Retrenchment Meaning and Nepali legal Provision

Retrenchment Meaning and Nepali legal Provision

-Advocate Bhakti Ghimire

All retrenchments are terminations, but not all terminations are retrenchments (Mohamed & Baig, 2012). When an employee is retrenched, this amounts to a termination of his services. When an employee's services have been terminated, it does not necessarily mean that he has been retrenched however retrenchment is one of the methods in which an employee's services can be terminated (Mohamed & Baig, 2012). There are other reasons for which an employee's services can be terminated, namely misconduct, attaining the age of retirement and voluntary termination by the employee himself (Mohamed & Baig, 2012).

In England, the term "dismissal by reason of redundancy" is used for purposes of downsizing the workforce (Whincup, 2014). Whereas in Malaysia, the terms "retrenchment", termination" and "lay-off" are used interchangeably. These terms, however, should be understood individually as they have their own distinct meanings (Mohamed & Baig, 2012). An analysis of the above terminologies forms the basis of this chapter. The discussion is important because there have been inconsistencies regarding the definition of retrenchment and different opinions regarding certain issues on this subject. As retrenchment exercises are to be carried out only under genuine circumstances, it is necessary that a comprehensive definition of retrenchment should be formulated (Whincup, 2014).

The act of organizing or the state of being organized again is known as (Collins English Dictionary, 2012). The term reorganization means the right to reorganize the business for the reasons of better economy that are found to be redundant by an employer (Ayadurai, 1996). Right to reorganize one's business is an inherent right vested in every employer. It is a right to maximize factors of production in the interests of profitability of a business. A reorganization may involve closure or scaling down of business operations in an effort to channel factors of production the more profitable parts of the business. Alternatively, it may involve re-deploying the resources of the business to one location and giving up the other locations, or it may take the form of a merger of two business organisations with the end result requiring only one set of employees (Bidin, Khan & Tan, 2012). The variations or permutations are infinite as far as the business ingenuity of man can suggest (Bidin, Khan & Tan, 2012).

Redundancy has been further defined as superfluity, profusion or abundance (Oxford English Dictionary, 1973). In the context of labour law, it means a surplus and due to this superfluity, workers need to be removed or retrenched (Ayadurai, 1996). In other words, redundancy occurs when the employer has ceased, intends to cease in continuing the business. It can also arise where work has ceased or diminished. This means that a redundancy would eventually lead to retrenchment. Dunstan Ayadurai, (1996) describes redundancy as follow:-

“A surplus of labour is normally the result of a reorganization and its usual consequence is retrenchment, i.e.: the termination by the employer of those employees found to be surplus to the requirements of the organization”.

Retrenchment

Retrenchment literally means a "reduction or curtailment of cost or expenses". It is a cutting of expenses or spending in response to economic difficulty (Johnson, Latham, & Todd, 1866). The Shorter Oxford English Dictionary (1973) defined “retrenchment as the act of cutting down, off, or out, curtailment, limitation, reduction" This definition does not specifically refer to the labour industry. However, it does spell out the basic idea of retrenchment, that is, a step that has to be taken to cut down expenses. Venkataramaiya's Law Lexicon Desai, 1983 states:-

“Retrenchment connotes in its ordinary acceptation that the business itself is being continued but that a portion of the staff or the labour force is discharged and the termination of services of all the workmen as a result of the closure of the business cannot therefore be properly described as retrenchment.”

The Ministry of Human Resources Malaysia, has defined the retrenchment as the termination of the contract service of the employer due to redundancy. The redundancy situation can arise from several factors such as closure of business, restructuring, reduction in production, mergers, technological changes, take-over, economic downturn and others.

Further, in Pipraich Sugar Mills LTD v Pipraich Sugar Mills Mazdoor Union, 19574 it was stated :-

"Retrenchment connotes in its ordinary acceptation that the business itself is being continued but that a portion of the staff or the labour force is discharged as surplus. The termination of all the workmen as a result of the closure of the business cannot, therefore, be properly described as retrenchment.”

From the above discussion, it is clear that retrenchment basically means, an act by the employer in terminating the services of his employee because the employee has become a surplus to the requirement of the organization. This is due to various reasons such as reduction, diminution, or cessation of the type of work in the organization. It needs to be understood that there will be times when the management suffers losses or sometimes there is a need to reorganize a business. At times, such as these, the employer might need to reduce its staff by terminating their services. This act of termination is called retrenchment (Ayadurai, 1996).  

 Reasons for retrenchment

There are various reasons for retrenchment. Few of them are as follows:-

Global Economic Slowdown

Global economic problems do not usually happen overnight except, if they happen the way they did on September 11, 2001, when America awoke to an attack on the World Trade Centre in New York that ruins one of the most famous symbols of its capitalism (Muniapan, 2015). Even before the horrific event of September 11, Asia was preparing for a global economic slowdown, and thereafter the region's countries had to navigate a longer and more painful path to recovery. For example, fear of terrorism coupled with the nosedive in the global economy had hammered the aviation industry.

Recession refers to an economic decline of temporary nature, in which trade and industrial activity are reduced. Running a company in a blooming economy is relatively easy and rewarding. However, doing the same in a downturn is less forgiving, with uncertainty in the business climate, and employers having to make decisions they never faced before, most of which would center on cost cutting. In 1974, Malaysia experienced a recession followed again in 1986 on a greater scale. Malaysia tried to overcome this by implementing several shifts in policy since the 1970s and 1980s. However, 1997 saw yet a bigger currency crisis where many corporations went into distress, with some still trying to recover.

 Losses and Declining Profits

This is a situation where a company faces losses of any nature, for example, caused by temporary or permanent decline in or loss of trade or work (Muniapan, 2006). Due to this reason, the volume of work reduces and therefore results in redundancies and retrenchments. In Koperatif Perumahan Angkatan Tentera Berhad v Meor Othman Lofti bin Abdul Latiph, 19945 the Industrial Court stated:-

“Retrenchment of an employee can be justified if carried out for profitability, economy or convenience of the employer's business. Services of employee may well become surplus if there was reduction, diminution or cessation of the type of work the employee was performing.”

Take-Overs and Mergers

Take-overs and mergers are a result of restructuring or reorganisation. Restructuring sometimes causes redundancy and thus workers need to be retrenched. A take-over is where some person(s) acquires a certain number of shares in a company and this gave them the right to control the company. Often it is a full take-over where 100% of the shares are acquired; however a partial take-over is also possible. “Take-overs in Malaysia are mainly regulated by Part IV of the Securities Commission Act 1993 (Act 498), the Malaysian Code on Take-overs and Mergers 2010.”

Automation

Automation is better understood as "from manual to robotic"(Muniapan, 2006). It means reorganisation due to improved technology. In this case, “it can be seen that there is no reduction in the volume of work of any kind, but the requirement of the employer for as many persons to do the work may be reduced because of improved mechanisation, automation or other technical advancement (Muniapan, 2006).”

Change in the nature of work

Change in the nature of work could also be the consequence of a reorganisation. A good example would be the case of Amos and others Max-Are Ltd, 19376, where the employees worked at a metal factory. Due to reorganisation, the stainless steel business that the employees had been working in was sub-contracted and the employer expanded to work on black metals. The employees refused to work with black metal because less remuneration was paid for that and they claimed that they had been made redundant and be retrenched (Parasuraman, 2004).

Change in terms and conditions of services

A reorganisation will not always result in redundancies. Sometimes, an employer needs to amend or change a few terms and conditions in the contract of services based on the needs of his business: the employer for example has to change the working time, shift work, withdrawing certain benefits such as transport, and non-essential benefits. Changes like these might not necessarily lead to retrenchment because the job still exists and there is work to do. But some changes that involve mobility, for example, or transfer of employees to an unreasonable distance due to closure of one of the branches, may involve issues of redundancy (Rajkumar, 1999).

 Outsourcing

Outsourcing is basically the exercise of contracting out a company's non-core activity or business process to a third party so that the company can concentrate on its core business. The outsourcing company will then make it its core business. It helps companies cut cost as their budgets are tightened due to certain reasons such as economic slowdown (Todd & Peetz, 2001).

Types of retrenchment method

There are 3 common types of retrenchment in Malaysia:-

1. Involuntary Separation

2. Voluntary Separation

3. Mutual Separation

Involuntary Separation

This type of retrenchment occurs when an employee has no control over the decision to retrench. Retrenchment planning is fully decided by the employer. It is a common retrenchment exercise where companies can lay off workers due to cost, business or operational factors. In involuntary separation the selected employees should be given reasonable time before retrenching them and the retrenchment should comply with legal requirement when compensation is given to them.