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Mutual separation is an agreement between the employer and the employee for the employment relationship to come to an end.  Usually, the main feature of a mutual separation is that the employer will agree to a financial pay-out in exchange for the employee agreeing to leave his employer voluntarily through resignation. It is often used to secure the departure of certain employees where a unilateral termination may be difficult, or otherwise undesirable.

For example, there may be a mutual separation in poor performance cases where both parties realise the employment relationship is unsalvageable due to misalignment of performance expectations or leadership style. The employee receives a financial package to resign, and avoids going through a performance management process or potential dismissal which could be a black mark on their employment record.

However, mutual separation offers in certain situations such as redundancy may raise questions. If the employee agrees to a mutual separation after being told they are redundant, is this enforceable? Or can the employee claim unfair dismissal? The Industrial Court in Murali Tharan Nair a/l G Narayana Nair v HLMG Management Co Sdn Bhd (Award 276 of 2020, 28 January 2020) recently dealt with this issue.

 

Brief Facts
  • The Head of Human Resources of the Company informed the Claimant that his department would be undergoing restructuring and that the Claimant’s position would not exist, rendering him redundant.
  • The Claimant was offered a mutual separation package of 5 months of his last drawn salary, and the Claimant was also requested to tender his resignation in exchange for the financial package.
  • A Mutual Separation Agreement (“MSA”) was prepared for the Claimant to sign. The MSA included a resignation clause and did not mention the Claimant’s alleged redundancy.
  • Despite the Claimant’s requests, the Company refused to revise the MSA to include the reason for the MSA (i.e. the restructuring and the Claimant’s redundancy). The Claimant therefore signed the MSA but made a note “Accepted due to restructuring and redundancy”.
  • The Company refused to accept the MSA with the Claimant’s note, and insisted that the Claimant had to sign the MSA without any condition. The Claimant thereafter signed a second copy of the MSA without stating any note or condition.
  • The Claimant lodged a complaint of unfair dismissal, contending that he was forced or coerced to sign the MSA and that he was misled by the Company that he was redundant due to the restructuring exercise.
  • The Company defended the unfair dismissal claim, primarily on the basis that there was no dismissal, since the employment relationship had mutually come to an end via the MSA.
Court’s Findings

The Industrial Court held that the principles applicable to a termination of employment via mutual separation are:

  • There must be a genuine consensus or a meeting of the minds between the parties when entering into the mutual separation; and
  • There must be no vitiating factors (e.g. harassment, compulsion, misrepresentation, duress, coercion, etc) in the process of reaching the said agreement

In this case, the Industrial Court held that while one does not have to prove redundancy in cases involving mutual separation, what is pertinent is the effect of representations made to the employee, on the employee’s state of mind – i.e. whether the mutual separation was being offered pursuant to the restructuring exercise and as a result of which the employee’s services were redundant.  A misrepresentation that affects the employee’s judgment and / or induces him into entering a mutual separation agreement will negate the element of voluntariness.

The Industrial Court referred to the case of Ahmad Fauzan Aziz & Others v Dynacraft Industries Sdn Bhd [2010] 3 MELR 381, which struck down a voluntary separation scheme agreed by employees, on the basis that the employees had only agreed to the VSS due to the fear of retrenchment that was planted in their minds by the Company. There, the Court held that the employees were compelled to accept the VSS as they would otherwise face the prospect of being retrenched in the future with lower benefits.

Here, the Court found that since the Company took the position that redundancy is not an issue (since the Company’s position is that they did not have to prove redundancy due to the MSA entered between the parties), there were some misrepresentations made to the Claimant in order to induce him to sign the MSA.  The Industrial Court therefore held that the Claimant was indeed forced or pressured into signing the MSA due to the misrepresentations made to him that he was redundant pursuant to the restructuring exercise taking place. As such, the MSA was not voluntarily entered into by the Claimant, and the Claimant was dismissed by the Company in the guise of a mutual separation scheme.

Key Takeaways

This case highlights the complexities involved in employment termination matters. Mutual separations are often seen as a “quick fix” for problematic dismissals, without much consideration as to whether they are conceptually suitable for the facts at hand.

Redundancy typically arises when the employee’s job functions no longer exist, or have diminished to such an extent that it has become surplus to the needs of the company.  When an employer tells an employee that they are redundant, but still offer a mutual separation – how does this work? After all, if the role is redundant and no longer required, the end of employment is inevitable and there is nothing mutual about it. If the employee does not agree to the mutual separation, they would have to be retrenched anyway due to the redundancy.

It is of course permissible to offer VSS or mutual separation in order to avert retrenchment on a wider scale, since employees who agree to leave voluntarily may reduce headcount to the level desired such that a restructuring is no longer required. However, communication of mutual separation offers have to be made carefully, using the right terminology to ensure that there is a correct understanding on the basis of the offer. Both parties have to know what happens to the employee if the “mutual separation” is not accepted. If the employee is informed that dismissal is inevitable whether or not the MSA is signed, then there is a risk that any MSA signed could be vitiated.

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This article was written by Donovan Cheah. Donovan has been named as a recommended lawyer for Labour and Employment by the Legal 500 Asia Pacific 2017, 2018, 2019 and 2020, and he has also been recognised by Chambers Asia Pacific and Asialaw Profiles for his employment law and industrial relations work.

Donovan & Ho is a law firm in Malaysia. Our practice areas include employment law, dispute resolution, tax advisory and corporate advisory.  Have a question? Please contact us

 

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