Cross-Border Catch-Up: Genuine Selection Criteria in Malaysian Retrenchments

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Diana Nehro: Welcome to the Cross-Border Catch-Up, the podcast for global employers who want to stay in the know about cutting-edge employment issues worldwide. I’m Diana Nehro, the chair of the cross-border practice at Ogletree. And today, my wonderful colleague, Skye Hao, an associate in our group, is joining us to discuss the evolving legal landscape around retrenchment and the importance of genuine selection criteria in Malaysia.

Skye Hao: Hello, Diana. Thank you for having me on the podcast. I’m excited to be here and to dive into this topic.

Diana Nehro: Skye, just let’s set some basic background information for those of us who don’t know what a retrenchment is here in the United States and what genuine selection criteria has to do with it in Malaysia. So, as the background information, can you please explain to our listeners what retrenchment is and what it involves?

Skye Hao: Absolutely, Diana. Retrenchment in Malaysia is also known as redundancy. It’s the process where employers terminate an employee due to surplus labor or business restructures. This often happens when a company needs to downsize, streamline operations to adapt to market changes. It’s really important for employers to understand the legal requirement and best practices to ensure fair and compliant process. In Malaysia, this practice is primarily governed by the Employment Act 1955 and the Industrial Relations Act 1967. The need for retrenchment has become more apparent in recent years, particularly following the pandemic and the rise of automation in the workplace.

Diana Nehro: Oh yeah, that’s a really good point. So, what does Malaysia law require in these situations?

Skye Hao: So, first of all, redundancy must be real and demonstrable. So, employers must show that there is a genuine surplus of labor or need to restructure due to business reasons. Retrenchment can’t be used as a pretext to dismiss unwanted employees, for example, performance, or if there are other issues. So, therefore, the good faith is an essential element in this whole process. The Malaysia Industry Court has the authority to scrutinize retrenchment decisions on case-by-case basis and will intervene if a retrenchment is found to be in bad faith.

Diana Nehro: Very interesting. So, it has to be for a real business need as opposed to an individual performance need. So, can you tell me what constitutes bad faith in this context?

Skye Hao: Certainly. Bad faith occurs when an employer uses the process as a pretext to unfairly dismiss employees for reasons other than the general redundancy. So, this can include targeting employees for dismissal due to bias, discrimination, or as a mean to retaliate against employees for exercising in their rights such as filling a complaint or participating in union activities. In addition, bad faith may be demonstrated if the employer fails to follow a fair and transparent selection process. The industrial court will look at the overall conduct of the employer to determine if the specific retrenchment was carried out with honesty and integrity. And of course, if bad faith is found, the court may order appropriate remedies.

Diana Nehro: Got it. So, if it’s not genuine selection criteria, that’s a strong sign that it could be found to be in bad faith. So, tell me more. What is genuine selection criteria?

Skye Hao: Sure. Malaysia authorities in court are placing great emphasis on genuine selection criteria. That means the employer must use fair, objective, and transparent methods when deciding which employee to retrench. The goal is to ensure that layoffs are not discriminatory or arbitrary, but instead based on clear business needs and justifiable reasons. The Code of Conduct for Industrial Harmony provides guidance for employers, recommending steps such as limiting recruitment, restricting overtime, reducing workovers, and transferring employees before resorting to retrenchment. When retrenchments are unavoidable, employers are expected to use criteria as the lens of services, performance, skills, and qualifications to determine who stays and who goes. Recent tribunal decisions have highlighted that failure to apply the consistent selection criteria can lead to findings of unfair dismissal, and employers must document their process and be prepared to justify their choices if challenged by the court.

Diana Nehro: Interesting. So, it’s clear that if following genuine selection criteria is critical for layoffs, but are there other requirements that regulations or courts mandate for employers?

Skye Hao: Yes, absolutely. Besides the selection criteria, employers must also follow proper procedures. The Employment Act requires due notice and just cause for termination. Discriminatory dismissal such as firing someone on maternity leave or a protected category are prohibited, of course, except in the cases of serious misconduct or business closure. And employees who believe they have been unfairly retrenched can bring their case to the industrial court, which have really brought cover to their reinstatement or compensation.

Diana Nehro: Wow. So, they could actually be reinstated or highly compensated in exchange with damages. So, thanks for that explanation, Skye. Now let’s dive a little bit deeper into the practical steps employers can take to manage retrenchment effectively. What are some practices that companies can follow to mitigate their risk and to ensure a smooth and fair retrenchment process?

Skye Hao: That’s a really great question, Diana. So, there are several best practices. The first one is communication. Employers should keep their employees informed about the company situation and the reason behind the retrenchment. Maintaining an open line of communication and showing empathy can go a really long way, and employers should be available to answer questions and provide support for employees who are being retrenched, and those, of course, remain with the company; this can help maintain more trust within the organization. Second, if it is possible based on the business situation, employers can consider support for affected employees. This could include providing generous severance packages, offering outplacement services, or even providing training and development opportunities to help them transition to a new role or a new position. And finally, documentation is crucial. Employers should keep detailed records of the decision-making process, including the criteria used for selection and for a retrenchment step to be taken to mitigate the impact. This can be really valuable if the retrenchment decision is later challenged in court.

Diana Nehro: So, it seems like that’s the one consistent theme everywhere, documentation, documentation, documentation. So, it’s really critical for employers to handle retrenchment with care and compassion. I think that’s a really great point. That’s obviously true culturally in Malaysia, but something we can use across the board. I think it does go a long way. So great point, Skye. Before we wrap up, do you have any final thoughts or other advice for our listeners?

Skye Hao: Yeah, my final piece of advice would be always prioritize fairness and transparency in the retrenchment process. By doing so, employers can not only comply with a legal requirement but also maintain a positive reputation to foster a supportive work environment. Retrenchment is never easy, but with the right approach, it can be managed in a way that minimizes the impact on both the employees and the organization.

Diana Nehro: That’s a great point. Really, really interesting information, Skye. Thank you so much for sharing your insights and advice with us today. With that said, thank you all for joining us for today’s Cross-Border Catch-Up. Follow us to stay in the know about cutting-edge employment issues worldwide, and have a great weekend.

Announcer: Thank you for joining us on the Ogletree Deakins podcast. You can subscribe to our podcasts on Apple Podcasts or through your favorite podcast service. Please consider rating and reviewing so that we may continue to provide the content that covers your needs. And remember, the information in this podcast is for informational purposes only and is not to be construed as legal advice.