered two questions of law, namely whether (1) under the NWCCA, hoteliers are entitled to utilise part or all of the employees' service charge to satisfy their statutory obligations to pay the minimum wage, and (2) having regard to the NWCCA and its subsidiary legislation, a service charge can be incorporated into a clean wage12 or used to top up the minimum wage. In answering the two questions of law in the negative, the Federal Court held that the object and the purpose of the NWCCA and the Minimum Wage Order(s) of 2012–2020 are to enhance and alleviate the plight of labour, more particularly the 'working poor'. Therefore, the IRA cannot, and ought not, be construed so as to read down or abrogate the purpose, object and effect of the minimum wage legislation. Section 2 of the EA defines wages as 'basic wages' and does not include any payments in cash due to an employee for work done in respect of service, such as a service charge. The service charge did not and could not fall within the definition of 'basic wages' as defined under the minimum wage legislation and Section 2 of the EA. Therefore, hoteliers are not entitled to use the employees' service charge to satisfy their statutory obligations to pay the minimum wage. Service charges cannot be incorporated into a clean wage or utilised to top up the minimum wage.

iii Subramaniam a/l Letchimanan v. The United States of America and another appeal

In this case,13 a Malaysian worker was employed by the United States Embassy. The worker complained that he had been unlawfully dismissed by the United States. When the dispute was referred to the industrial court, the United States challenged the reference on the basis that state immunity should be applicable. The high court ruled in favour of the United States.

In setting aside the high court decision, the court of appeal held, among other things, that the sovereign immunity recognised in Malaysia is one of restrictive immunity, and in the case of restrictive immunity, it is not all acts of the sovereign foreign state that are immune from legal action but only those acts that were primarily and peculiarly governmental or diplomatic in nature and character. Actions by a foreign state that are of a purely commercial or private law nature are not immune from legal challenge by the parties affected by them. The act of dismissal had to be considered by the industrial court as to whether it was an act falling within an act of sovereignty or government act. The challenge by the United States by way of a judicial review application was rather premature. The industrial court has the duty to embark on a fact-finding process to determine whether the defence of state immunity applies to exclude the jurisdiction of the court. Consequently, the matter has to be remitted to the industrial court for adjudication to determine the applicability of the defence of sovereign immunity.

Basics of entering an employment relationship

i Employment relationship

A contract of employment may be made in writing or orally. However, for employment positions governed under the EA, a contract must be in writing if it is for a service for a specified period exceeding one month or for the performance of a specified piece of work where the time reasonably required for completion of the work exceeds one month.14 A written contract must include a clause setting out the manner in which the contract may be terminated by either party.15 It must be signed by both parties and may be altered only by mutual consent.

Not all terms of employment are found in an employment contract. Some may be found in an employment handbook, which is usually incorporated by reference in the employment contract.

An employment contract can be for a fixed term, and a genuine fixed-term contract is recognised in Malaysia. However, a court will look at the substance rather than the form of the fixed-term arrangement. A fixed-term contract that has been repeatedly renewed may be regarded as a sham arrangement and may be treated as a permanent contract of employment.

Under the Minimum Retirement Age Act 2012 (MRAA), a fixed-term contract that exceeds the period stipulated in the Schedule to the MRAA can end only when the employee reaches retirement age.16 Therefore, a fixed-term contract loses its efficacy if it is for a fixed term (inclusive of any extension) that is longer than the period permitted under the MRAA.17 In these circumstances, the fixed-term contract in substance becomes a permanent contract, whereby it will only end when the employee reaches retirement age (which is 60 years).

ii Probationary periods

The law in Malaysia recognises probationary periods. There is no statutory minimum notice of dismissal for a probationer and, as such, termination is a matter of contractual right. Nevertheless, for employees governed under the EA, when the reason for dismissal falls within certain categories, such as redundancy or closure of business, there are minimum periods of notice that must be given to the employee.18 A probationer has a right to lodge a complaint for unfair dismissal under the IRA.

iii Establishing a presence

There is no legislation that prohibits a foreign company from hiring employees without being officially registered to conduct business in Malaysia. However, the foreign company itself must not conduct business in Malaysia.19 Merely hiring an employee may not by itself be regarded as conducting business in Malaysia. If, however, these employees are actively soliciting business in Malaysia, and concluding contracts in Malaysia, there is a risk that the foreign company may be regarded as conducting business in Malaysia.

There is also no legislation that prohibits a foreign company from engaging an independent contractor without registering in Malaysia. However, the foreign company must consider whether engaging an independent contractor or an employee may give rise to the foreign company having a permanent establishment (PE) in Malaysia. A foreign company is regarded as having a PE in Malaysia if the independent contractor or employee:

  1. continues supervisory activities in Malaysia in connection with a building or work site or a construction, an installation or an assembly project;
  2. acts on behalf of the foreign company in Malaysia and has the authority to conclude contracts on its behalf and habitually does so, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification; or
  3. maintains a stock of goods in a place in Malaysia from which the independent contractor or employee delivers goods, or regularly fills orders on the company's behalf.

The consequence of having a PE in Malaysia is that income generated by the business will be subject to Malaysian income tax.

If a company hires employees in Malaysia, the employer is obliged to pay benefits due under the following:

  • an employee provident fund;
  • SOCSO (social security protection); and
  • an employment insurance system (EIS).
  • Income tax will be deducted at source as a monthly tax deduction. In practice, it would be difficult for a foreign company to comply with the above requirements without a locally registered company. Typically, payroll companies will be employed by foreign companies to perform payments of the above statutory contributions and deductions.

    Restrictive covenants

    An agreement in restraint of trade is void and unenforceable pursuant to Section 28 of the Malaysian Contracts Act 1950 (CA). Unlike other common law jurisdictions where an agreement in restraint of trade may be valid depending on the 'reasonableness'20 of the restraint, in Malaysia, once a clause is found to be an agreement in restraint of trade, it is automatically void regardless of the reasonableness of the restraint.21

    The non-enforceability of an agreement in restraint of trade applies only to post-contractual restraint. Therefore, a non-compete restraint that is imposed on an employee during the life of the contract for employment is not a covenant in restraint of trade and is not rendered void under Section 28 of the CA.

    Although post-termination non-compete clauses are clearly void by reason of Section 28 of the CA, a non-solicitation clause may be upheld if it is regarded as reasonable.22

    Wages

    i Working time

    There is no regulated or fixed number of working hours except for employees who are governed by the EA. Under Section 60A of the EA, employees must not be required to work for more than five consecutive hours without a rest period of not less than 30 minutes, or for more than eight hours in one day, or spread over a period of more than 10 hours in one day, and for no more than 48 hours in one week. Furthermore, no employer is allowed to require any female employee to work in any industrial undertaking between 10pm and 5am, nor work for a day without having had a period of 11 consecutive hours free from the work.23 The DGL has the power to provide a written exemption to any female employee, or classes of female employees, from any restriction in Section 34 of the EA. In practice, these exemptions have been given.24 There is also a blanket exemption given for all employers, provided that certain conditions are met.25

    ii Overtime

    An employee is entitled to a minimum overtime rate of one and a half times the usual hourly rate of pay for work beyond the employee's normal hours of work per day.26 For work carried out in excess of the normal hours of work on a rest day, the employee is entitled to twice the hourly rate of pay.27 For work carried out in excess of the normal hours of work on a public holiday, an EA employee is entitled to three times the hourly rate of pay.28 Employees cannot work more than 104 hours of overtime in one month.29

    Foreign workers

    The Immigration Department, as a matter of practice, draws a distinction between 'foreign workers' (who are blue-collar workers in manufacturing, construction, plantation, agriculture and services) and 'expatriates' (who are white-collar workers). To hire expatriates, an employer must apply for passes, such as an employment pass and a professional visit pass, via the Expatriate Services Division website. As part of the government's initiative to provide employment opportunities to local people, companies in Malaysia are now required to advertise job vacancies in Malaysia through the JobsMalaysia online portal for a minimum of 30 days before employment pass applications for expatriates can be submitted for approval.30 Companies may only proceed with the relevant employment pass applications if no local candidate has been successfully hired for an advertised role and an acknowledgement letter will be issued by JobsMalaysia. Implementation of this policy took effect on 1 January 2021.

    As regards the hiring of a foreign worker, the employer must apply in advance for immigration security clearance (ISC) at an ISC centre in the source country and for a visa with reference from the Immigration Department. An employer who employs a foreign worker must furnish the DGL with the particulars of the foreign worker, within 14 days of employment, by forwarding the particulars to the nearest office of the DGL.31 In respect of registration, the employer must prepare and keep one or more registers containing information regarding each foreign worker it has employed. There is currently no express limitation on the number of foreign workers that a company may employ but a maximum quota of foreign workers must be obtained by employers and companies from the Ministry of Home Affairs.32

    Employers must apply to the Immigration Department for the necessary visa and visit passes for foreign workers. New foreign workers starting work in Malaysia on or after 1 January 2019 will have to be registered by their employers with SOCSO under the Employment Injury Scheme. The employer or company is also required to make EIS contributions to the relevant employment insurance fund. This EIS fund provides for a number of benefits, such as re-employment allowance, reduced income allowance, training allowance and assistance with finding a job.

    Generally, employers do not have to contribute to an employee provident fund unless the foreign worker elects to contribute. In such a case, the employer's share of the contribution is five ringgit per month. Foreign workers who leave Malaysia permanently may withdraw their contributions when leaving.

    Foreign workers are protected under the local employment law. Workers whose wages do not exceed 2,000 ringgit or whose nature of work falls under the First Schedule of the EA are protected by the EA. The EA prescribes certain minimum benefits and rights of an employee. A foreign worker is also protected from unfair dismissal.33

    An employer will not be permitted to obtain an employee's bank account information as it is protected by banking secrecy laws.34 Written consent is required from the employee before a bank will disclose this type of information.

    See also Section XII regarding data protection and background checks.

    Global policies

    There is no express legal requirement for a company to have internal disciplinary rules. Nevertheless, it is good practice to maintain such policies and procedures. An employer has the management prerogative to set down guidelines for the discipline and protection of its employees and to meet its legitimate business interests.35 Therefore, there is no need for an employer to obtain approval from the employees or representative body for its rules.

    An employer is required to investigate any claim by an employee that he or she has been sexually harassed and must inform the complainant within 30 days. If the employer chooses not to investigate, it must have reasons for that decision. An employer may refuse to investigate if the claim has been investigated previously, or if the claim is frivolous or not made in good faith. If the employer is satisfied that a case for sexual harassment has been proven, the employer must take disciplinary action against the accused employee, which may include dismissal, demotion or any other lesser punishment as the employer deems just and fit. If a suspension without wages is imposed, it must not exceed two weeks.

    Further, a complainant who is dissatisfied with the refusal by his or her employer to investigate a complaint of sexual harassment may refer the matter to the DGL. The DGL may direct the employer to conduct an inquiry if the DGL thinks the matter warrants it.

    Although it is not mandatory for a company to have rules relating to the prevention of corruption, it is highly advisable to do so. Section 17A of the Malaysian Anti-Corruption Commission Act 2009 (the MACC Act), which came into force on 1 June 2020, imposes liability on a commercial organisation if a person associated36 with that organisation is involved in corrupt activities. In this regard, Section 17A(1) of the MACC Act provides that it is a defence for the commercial organisation to prove that it had 'adequate procedures' in place to prevent persons associated with the organisation from undertaking any corrupt activity.

    There is no requirement for the rules in this respect to be written in the local language. It is also not a requirement for the rules to be signed by employees; it is sufficient that the rules are brought to the attention of employees.37 In this regard, it is sufficient if the rules are posted on the company's intranet and reference to this is incorporated in the employment contract.38

    It is common in Malaysia for disciplinary rules to be set out in full in an employment handbook and incorporated by reference in employment contracts.

    Parental leave

    A female employee is entitled to 60 days of maternity leave for each and every birth. A female employee is also entitled to a maternity allowance (which is paid maternity leave) if she fulfils two conditions: (1) she must have no more than five surviving children at the time she gives birth; and (2) she must have worked with the employer for at least 90 days during the nine months before she gives birth and at least one day in the four months before she gives birth.

    Save and except for termination of an employment contract on the ground of closure of business, an employer is prohibited from dismissing a female employee during the period she is entitled to maternity leave.39 If an employee remains absent from work after the expiry of her maternity leave because of an illness arising out of her pregnancy and confinement that results in her being unable to work, an employer can only terminate her services if she remains absent for more than 90 days after the expiry of her maternity leave.40

    Translation

    For an employer with employees who are governed by the EA, there is an obligation to maintain one or more registers containing information regarding each of those employees.41 The details must include, among other things, the name, gender and age of the employee, and the terms and conditions of employment, such as rates of pay, allowances, overtime rates, agreed hours of work, annual leave, sick leave, holidays and other benefits.42

    Employees must have the right to examine the register, which must be maintained and kept in a place where every employee can have access to it. The register must be in the national language (i.e., Malay).43 Failure to translate any documents as necessary will render the employer subject to a fine.

    Although there is no express statutory provision for a contract of employment to be in Malay, some labour officers take the view that because the register that contains the terms and conditions of employment must be in Malay, it follows that the contract of employment must also be in Malay. Therefore, for employees governed by the EA, it is preferable that their employment contracts are translated into Malay.

    Employee representation

    Employees in Malaysia have an unfettered right to join a trade union and this right cannot be restricted by contract.44 Before a trade union can represent its employees, however, it must satisfy two requirements: (1) it must be registered under the Trade Unions Act 1959; and (2) it must be recognised by the employer under the IRA.

    Once a trade union is duly registered, it may serve on an employer a claim for recognition. The employer can refuse to recognise the trade union; if it does so, the matter will be referred to the Director General of Industrial Relations (DGIR) for a decision. The DGIR will make enquiries as to the competency of the trade union and to conduct a membership verification. A secret ballot will be carried out to ascertain whether the trade union commands the requisite majority to represent the employees in the establishment.

    When a trade union has been accorded recognition in respect of any worker or class of worker, no other trade union shall make any claim for recognition in respect of the same workers or class of workers unless three years have elapsed since the initial recognition, or the original trade union no longer exists.

    A trade union representative cannot be dismissed or discriminated against by reason of his or her position as an officer of the trade union.45

    Data protection

    The Personal Data Protection Act 2010 (PDPA) seeks to regulate the processing of any information that relates directly or indirectly to an identifiable individual (the data subject), in commercial transactions (personal data) by any party who processes personal data, or has control over or authorises the processing of personal data (the data user). An employer would be the data user and an employee would be the data subject.

    The PDPA applies to a person's personal data if the person is established in Malaysia and the personal data is processed in Malaysia. The PDPA does not apply to any personal data processed outside Malaysia unless the intention is for it to be processed further in Malaysia.

    i Requirements for registration

    The PDPA requires the registration of certain classes of data users, which are described in the Personal Data Protection (Class of Data Users) Order 2013. A data user who belongs to two or more classes of data users must make a separate application for registration for each class to which the data user belongs.

    ii Cross-border data transfers

    Data users cannot transfer personal data outside Malaysia unless the transfer is to a location specified by the Communications and Multimedia Minister. The Minister has issued a public consultation paper on the Personal Data Protection (Transfer of Personal Data to Places Outside Malaysia) Order 2017, though the Order has yet to be finalised and published in the Official Gazette. Notwithstanding the foregoing, data users may transfer any personal data to a place outside Malaysia under certain conditions, for instance, if an employee has consented to the transfer, the transfer is necessary to conclude a contract between an employee and an employer, or the transfer is for the purpose of any legal proceedings.

    iii Sensitive personal data

    Sensitive personal data means any personal data consisting of information about the physical or mental health or condition of a data subject, his or her political opinions, religious beliefs or other beliefs of a similar nature, or the commission or alleged commission of any offence. An example of sensitive personal data is an employee's medical information.

    iv Background checks

    There is no express prohibition of background checks. An employer may carry out credit checks on an employee through a licensed credit reporting agency in Malaysia. Nevertheless, credit reporting agencies usually require the consent of employees before divulging any information.

    Criminal checks are more difficult to procure, as the cooperation and assistance of the police is required. However, for offences under the MACC Act, an employer or future employer may carry out an initial filter or check on a prospective employee by searching the records of corruption offenders on the MACC website.46

    Discontinuing employment

    i Dismissal

    Any termination of employment in Malaysia must be for 'just cause or excuse'.47 The following are the commonly recognised categories of just cause or excuse for termination of a contract of employment:

    1. misconduct;
    2. retrenchment;
    3. poor performance;
    4. retirement;
    5. expiry of a genuine fixed-term contract;
    6. resignation; and
    7. by mutual agreement.

    In an unfair dismissal case, the burden is on the company to prove that the contract of employment is terminated with just cause or excuse. An employee who believes that he or she has been dismissed without just cause or excuse can make representations in writing to the DGIR to be reinstated to his or her former employment.48 These representations may then be referred to an industrial court, if the DGIR is of the view that there is no likelihood of these representations being settled.49

    There is no notification requirement for termination of employment in Malaysia. However, for termination by reason of retrenchment or under a voluntary separation scheme, the employer will need to file the requisite PK Forms I to IV at least 30 days before the date of cessation of employment.50 Thereafter, the employer will also need to file PK Forms V and VI. There is no duty to notify the trade union of any termination of employment unless it is expressly provided for in the collective agreement.

    For termination by reason of misconduct, no notice is required as an employee may be summarily dismissed. However, it is generally accepted practice that this step of summary dismissal is taken only after having conducted an inquiry for the employee to be given a chance to defend himself or herself. The requirement for due inquiry is even more important in terms of EA employees by reason of Section 14(1) of the EA.

    If the ground for termination is redundancy or poor performance, the employer should comply with the notice requirement provided for in the contract. The notice may be waived by either party, or the employer may decide to pay salary in lieu of notice.

    ii Redundancies

    Retrenchment is a term to describe instances where a business entity terminates the services of employees who it considers as surplus and redundant to its business requirement. It is the right and privilege of an employer to reorganise his or her business in any manner he or she sees fit, so long as the procedure is bona fide and does not have any collateral purpose.51

    Note, however, that an ill-planned retrenchment exercise may be challenged by the employees by way of unfair dismissal representations to the DGIR, which subsequently may be referred for adjudication at an industrial court. In the event that the legality of the retrenchment exercise is challenged, the onus is on the company or employer to show that there was a real redundancy situation and the retrenchment is justified to safeguard its interest.52 The relevant questions for consideration are (1) whether there is a real redundancy situation leading to the retrenchment exercise and, if so, (2) was the consequential retrenchment exercise made in compliance or in conformity with accepted standards of procedure?

    There is no legal difference between multiple redundancies, collective dismissal or reduction in force. However, practically, if there are multiple redundancies, or there is a collective dismissal or reduction in force, it would be more difficult for an employee to contend that he or she was negatively affected as the retrenchment is affecting a number of employees within the organisation, not just one employee.

    A company should try to comply with the Code of Conduct for Industrial Harmony (the Code), which is relevant in redundancy situations.53 Although the Code does not have the force of law, the industrial courts frequently use it as a reference guide when deciding whether an employee has been properly retrenched using fair procedures. The Code sets out the steps that should be taken by an employer in circumstances where redundancy is likely to occur, such as to limit recruitment, to restrict overtime work, to restrict work on the weekly day of rest, to restrict the number of shifts or days worked per week, to restrict the number of hours of work and to retrain or transfer employees to other departments or types of work.54

    A company is required to give sufficient notice of termination to its employees as provided for in the employment contract. For employees governed by the EA, however, an employer is obliged to give a minimum notice of termination (as set forth in the EA)55 to employees before the date of retrenchment. Either party may waive the right to the requisite notice. If notice is not given, however, the employer would be liable to pay employees an indemnity for the lack of notice equivalent to the notice period.

    There is also a requirement to pay retrenchment benefits for employees governed by the EA provided they have worked for a continuous period of 12 months or more.56

    For unionised employees, an employer must consider the terms of the collective agreement and determine whether there are clauses dealing with retrenchment or termination benefits. If so, the employer should pay in accordance with the terms of the collective agreement.

    The employer should also consider the terms of the contract of employment and the employment handbook and determine whether retrenchment or termination benefits are provided for in the contract or handbook. If so, the employer should pay in accordance with the terms of the contract or the handbook if the terms are more favourable than the statutory termination benefits.

    Although a genuine retrenchment is recognised by the industrial courts as a valid ground for termination of employment, some companies prefer to offer a voluntary separation scheme (VSS) to reduce the number of employees. By its nature, a VSS is on a voluntary basis, offered at the discretion of the employer to the employees, who may choose to accept or reject the VSS. It is common for companies to offer a VSS before a retrenchment exercise.

    Occasionally, instead of conducting a VSS, a company might decide to enter into a one-to-one negotiation with each employee to agree to a mutual separation agreement. This is also an acceptable manner to end a contract of employment. However, the company must be cautious so as not to be accused of coercing or forcing an employee to sign a mutual separation agreement.

    Transfer of business

    Although statutory termination benefits are normally payable to employees governed by the EA by reason of redundancy, this is not necessarily the case if the termination of employment is by reason of a change of business ownership. Termination benefits are not payable if, within seven days of the change of ownership, the transferee offers to continue to employ the employee on terms and conditions of employment that are no less favourable than those under which the employee has been employed before the change occurs, and the employee unreasonably refuses that offer.57

    Outlook

    The proposed amendments to the EA have been tabled for a first reading at the House of Representatives. Therefore, employers in Malaysia should monitor closely the developments on the Bill and be prepared for the implementation of amendments to the EA. Further, employers must be mindful that, under the Bill, employers are required to display a notice in a clearly visible location to raise awareness of sexual harassment. The Bill is also significant in that, for the first time, there are express statutory provisions that prohibit employers from engaging in discriminatory conduct. Another important piece of legislation is the Anti-Sexual Harassment Bill 2021. If passed into law, it will result in the setting up of an independent tribunal to hear sexual harassment complaints, which will have the power, among other things, to order payment of damages of up to 250,000 ringgit and to order the respondent to issue a statement of apology to the complainant.

    Another important piece of legislation is the Occupational Safety and Health Act 1994 (OSHA) and a number of proposed significant amendments under the Occupational Safety and Health (Amendment) Bill 2020 (the OSHA Bill). The Bill was tabled for a second reading on 27 October 2021 at the House of Representatives. Once the OSHA Bill is passed, application of the OSHA will be widened to ensure that the safety, health and welfare of all employees in all industries are given protection. Both employers and principals will also need to take up additional responsibilities, such as those that may be required to deal with emergencies, and a new duty to conduct risk assessments at the workplace. The proposed amendment to the OSHA makes it compulsory for employers to carry out hazard identification, risk assessment and risk control measures. To provide more protection for employees, the amendment also allows an employee (subject to certain conditions) to remove himself or herself from any danger or work if there is reasonable justification to believe that there is an imminent danger.

    Footnotes

    1 Jack Yow is a partner at Rahmat Lim & Partners.

    2 Pihak Berkuasa Tatatertib Majlis Perbandaran Seberang Perai & Anor v. Mohd Sobri Che Hassan [2020] 4 MLJ 620.

    3 Employment Act 1955 [EA], Section 69.

    4 Industrial Relations Act 1967, Section 20(1).

    5 id., at Section 52.

    6 Order 53 of the Rules of Court 2012 read with the Schedule to the Courts Judicature Act 1964.

    7 The Industrial Relations (Amendment) Act 2020 [IR(A)A] came into force with effect from 1 January 2021. A party who is dissatisfied with an industrial court award may appeal to the high court within 14 days of the date of receipt of the award. The power to quash awards is still relevant for awards made before 1 January 2021.

    8 Industrial Court 1967, Section 33C.

    9 EA, Section 77(1).

    10 [2021] 3 MLJ 78.

    11 [2021] 3 MLJ 466.

    12 'Clean wage' in this instance means basic wages plus service charge.

    13 [2021] 5 MLJ 612.

    14 EA, Section 10(1).

    15 id., at Section 10(2).

    16 Wong Mei Yoke v. Tien Wah Press (Malaya) Sdn Bhd [2018] 1 ILR 20.

    17 Minimum Retirement Age Act 2012, Schedule (Section 2), Paragraphs 1(h) or 1(ha).

    18 EA, Section 12(3), Paragraphs (a) to (f) read with Section 12(2), Paragraphs (a) to (c).

    19 Companies Act 2016, Section 561.

    20 Usually, the reasonableness of the restraint will depend on the geographical location and the length of the restraint.

    21 Polygram Records Sdn Bhd v. The Search [1994] 3 MLJ 127 and Nagadevan Mahalingam v. Millennium Medicare Services [2011] 4 MLJ 739.

    22 Tint-Shop (M) Sdn Bhd v. Yu Yeing Yin [2009] 1 LNS 187.

    23 EA, Section 34.

    24 Employment (Employment of Women) (Shift Workers) Regulations 1958 (revised 1983).

    25 Maimunah Aminuddin, Employment Law Manual for Practitioners, 2013 CLJ Publications, at pp. 48 and 49.

    26 EA, Section 60A(3)(a).

    27 id., at Section 60(3)(c).

    28 id., at Section 60D(3)(aa).

    29 Employment (Limitation of Overtime Work) Regulations 1980.

    31 Employment (Limitation of Overtime Work) Regulations 1980, Section 60K(1).

    33 Industrial Relations Act 1967, Section 20(1).

    34 Financial Services Act 2013, Section 133.

    35 Hamdan bin Ahmad v. U Mobile Sdn Bhd [2014] 4 ILJ 386.

    36 Under Section 17A(6) of the Malaysian Anti-Corruption Commission Act 2009, a person is associated with a commercial organisation if he or she is a director, a partner or an employee of the commercial organisation, or a person who performs services for or on behalf of the commercial organisation (e.g., an independent contractor or an agent).

    37 Zulkifli Abdul Latif v. Sistem Penerbangan Malaysia Berhad [2006] 3 ILR 1923; Tan Siang Pin v. IBM Malaysia Sdn Bhd [2019] 2 ILR 593.

    38 Tan Siang Pin v. IBM Malaysia Sdn Bhd [2019] 2 ILR 593.

    39 EA, Section 37(4).

    40 id., at Section 42.

    41 id., at Section 61(1).

    42 Employment Regulations 1957, Regulation 5.

    43 id., at Regulation 7.

    44 Industrial Relations Act 1967, Section 5.

    45 id., at Section 5, Paragraphs (c) and (d).

    47 Employment law in Malaysia does not recognise an employer's right to exercise a termination simpliciter, which is to terminate an employment contract by merely giving sufficient notice pursuant to the employment contract.

    48 Industrial Relations Act 1967, Section 20(1).

    49 IR(A)A, at Section 12.

    50 EA, Section 63(1) read with Employment Retrenchment Notification Regulations 2004, Regulation 4 and First Schedule. Failure to comply with this requirement is an offence punishable under EA, Section 99A, and shall be liable to a fine not exceeding 10,000 ringgit.

    51 Harris Solid State (M) Sdn Bhd v. Bruno Gentil Pereira [1996] 4 CLJ 747, CA. The usual justifications for retrenchment include business loss, closure of department or business, reduced turnover, adverse business conditions and escalating expenditures.

    52 Gold Coin Feedmills (Malaysia) Sdn Bhd v. En Ibrahim bin Mohd Shah & 2 Ors (Award 657 of 2001).

    53 The Code of Conduct for Industrial Harmony [the Code] is a collaboration between the Ministry of Human Resources, the Malaysian Council of Employer's Organisations and the Malaysian Trades Union Congress, with the aim of providing principles and guidelines to employers and workers on the practice of industrial relations to achieve greater industrial harmony.

    54 The Code, Article 20.

    55 EA, Section 12(2) read with Section 12(3).

    56 Employment (Termination and Lay-Off Benefits) Regulations 1980, Regulation 6.

    57 id., at Regulation 8.

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