8/2/2019 @VSSI(98-100)

1/32 n d Q u a r t e r 2 0 0 5

rticleA

98

Voluntary Separation SchemeAnd RetrenchmentBy Thomas Chow, Managing Director, Professional & Organisation Development Sdn. Bhd.

The current business slowdown in the construction industry

in Malaysia has come down rather hard on many

construction companies, particularly those that depend

substantially on Government projects. The Prime Minister, Dato

Seri Abdullah Hj Ahmad Badawi has summed this up very

succinctly in his press interview with The Star, after opening the

Malay Construction Entrepreneurs Convention 2005 on June 11,

2005, when he said: Contractors should face the stark reality that

the construction boom in the country is over. They have to look forother opportunities, including those overseas. It is very likely we will

not see another construction boom in the country. We have built

enough roads, hospitals and schools to last us a very long time .I

am not saying there will not be anymore big infrastructure projects,

but it will not be like before. The days of durian runtuh are gone.

The slow down and pessimistic business environment has dire

consequences that have affected or will affect many businesses

and individuals in the construction industry. The pre-occupied

concerns are how to weather the difficult years ahead and stay

nose above water. The dilemma of surplus workforce,

maintaining costs effectiveness and managing human resources

would indeed be formidable challenges to management. Underthese circumstances, an inevitable route, though sensitive, is to

reduce the workforce.

RIGHTSIZING AND REDUNDANCY

Retrenchment, as a consequential effect of rightsizing, has always

been a rather sensitive issue. Similar to other forms of

termination and dismissal, retrenchment is a form of dismissal

of a workman and he may consider that he has been dismissed

without just cause or excuse and hence makes representation

for reinstatement under Section 20(1) of the Industrial Relations

Act 1967, which provides inter alia:

Where a workman, irrespective of whether he is a member of a trade

union of workmen or otherwise, considers that he has been

dismissed without just cause or excise by his employer, he may make

representations in writing to the Director General to be reinstated

in his former employment; the representations may be filed at the

office of the Director General nearest to the place of employment

from which the workmen was dismissed.

In the industrial law of Malaysia, it does not matter that the word

used in the letter is retrenchment or voluntary separation. Many

retrenchment and separation cases in the past were referred to

the Industrial Court. In two retrenchment cases awarded in 1997,

the two retrenched workmen (managers) were reinstated withfull back-wages totaling in excess of RM1,000,000. That was

certainly a hefty sum to pay aside from having to reinstate the

workmen to the jobs, which were declared redundant earlier.

VOLUNTARY SEPARATION SCHEME (VSS)

The Government has advised companies to adopt voluntary

separations scheme instead of normal retrenchment of surplus

employees, which often were hostile and conflict prone,

particularly where the workmen were unionised. As the term

suggests, the employees are to participate in it voluntarily.

Consequences Of An Involuntarily Voluntary Scheme

The consequences of a case where the Industrial Court has

determined that the separation was indeed involuntary, the

separation then becomes an unjust dismissal and the Industrial

Court may award reinstatement of the workmen or order

compensation in lieu of reinstatement.

RETRENCHMENT

Industrial Law On Retrenchment

Section 13(3) of the Industrial Relations Act 1967 confers on the

employer the right on termination of the services of a workmanby reason of redundancy or by reason of reorganisation of an

employers profession, business, trade or work or the criteria for

such termination. The Industrial Court has always recognised

such employers right and will not disturb the termination of

workmen by retrenchment or voluntary separation unless it is

capricious, unjust or malicious.

The Principle Of Last-In-First-Out (LIFO)

It is trite law and a well-established principle that in retrenchment

of surplus employees, the principle of LIFO must be adhered to.

The Industrial Court has in past cases applied very strict scrutiny

where there were deviations. Only in a sprinkling of cases hadthe Court accepted deviations. However, in reality, most

companies found it difficult to comply completely with the LIFO

principle.

Severe Financial Consequences Of A Wrongful Retrenchment

The financial consequence of a wrongful retrenchment can be

very severe. Aside from the possibility of reinstatement which is

severe on financial impact, the Industrial Court could also award

compensations in lieu of reinstatement.

(a) Reinstatement

The dismissed employee will have to be reinstated to his former

position. With the reinstatement, the Company will have to pay

the employee back-wages from the date of dismissal until the

8/2/2019 @VSSI(98-100)

2/32 n d Q u a r t e r 2 0 0 5

rticleA

99

last hearing day of the case without any loss in service and

benefits, less any payment of compensation on retrenchment

or VSS. With severe backlog of cases now, some cases had taken

some three to four years from the date of dismissal to the final

hearing date.

(b) Compensation in lieu of reinstatement

In lieu of reinstatement, the Industrial Court may award

compensation. As a guide, the Court usually awards:

(i) Compensation for past services at one months salary for

each year of service up to the last day of hearing in Court;

PLUS

(ii) Compensation for loss of employment, i.e. back-wages, from

date of dismissal to the last day of hearing in Court.

TO OFFER VSS OR TO RETRENCH

With a surplus workforce that is more than the manpower that acompany needs, there could be several options like

redeployment, re-assignments, realignments, retrain for other

jobs, regional postings, outplacements, etc. However, one hard

and unavoidable fact remains is that when a company is unable

to absorb the surplus workforce, a redundancy arises.

The Differences Between Retrenchment And VSS, Its Pros

And Cons

The differences can be substantial between these two methods

to reduce surplus employees, and among them are:

CONDUCTING AN EXERCISE - WHETHER VSS OR

RETRENCHMENT

To conduct an effective retrenchment or VSS exercise, a company

must be prepared to spend long hours to deliberate on such a

need and its impact on the company as well as the employees.It has to analyse its organizations structure; focus on post-event

organisation effectiveness; empathize and be concern for the

redundant employees; and extend assistance to redundant

employees. Further, the company must focus on how to

communicate effectively such needs; call for understanding and

cooperation; and consolidate the remaining team into a lean,

cohesive and determined workforce. In order to handle it well,

there are three principle phases to such an exercise.

G The Planning Phase

The Planning Phase is perhaps the most critical task in a

retrenchment or VSS exercise as it may well spell success or

disaster. A Company must take this seriously and should notspare any effort to plan it well, having due consideration for the

well-being of the Company, the affected employees as well as

the remaining employees after the exercise, so as to reduce any

negative impact that could seriously undermine the interests of

the Company.

G The Implementation Phase

The implementation of any retrenchment or VSS exercise can

be traumatic both on the affected employees and the managers

who have to communicate the sad or not too good news. There

are not many managers who have the experience to handle such

a traumatic event. In one retrenchment exercise, the Managing

Director found it difficult to hand over the letters of retrenchmentto the affected employees and he decided to send it through

the office boy. You can imagine the furor; disappointment, anger

and hurt. This had resulted in almost all the employees filing

representation for unjust dismissal. The post-event results on

productivity; teamwork and cooperation was worst than before

the retrenchment.

It is pertinent that the Implementation Phase is properly

strategised and that the affected employees are handled

appropriately with empathy, care and dignity.

G The Consolidation Phase

It is equally important that a company must pay close attentionon the Consolidation Phase for the remaining employees. Many

employees would be concerned whether there could be further

retrenchment or VSS exercise in the near future of which they

may be affected. There will be more negative thoughts than

positive reactions. Therefore, they will be looking forward to the

company for directions and reassurances. In the Consolidation

Phase, the company must focus on how to instill confidence, jell

and energize the remaining workforce to focus on business and

positive actions that will ensure the very survival and success of

the company.

COMPENSATION PACKAGE AND FINANCIAL COST IMPACT

In designing the compensation package, there are various

practices, which defer from company to company as well as

Retrenchment VSS

Focus on actual surplus Focus on reducing the rightemployees number

Focus on right fit May not attract the right fitto stay

Potentially hostile Amicable

Hard approach Soft approach

Managers find it tough to handle Easy and less traumatic

Able to take off the right number May have difficult toachieve number

Contractual compensation or Needs an inducement orin law sweetener

Productivity can be disrupted Less disruption to productivity

Potential claims for unjust Less claims on unjustdismissals dismissals

May end in reinstatements Less exposure toreinstatements

Potentially additional Less exposure to morecompensation compensation

Impact on corporate image Corporate image is least

impacted

Industrial actions by employees No cause for industrial actions

8/2/2019 @VSSI(98-100)

3/32 n d Q u a r t e r 2 0 0 5

rticleA

100

MBJ

industry to industry. It all depends on the financial capability of

the company to meet the employees aspiration. Among the

compensation factors that a company should consider are:

G retrenchment and termination benefits in contract or in law

and market practicesG consideration for those nearing retirement

G should there be a maximum capping

G a lump sum top-up payment or an ex-gratia

G payment in lieu of notice

G payment in lieu of balance annual leave

G gratuity payment

G retirement benefit (contractual) on top of retrenchment

benefit

G housing loan repayment deferment

G car loan repayment deferment

G extension of staff purchase scheme

G special medical cases

G

maternity benefits to expecting female employeesG medical assistance for employees

In the absence of contractual provisions for retrenchment benefits,

the common practice seems to suggest the compensation at a

rate of one months basic salary for each year of service. There

were cases where some companies had paid compensation at

rates as high as 2.5 months for each year of service.

For employees who are covered by the Employment Act 1955,

the compensation cannot be less than the provisions in the

Employment (Termination & Lay-off Benefits) Regulations 1980,

which provides as follows:

(a) Less than 1 year of service : Nil

(b) => 1 but < 2 years of service : 10 days wages x completed years

(c) => 2 but < 5 years of service : 15 days wages x completed years

(d) => 5 years of service : 20 days wages x completed years

Also, for employees who are covered by the Employment Act

1955, the appropriate notice unless the contract provides for

more favourable terms; it cannot be less than :

(a) < 2 years of service : 4 weeks

(b) => 2 but < 5 years of service : 6 weeks

(c) => 5 years of service : 8 weeks

In a VSS exercise, some companies had stated that there would

not be any notice applicable as the offer and acceptance is based

on voluntary basis.

PITFALLS TO AVOID

To avoid the mistakes of past failed cases of retrenchment and

VSS and to ensure both smooth implementation as well as

organization effectiveness, a company should avoid the

following common pitfalls in a retrenchment and VSS exercises:

G Jump on the bandwagon to retrench to maximize profits

G Lack of a task force to spearhead the exercise

G Vacillate on needs for external consultants until the last

minute

G Fail to plan the effective organization based on future

business volume

G Fail to establish selection criteria on manpower needs

G Fail to update all employees records

G Identify surplus employees first rather than redundant posts

G Arbitrary decision on retrenchees

G Fail to justify any deviations from the LIFO principle

G Refuse to pay appropriate retrenchment compensationsG Refuse to serve any notice to the retrenchees

G March the employees out of the doors

G Disregard the opinions of the union

G Fail to develop communicate briefs, likely Questions and

Answers

G Fail to notify the Ministry of Human Resources

G Fail to seek assistance from the Inland Revenue Board for

early and bulk clearances

G Fail to notify the Immigration Department where foreign

workers are involved

G Fail to monitor the situation and address promptly all

grievances, queries and issues

G Disregard security requirements on documents andproperty

G Fail to consider the morale and productivity of remaining

employees

G Arbitrarily distribute the residual functions of retrenched

employees

G Lack in clarity of roles and responsibilities

G Did not retrain and develop remaining employees

G No activities to jell the remaining workforce towards new

organization goals

G Lack in strategies on various means and process for a

smooth and harmonious execution

G Lack of care and empathy

CONCLUSION

Retrenchment or VSS is a very traumatic exercise and the

downside risks and problems can be overwhelming if a company

handles it badly. Whilst a company needs to retrench surplus

employees, the manner and efficiency in handling the exercise

smoothly with care, empathy and dignity cannot be overlooked.

There are many pitfalls aside from the fact that the retrenchees

may file a case against the company. The post event productivity

is critical to the company after having retrenched or separated a

substantial number of employees and paying a large sum of

money in compensations. How quickly a company can recover

and move forward positively and efficiently depends largely on

how the retrenchment or VSS is planned and implemented. There

is no short cut.