Case Spotlight: What is a Genuine Redundancy?
The concept of redundancy often presents complex challenges for both employers and employees. The Court of Appeal case of Au Lai Chan & Anor v Malaysian Mosaics Sdn Bhd & Anor and another appeal [2024] 1 MLJ 28 involving the termination of multiple employees, provides guidance on the nuances and legal considerations in determining genuine redundancy.
Brief Facts
- Over 20 employees were terminated on grounds of redundancy by the Company, which was in the business of manufacturing and distributing ceramic and porcelain tiles and accessories.
- The case involved three individuals, who each had more than 20 years of service with the Company:
- Au Lai Chan, was terminated from her role as a Senior General Manager (Manufacturing and Operational Support) overseeing operations of three plants.
- Lim Chwee Hoon and Wong Meng Koon were terminated from their roles as Administration Executive and General Manager (Commercial) respectively.
- The claims of all three employees were dismissed at the Industrial Court, and their respective judicial review applications were dismissed at the High Court. Hence, their appeal to the Court of Appeal.
The Company’s Justifications for Redundancy
- As the Company was operating at a loss, it had to downsize by closing one of its plants.
- A comprehensive review of all departments and employee roles was conducted to identify any positions that were surplus to its manpower requirements.
- The Company cited the reasons of downward market trend, cost pressures, and continued poor manufacturing yields as grounds for redundancy in the termination letters.
- The terminations were necessitated by significant losses and a strategic decision to downsize manufacturing operations, including the closure of one of its plants. It was argued that the job functions of the terminated employees either ceased to exist or were absorbed by other employees due to the restructuring and downsizing of operations.
At the Industrial Court
- The Industrial Court ruled in favour of the Company, acknowledging the genuine nature of the redundancies.
- It accepted the evidence of financial losses and operational challenges faced by the Company, including the decline in manufacturing yields during that period and the closure of a non-profitable plant.
- As the plant was running at a loss, it was the prerogative of management to close it, which was done without ulterior motive on the part of the Company.
- The fact that an employee’s job functions ceased to exist or were absorbed by remaining employees of the Company was not necessarily indicative of bad faith.
- The redistribution of job functions and redundancy of surplus positions were a result of a legitimate business restructuring, and there was no evidence of bad faith on the part of the Company.
At the High Court
- The High Court upheld the Industrial Court’s findings that a genuine redundancy existed, emphasising the authenticity of the Company’s financial records and the evidence of actual losses incurred.
- There was no bad faith on the part of the Company, and no new employees were hired to replace the redundant positions. The job functions were merely redistributed.
Court of Appeal’s Decision
The Court of Appeal reaffirmed the legitimacy of the redundancies, stressing the importance of evidence in proving the necessity of downsizing and reorganisation.
The Court of Appeal considered these factors:
Substantiating Redundancy Reasons in the Termination Letter
Where citing adverse financial conditions, employers must be able to provide tangible and authentic evidence to prove that reasons given in the termination letter are genuine. This would include things like audited accounts, financial statements and witness statements which can substantiate the claims of redundancy.
In this case, the Company’s deterioration of profits was public knowledge; an article published in The Star which addressed the group’s filing to the stock exchange was tendered as evidence. WhatsApp conversations with one of the affected employees about the losses of the Company also showed that the Company was going through financial difficulties.
Business Judgment and Downsizing
The Courts generally respect management’s prerogative to make strategic business decisions, including downsizing operations, provided such decisions are based on legitimate business reasons. The finding of redundancy is very much a fact-sensitive exercise and issues such as declining profits, company reorganisation and redistribution of job functions may or may not constitute a genuine redundancy, depending on the facts and evidence.
Here, when the plant was closed, the Company did not need a senior position to oversee the significantly diminished operations and to liaise with top management. As such, that position was a genuine surplus to the Company’s requirements.
Absorption of Job Functions
While merely removing a position from an organisation chart does not automatically substantiate a genuine redundancy, redistribution or decentralising of job functions to remaining employees can justify redundancy if the roles are surplus to the Company’s workforce requirements.
If an employee claims that there were other job functions being performed, or that their job functions were merely taken over by a junior employee, the employee must be able to substantiate such claims with evidence. Ultimately, the Company has the discretion to determine its staffing volume and reorganise for economic and management purposes.
Alternative Employment
Employers are not obligated to find alternative positions for redundant employees if no suitable roles exist within the organisation. In this case, the employees failed to identify the existence of suitable positions and in any event, returning to a previous position would amount to a demotion.
Key Takeaways
Overall, the case highlights the importance of factual evidence and business rationale in justifying redundancies. Without evidence, there is a fine line between legitimate downsizing and potential unfair dismissal.
Ultimately, legal interpretations of redundancy cases are fact-specific, and are heavily reliant on the evidence presented, including those which can show adherence to established legal principles governing employment termination.
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This article was written by Adelyn Fang (Associate) from Donovan & Ho’s employment law practice.
Donovan & Ho is a law firm in Malaysia, and our employment practice group has built a reputation for providing strategic employment advice to local and global organisations. Our team of employment lawyers provide advice on employment law and industrial relations including review of employment contracts, policies and handbooks, advising on workforce reductions, and managing dismissals of employees for poor performance or misconduct. We also represent clients in unfair dismissal claims and employment-related litigation. Have a question? Please contact us.
