Employment Contingency

  • Renegotiation of Contract of Service
  • Voluntary Separation Scheme (“VSS”) & Mutual Separation Scheme (“MSS”)
  • Retrenchment

In our series of articles, we have explained on the possible remedies for contractual parties in various types of contracts. Internal corporate restructuring and adjustment especially on human resource policies may be necessary for the business to remain sustainable. In this article, we will discuss the possible human resource contingency plans in which business may adopt to reduce financial impact on the business.

A. Renegotiation of Contract of Service
The company may consider renegotiating contract of service with employees in view of the foreseeable reduction of revenue. It will be essential to undertake an overhaul and review to identify relevant employees which shall be subject to the renegotiation.

Renegotiation shall focus on pertinent areas of reduction of working hours, change of job scope and reduction of wages. In the event the company has entered into a collective agreement with any trade union, renegotiation may require amendment to the collective agreement with the consent of the trade union.

The company that unilaterally adjusts the employees’ job scopes to the extent which are materially different from the contract of service or reduce their wages may commit a fundamental breach of the contract of service and thereby putting themselves at risk of facing resignation from the employees, who may in turn make representations in writing to the Director General for Industrial Relations for constructive dismissal. If the matter is referred to the Industrial Court, the company will incur legal costs and possible payment of back wages up to 24 months.

In relation to employees protected under the Employment Act 1955 [Act 265], if wages are reduced without consent of the employees, the Director General of Labour may inquire into complaints made by employees pertinent to dispute on wages and make orders against the company for payment of full wages.

B. Voluntary Separation Scheme (“VSS”) & Mutual Separation Scheme (“MSS”)

Renegotiated contracts of service and reliefs by the Government may assist company to reduce the pressure of wage expenses in the short term. If the company is facing serious working capital issues, a more vigorous contingency measure such as VSS and MSS may be required.

VSS is a mechanism whereby the company offer its employees the choice to terminate the contract of service voluntarily with termination and lay-off benefits and any other arrangements offered by the company.

MSS is a mechanism whereby company choose the employees it wishes to terminate the contract of service. The company then can negotiate with the affected employees for relevant scheme, termination and lay-off benefits and other arrangement with the employees affected.

VSS is a more diplomatic approach in conducting separation schemes and should be implemented first as the MSS approach is harsher and the company will face backlash and questions on the fairness and the process of selection of employees to be terminated. Upon reaching a consensus on the termination of contract of service, the company and the employees affected should then reduce the terms and conditions of the VSS or MSS into a written agreement.

For employees who are protected under the Employment Act 1955 [Act 265], they are not entitled to any termination or lay-off benefits under relevant written laws upon acceptance of VSS or MSS. In any event, the compensation under VSS or MSS are usually more favorable compared to the statutory provisions. If there is any collective agreement in force, the company shall consult the trade union prior to undertaking VSS or MSS.

Legal impact of VSS or MSS

As VSS or MSS is a contract which terminates the contract of service on specific terms and conditions as agreed by both the company and employees, company should be mindful in the negotiation process with the employees. Any vitiating factors in inducing the employees into entering a VSS or MSS agreement would render the VSS or MSS agreement void or voidable.

Company may misrepresent that redundancy will ensue if the employees refuse to accept the terms or in some instance coerce their employees into accepting VSS or MSS. In such circumstances, the employees may have a valid claim against the company for dismissal without just cause or excuse. The key in VSS or MSS is consensus of both the company and the employees in reaching an agreement to terminate the contract of service.

A properly negotiated and entered VSS or MSS is not considered a retrenchment or dismissal and is capable of protecting the company from future claim by the employees. The burden is on the employees to prove that a vitiating factor is present in inducing the entry of a VSS or MSS.

D. Retrenchment
Retrenchment is defined as discharge of surplus labour or staff by the employer for any reason whatsoever otherwise than as a punishment inflicted by way of disciplinary action.

Retrenchment is a draconian measure and should always be the last resort for a company. The company is required to prove, at law, redundancy has occurred prior to retrenching any employee. The burden of proof lies on the employer i.e. the company.

The courts recognize the company’s rights to reorganize its business provided that such rights shall be exercised in good faith. Retrenchment may only be justified by the employer if there is an actual redundancy. Mere reorganization of business is not a sufficient prove that redundancy has occurred.

The Code of Conduct for Industrial Harmony 1975 (the “Code”) recommends a company to undertake the following measures if redundancy is likely to happen: –

  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;
  6. re-training and/or transfer to other department/work.

If there is any collective agreement in force, the company shall consult the trade union prior to undertaking the retrenchment exercise.

The Code has also laid down the factors to considered in selecting employees affected by retrenchment:

  1. the need for the efficient operation of the company;
  2. the ability, experience, skill and occupational qualifications;
  3. the length of service (Last in, First Out “LIFO” principle) and status (non-citizens, casual, temporary, permanent);
  4. age;
  5. family situation; and
  6. other criteria as may be formulated in the context of national policies.

Upon decision of retrenchment: –

(i) If the employees are protected by the Employment Act 1955 [Act 265] and subject to more favourable provisions in the contract of service: –

  1. the company shall give sufficient notice pursuant to the requirement of the laws or make payment in lieu of such notice; and
  2. the company shall pay the termination benefits in accordance to the Employment (Termination and Lay-Off Benefits) Regulations 1980 [P.U. (A) 278/1980].

If the employees are not governed under the Employment Act 1955 [Act 265], the termination notice or payment in lieu as well as termination benefits shall be made in accordance to the relevant contract of service.Legal impact of Retrenchment

Despite the cost of retrenchment under the Employment (Termination and Lay-Off Benefits) Regulations 1980 [P.U. (A) 278/1980] may seem lower for the company, the risk of claim against the company by the employees is indeed higher.

In determining the justification provided by a company in claiming redundancy has occurred, the court has taken into consideration of the compliance of the Code by company. Conducting VSS or MSS is one of the exercises recommended by the Code prior to retrenchment.

The burden is on the company to proof that there is a redundancy to justify a retrenchment. A justified retrenchment will not amount to dismissal without just cause or excuse.


Regardless of which measure the company wishes to adopt and implement, the company has to ensure that they have complied with procedures set out in the Employment Act 1965 [Act 265] and give notification to the relevant authorities such as the Department of Labour and the Inland Revenue Board whenever applicable. Failure to comply with the law will result in fine or imprisonment or both.

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