Retrenchment, Voluntary Separation Scheme (“VSS”) & Mutual Separation Scheme (“MSS”), Choosing the Better Evils:

As Employer continues to create revenue for its business in difficult time, human resource restructuring is often considered as a method to reduce Employer’s overheads. There are various methods an Employer may opt for in severing the employment ties with the surplus workforce, mainly by way of: retrenchment, mutual separation scheme (“MSS”) and voluntary separation scheme (“VSS”).

Employer who intends to downsize its workforce during difficult economic climate shall consider each method in conducting the exercise to reduce its legal risk and liabilities.

Retrenchment means the discharge of surplus labour or staff by the Employer for any reason whatsoever otherwise than as a punishment inflicted by way of disciplinary action. Employer who embarks on retrenchment exercise is required to comply the strict requirements of the law in selecting the employees who are to be affected by retrenchment. Amongst others, the Employer will need to fulfill the following legal requirements prior to retrenching its employees: –

  1. there is a genuine need for the business reorganization exercised by the Employer;
  2. there is a genuine redundancy situation arising from that business reorganization which led to the retrenchment of the employees; and
  3. the Employer shall comply with the accepted standards and procedure when selecting and retrenching the employees (i.e. “Last In First Out” principle etc.).

(“Retrenchment Criteria”)

Implication of failure to comply with Retrenchment Criteria
Failure to comply to Retrenchment Criteria may result in the aggrieved employee making representations with the Director General for Industrial Relations for dismissal without just cause or excuse. If there be no likelihood of the representations being settled, the Director General for Industrial Relations may then refer the representation to Industrial Court for an award.

Should the Industrial Court found that the retrenchment is indeed a sham which intends to dismiss the employee without just cause and excuse, the aggrieved employee may be reinstated to his position. Alternatively, the Industrial Court may grant compensation in lieu of reinstatement and back wages of up to 24 months.

In order to avoid the allegation of dismissal without just cause and excuse, Employer often opt for VSS and MSS, which provide sufficient flexibility. In employing VSS or MSS, Employers may reduce their excess manpower without increasing its legal risks significantly.

Voluntary Separation Scheme (“VSS”)
A VSS is a scheme put forward by Employer who intends to downsize or restructure the manpower organization. The VSS will be offered by the Employer though an announcement to targeted employees providing the targeted employees an option to accept the VSS scheme or otherwise.

Such VSS scheme is usually offered at the Employer’ discretion i.e., the scheme may be offered to selected group of the employees and/or offered with benefits packages as decided by the company. Under VSS scheme, company will usually offer VSS package which is more attractive than the statutory benefit for laying-off or dismissal in order to incentivizes the targeted employees to accept the VSS scheme.

The voluntary nature of such scheme is a more diplomatic approach adopted by the Employer in reducing its manpower surplus.

Mutual Separation Scheme (“MSS”)
Similar to VSS, MSS involves the termination of the contract of service mutually by the Employer and the employee.

The pertinent difference is: VSS involves offer-at-large to targeted employees; whilst MSS is on a selective basis whereby the Employer will select targeted employee to negotiate for a mutual termination of the contract of service.

Effect of VSS and MSS
Once an employee has elected to accept the VSS scheme offered by the company or has accepted the terms of MSS, a legally binding contract will be formed between the employee and the Employer.

In the absence of vitiating factors, the employee will be bound by VSS or MSS once the relevant contracts denoting the same being executed by the employee and Employer. A well drafted VSS or MSS scheme will significantly reduce legal risk of Employer. It may significantly rebut the complaint by aggrieved employee on dismissal without just cause and excuse.

How we may help
You may view our previous article on employment contingency at here.

We have provided practical employment law advice to small medium enterprises (SMEs), private higher education institution and various companies. Our advice on human resource reorganization focuses on litigation risk management and statutory compliance to enable Employer to focus with their goals on loss-cutting and revenue making.

We will be pleased to assist you in providing you with pragmatic legal advice on retrenchment, VSS and MSS.

© 2021 L Y Lu & Co All Rights Reserved

This article is written by our corporate advisory practice group:

Lu Lih Youn @ Lee Youn, Partner

Ho Wei Duan, Associate

Choong Mun Yee, Associate

This article shall never be construed as a legal advice. We hold no liabilities whatsoever howsoever arising from any person’s reliance on this article without any advice from our advocates and solicitors.

Should you require further assistance, kindly contact our corporate advisory practice group at the email addresses as abovementioned.

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