Know The Difference: Layoff and Retrenchment

As Malaysia carefully moves on from the pandemic, companies are still struggling to survive. Some companies had to retrench their employees while others were able to lay off theirs. The only thing similar about retrenchment and layoff is that they under involuntary separation. 

This article will expand more on the differences between retrenchment and layoff.

What is layoff?

Layoff refers to the suspension of employment by an employer. A company layoff includes the cessation of employee benefits such as wages or salary. Employes who were laid off are paid laid-off compensation. All laid-off employees should be taken back to their original roles, as soon as the layoff is lifted. 

Here are the reasons that cause layoffs:

• Shortage of raw materials
• Economic recession
• Breakdown of machinery
• Accumulation of stocks

Under the Employment (Termination and Lay-Off Benefits) Regulations 1980 (“Regulations”), an employee is considered to be laid-off when:

• An employee is employed under an employment agreement whereby their remuneration depends on the employee being provided by the employer with work;

• The employer does not provide such work for them on at least a total of 12 normal working days within any period of 4 consecutive weeks; and

• The employee is not entitled to any remuneration under the contract for the period or periods in which they are not given work.

The date the employee is laid off is the date on which four consecutive weeks has expired. But, rest days, public holidays, sick leave, maternity leave, annual leave or any other leave allowed under the law shall not be taken into account in determining whether an employee has been laid off. 

The Regulations only refer to employees who fall within the purview of the Employment Act 1955, which essentially consists employees whose salaries do not exceed RM 2,000 a month, or those involved in manual labour (“EA Employees”).

What does  “remuneration depends on the employee being provided by the employer with work” mean?

It means that the employee must be the person whose contract provides that they only get paid for work done. For example, an employee whose contract is piece rated or per assignment, or who are on a "no work no pay" contract.

This does not apply to workers who are paid a fixed month on a monthly basis, since under those employment agreements, the remuneration would not be dependent on the employers providing work. There is no need for such statutory protection for monthly-rated employees since their remuneration is not dependent on the work received.

Benefits for laid-off employees

EA Employees who are laid off as per the Regulations are statutorily entitled to lay-off benefits depending on their length of service:

Lay-off benefits are only appropriate if an employee has been working under a continuous contract of service for a period of not less than 12 months. A continuous contract of service for a period of not less than 12 months includes two or more periods of employment which add up to at least 12 months if the intervening period between one period of employment and another does not exceed 30 days.

Non-EA Employees are not statutorily entitled to lay-off benefits.

Layoffs are usually temporary while retrenchments are permanent.

What is retrenchment?

Retrenchment means the discharge of surplus labour or staff by the employer for any reasons whatsoever otherwise than as a punishment by way of disciplinary action. For whatever the reasons a retrenchment exercise was carried out, there are four basic legal principles that every employer should know: 

1. Redundancy as a precondition for retrenchment. 

A precondition for the exercise of retrenchment is redundancy or surplus of labour. The law recognises that it is the employer's prerogative to reorganise its business for whatever reasons. Some reasons include: 

• Where the business needs fewer employees to reduce costs,
• Due to the recession of the economy,
• The merger of two businesses when the business requires fewer employees,
• A decline in profits and a reduction in business,
• Cessation or closure of the business.

The decision for retrenchment must be made with a genuine reason. 

2. Retrenchment guidelines

The valid guideline for the employer on a retrenchment exercise is the Code of Conduct for Industrial Harmony ("CCIH"). It must be accorded with due compliance. 

You can read more about the process of retrenchment and the CCIH in this article.

3. Retrenchment benefit

According to Regulation 6 of the Employment (Termination and Lay-Off Benefits) Regulations 1980, workers whose monthly salary is RM2000 and below and who falls within the purview of the Employment Act 1955 (“EA 1955”) must be entitled to retrenchment benefits as stated below, depending on their tenure of employment and pro-rated in respect of the incomplete year, calculated to the nearest month:

Retrenchment and layoff benefits are the same under Malaysian law.

For the workers who are not covered by the EA 1955, the employment relationship with the employer boils down to the employment contract or contract of service, subject to such other industrial laws and guidelines such as the CCIH.

4. Industrial Court as a place to challenge retrenchment

The Industrial Court of Malaysia a forum to challenge retrenchment where an employee considered it as an unjust dismissal.

As a statutory tribunal under the Industrial Relations Act 1967, the Industrial Court is duty-bound to investigate the facts and circumstances of each case that brought before it to determine whether the retrenchment exercise was in fact made in good faith due to genuine reasons, just cause and excuse, and untainted by any unfair labour practice. 

A layoff is volatile in nature while retrenchment is non-volatile.
 

Main differences between layoff and retrenchment

The biggest difference between layoff and retrenchment is that a layoff is volatile in nature. In layoffs, employees will be recalled once the layoff period ends. On the other hand, retrenchment is non-volatile in nature and involves the full and final termination of services. 

A layoff does not involve the termination of the employment agreement, since it refers to a temporary situation where an employee on a particular type of contract does not receive paid work for a period of time. The employee stays an employee but is not receiving work that would entitle them to get paid. 

Termination and layoff are two separate events, with separate legal requirements to be met.

It's important for employers to understand the legal distinction between these two methods, especially when communicating to the employees.

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Source: Donovan & Ho & Chia, Lee & Associates

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