Employee dismissal, also called employee termination and retrenchment, is the process of ending an employee's employment.

Dismissal refers to the general concept (i.e., ending the relationship between an employer and an employee), and termination is a specific event within the process, namely the act of firing an employee. As an employer, you should know abut the grounds for dismissing an employee.

We'll review the different forms of employee dismissals and some examples in this article. How you treat your employees is a big part of your success, and if you're doing it right, you'll have no problem keeping them in line. Many business owners find themselves in this situation, and being sued by employees who've been retrenched is not a desirable position to be in.

To effectively manage the workforce, Human Resources (HR) professionals must know the legalities and best practices related to retrenchment, and they need to be aware.

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What is retrenchment?‍

Retrenchment / Redundancy

The term 'retrenchment' can be used in different contexts. It can be used when referring to a reduction in staff size. The only time to retrench your workforce is when you've exhausted every other option.

When you're organisation is in a challenging situation, you must be prepared for anything, including a loss. If you don't have a plan to retrench your workforce, you could lose your entire business and be forced to file for bankruptcy. Retrenching your workforce is necessary to protect yourself from this scenario.

Here are the acceptable reasons to retrench people:
• Business is expected to shut down
• Business is in a state of crisis
• There is a high chance of your business failing within a short period (less than 6 months).

If you can't find any acceptable reason, then you need to look at other options to get the business up and running again. When you choose to retrench your workforce, it's imperative that you have a retrenchment plan, which will outline the process and timeline for your retrenchment.

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Under Section 20 (1) of the Industrial Relations Act (the Act), there are two types of dismissal: constructive and direct.

A constructive dismissal occurs when an employer can show that the employee was performing poorly and that the employer had reasonable grounds to terminate their employment. A direct dismissal is when the employer fires the employee.

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Constructive Dismissal

If the employer can show that the dismissal was substantively fair, then it is also procedurally fair. Procedural fairness means that the dismissal process had all the necessary elements of a fair procedure, i.e., notice, opportunity to be heard, and an impartial decision-maker. The key word in this definition is impartial.

A fair dismissal does not necessarily mean a fair decision. Procedural fairness is a subjective standard that focuses on the practical implementation of the dismissal process. It is an important part of the court system because it allows judges to decide what is fair in each case, and the goal is to provide equal protection under the law.

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What are the grounds for employee dismissal?
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Absenteeism

An employee can be dismissed from their employment if they have been absent from work for more than two consecutive days without obtaining leave from the employer unless they have any reasonable excuse for doing so and have tried to inform their employer.

Absenteeism is a big issue today. It is a term that describes the number of days that a person works and does not attend work. It is also referred to as non-attendance.

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Misconduct

Misconduct is defined as any behaviour that is incongruous with an employee's performance of their duties, such as incorrect behaviour, purposeful wrongdoing, or willful breach of a rule or standard of behaviour connected to their employment. After a misconduct investigation, an employer has the right to fire an employee without cause.

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Poor Performance

If an employee's work performance is deemed unsatisfactory, the employer has the right to remove the employee if the reason for dismissal is justified.

The employee can only be fired if the following conditions are met:

• The employee was told of their unsatisfactory performance
• Employee was given a warning
• The employee was given the opportunity to enhance their performance

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Four Preventive Measures To Reduce Employee Retrenchment

Retrenchment should be considered when an organisation isn't growing and there are signs of decline. The reasons for retrenchment include poor financial performance, lack of competitive advantage, lack of innovation, lack of market share, and other factors that make it difficult for the company to continue its operations.Before considering terminating your employee, here are a few strategies to improve your organisation's cash flow in your company.

Here are some more ways to save and improve on cash flow:

• Cut your expenses by paying less
• You can freeze your employees and their salary for a while
• Cut back on your working hours or working days
• Transfer surplus employees to another department

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New 2024 Update for Employee Dismissal

When an employer in Malaysia is about to cease employing an individual, or if an employee passes away, the employer is required to submit Form CP22A or CP22B to the Inland Revenue Board of Malaysia (IRBM). This form is a notification for tax purposes and is part of the process to ensure that all tax obligations are met before the employee leaves the company or in the event of their death.
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1. Notification Requirement: Employers must submit Form CP22A/CP22B at least 30 days before the employment ends, or within 30 days after being informed of the employee’s death.
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2. Online Submission: From 1 January 2024, it’s mandatory to submit these forms online through the MyTax portal using the e-SPC application.
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3. Monthly Tax Deduction (MTD) Exemption: If the employee’s income was subject to MTD, or if their monthly remuneration is below the minimum amount subject to MTD, the employer may not need to submit the form.
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4. Withholding income: Employers are required to withhold any i payable to the employee until they receive permission from the IRBM, which is usually 90 days after the form is submitted.
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5. Concessional Exemption: As of 1 December 2023, there’s a concessional exemption for compliance with certain conditions for employees who resigned or were terminated.
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6. Non-Compliance Penalties: Employers who fail to comply with these requirements may face fines or imprisonment.

In summary, Form CP22A/B is crucial for the proper termination of employment as it relates to tax clearance and ensuring that all tax liabilities are settled before the employee’s departure or in case of their death.
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Source: Termination Of Service | Lembaga Hasil Dalam Negeri Malaysia

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Retrenchment Process Guide In Malaysia

If your organisation have done everything it can to achieve profitability, yet it's still not enough. Here are seven steps to consider while retrenching your staff.

Step 1

Determine if the company can remain in business. This is typically determined by the value of the assets and cash flow. If your organisation is unable to sustain its current operation, then the process of retrenchment will be required to take place.

A company can use severance to make sure that an employee is not left with anything after they have been dismissed. This can be done through a voluntary or mandatory separation scheme (MSS). In a voluntary separation scheme (VSS), employees decide if they want to be separated from their employer. However, in a Mandatory Separation Scheme (MSS), an employer has the right to force an employee to leave the company.

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Step 2

Establish a retrenchment committee, if necessary. This committee is made up of employees that will determine how much each employee will be paid during retrenchment, the length of time that employees will be retrenched and the severance amount for each employee.

Notify the appropriate authorities by completing the Borang PK (Employment Notification Retrenchment Form) and submit it to the nearest local Labour Office. Fill three parts of the Borang PK on three different sections:

• Sections 1–4: must be completed 30 days before the retrenchment date
• Section 5: 14 days following the date of retrenchment
• Section 6: 30 days following the date of retrenchment
  

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Step 3

Determine the layoff date and the employee selection for retrenchment. Depending on the circumstances of the business, this may be set as early as 30 days after the first notice of retrenchment.

The employee selection process
The Code of Conduct for Industrial Harmony establishes principles for retrenchment exercises. Failure to comply is not legally enforceable, but it may be a factor that courts consider when evaluating whether the retrenchment exercise was carried out fairly. When deciding which employees to retrench, employers should carefully examine the criteria established in the Code. It includes the following:

• Experience
• Qualifications in skills and occupations
• Situations of age and family
• Duration of service
• Current situation (non-citizen, casual, temporary, permanent)

There are a few common industrial practices that are also used to retain workers based on the:

1. The FWFO principle (First In, First out) applies to foreign workers.
2. LIFO principle (Last In, First Out)
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The Last In, First Out (LIFO) principle states that the last worker hired into an organisation is the first one laid off when the organisation goes through a reduction in force (RIF). This is a common practice in many organisations today because it is more efficient to lay off the last worker in the organisation than to lay off the first worker.

Common mistake companies make is that they don't pay attention to the condition of their employees. When a company has been in business for many years, they tend to focus more on the number of employees than on the condition of the employees. As a result, the company may have to retrench some employees because they are sick, or have a family emergency.

EA Eligible Employment Retrenchment Benefits
For employees earning up to RM2,000, the minimum notice period is two months. Employees earning more than this amount must serve at least one month's notice. The notice time for employees covered by the Employment Act (those earning less than RM 2,000) is determined by the length of their service:

• Employees who have been with the company for less than two years: at least one month
• At least 6 weeks for employees with a tenure of 2 to 5 years
• At least 8 weeks if the employee has been with the company for 5 years or more

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Step 4

Inform employees that they will be retrenched. Employees must be informed of their retrenchment date and what actions they must take to be considered for rehire. If rehiring is required, then you must provide specific dates and times that the employee can return to work, the title of the job, and the compensation.

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Step 5

Terminate current employment contracts. Be sure to terminate all employment contracts before the layoff is complete. If an employee has an employment contract, it will need to be terminated prior to the layoff date. Otherwise, the termination of the employment contract is considered a breach of contract and can result in legal action.

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Step 6

Send final paychecks. You will need to send final paychecks to employees who are to be retrenched. Employees in the private sector will be able to collect unemployment benefits under the employment insurance system (EIS) scheme, click here to read more.

An EA-eligible employee who has worked for your company for at least 12 months is entitled to termination benefits under the Employment (Termination and Lay-off Benefits) Regulations 1980.

Here is a short formula for EA-eligible employees: The Mandatory Severance Scheme(MSS) or Voluntary Separation Scheme(VSS) calculation formula is: Year x ((monthly salary / 30 days) x 15 = Total Compensation

Calculation example for someone who has been earning RM1,500 while working in the company for about 4 years goes as follows:
4 x ((1, 500 / 30 days) x 15) = RM 3,000

Employees who are not qualified for the EA are compensated at the discretion of the company. Consider using this opportunity to assist employees in alleviating their financial load, even if only briefly and follow the guidelines if your employment contract stipulates layoff compensations.

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Step 7

Saying your final goodbye to your employees. Your employees may be feeling stressed because of their situation. It is a good idea to create an exit strategy for your employees in order to lessen this stress. An exit strategy is a written document that outlines how you are going to communicate with your employees.

You can also use this time to provide counselling and other services for your employees. This will ensure you get the best return from your resources and will strengthen the relationship with your employees.

Here are some supportive actions your organisation can choose to offer for your retrenched staff:

• Provide severance pay of up to 1 to 3 months of salary
• Offer to help with finding new employment
• Offer to provide a letter of recommendation
• Refer your retrenched employees to a career coach
• Offer to help your retrenched employees secure future job interviews
• Help your retrenched employees re-build their professional networks
• Offer to review and provide commendation on their LinkedIn
• Offer to provide career advice to your ex-employees
• Offer to provide resume reviews and portfolio critiques
• These benefits are all about making sure your ex-employee has the skills they need to succeed in their next career.

Conclusion

The best way to be the most supportive employer in the world is to create an environment where there are few layoffs. Your best bet is to be transparent about the changes taking place, provide resources and support for your employees during the process, and most importantly, have a plan in place to support your employees should they need to leave.

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