Business Rationalisation Measures During Uncertain Times

Note: An Economic Stimulus Package (Pakej Rangsangan Ekonomi Prihatin Rakyat) was announced by the Prime Minister on 27th March 2020. Look out for the upcoming update from our Employment and Industrial Relations practice group on this.

Global events often result in market volatility and changes to business landscapes.  It will be challenging for employers to ride out these uncertain times; they may well struggle to balance employees’ welfare, financial obligations, customer commitments and business survival. 

Difficult decisions have to be made.  Tough conversations will take place.

Cost cutting measures and reduction in force exercises (“RIF”) will undoubtedly be at the forefront of employers’ minds.  

That being said, RIF, or more commonly referred to as retrenchment exercises, ought to always be the last resort.  As stated in the Code of Conduct for Industrial Harmony (which serves as a guide), employers should take positive steps to avert or minimize reduction of workforce by adopting appropriate measures such as : 

  1. Limitation on recruitment; 
  2. Restriction of overtime work; 
  3. Restriction of work on weekly day of rest; 
  4. Reduction in number of shifts or days worked a week; 
  5. Reduction in the number of hours of work; or
  6. Retraining and/or transfer to other department/work.

Apart from the above, measures such as requiring employees to go on no-pay-leave or implementing a reduction in salary may at times be considered by employers as means to avoid a RIF.  

That being said, implementing a reduction in salary, if it is done without consent of the employee, amounts to a breach of the terms of an employment contract.  Making unilateral decisions on the implementation of no-pay leave policies or a reduction in salary will cause serious repercussions including claims for constructive dismissal.  Therefore, obtaining consent from employees is advised. Consultation with union representatives is also required, where applicable, particularly if there are collective agreements in place. 

As with all relationships, reasonableness and an open and honest communication are key.  Collective effort and common understanding go a long way towards implementing measures which would create a win-win situation for all concerned.  

In tandem with the importance of maintaining industrial harmony, it is advisable for employers to avoid implementing these measures at short notice.  Sufficient notice ought to be given to enable employees to make the necessary preparations. In addition, a structured approach, in particular, if a salary reduction is being implemented, ought to be adopted to lessen consequential burdens on employees.  

There is also an obligation to notify the nearest Labour Department office, by way of submission of a Form PK, if a salary reduction exercise is proposed to be undertaken.

Ultimately, the Courts do recognise an employer’s discretion to reorganise its business in a manner it deems fit so long as the exercise of discretion is done bona fide and it is not intended to victimise a select few of the employees.  Hence, it is important for employers to show that they have acted reasonably given the circumstances, and the measures are taken in an attempt to avoid a RIF, balancing the interests of all parties as far as possible.

Contributed by the Employment and Industrial Relations practice group. 

R. Ravindra Kumar (Partner)
(T): +603-2632 9863

Tham Li Vyen (Partner)
(T): +603-2632 9875

Prasath Thanaraju (Associate)
(T): +603-2632 9935

Lam Jia Jun (Associate)
(T): +603-2632 9956

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