Tuesday, 7 August 2018

What Happens to Employees in a Business Closure?

Authors: Donovan Cheah (Partner) and Amirul Izzat Hasri (Associate) (Donovan & Ho)
www.dnh.com.my

The latest in the legal drama involving Chatime and Tealive saw the Federal Court allowing Tealive to stay open pending their leave to appeal to the Federal Court. If Tealive ultimately loses its battle at the apex court, they will have to cease current operations; if they wish to continue operating they will have to have a business that does not compete with Chatime.

The most obvious question that then pops up in everyone’s mind is: “What happens to the Tealive employees?”

Chatime’s Group Managing Director, Aliza Ali recently spoke about the issue and said Chatime would be open in welcoming former Chatime franchisees and employees back into their operations. Before everyone starts to pop the champagne and sing kumbaya, there is also no guarantee that everyone finds a happy ending; even if it it can be done, not every Tealive employee will necessarily find employment in Chatime’s loving embrace.

So, what really happens to employees in a closure of business?

A business closure will result in the termination of the entire workforce. This is a technical difference from “retrenchment”, where only some of the employees are terminated. Business closure is a justifiable reason under law to terminate employees, but the employer must demonstrate that the closure is “bona fide” and not for some other collateral purpose/motive, and that the closure is a complete and not partial closure.

Employees covered under the Employment Act 1955 (“Act”)

Employees who fall under Act (mainly employees whose monthly wages do not exceed RM2,000 and/or are involved in manual labour) are covered under the Employment (Termination and Lay-Off Benefits) Regulations 1980 (“Regulations”).

The Regulations provide that certain termination benefits are payable to employees who are terminated for any reason other than:
          • Retirement
          • Misconduct
          • Voluntary termination/resignation by the employee
In such situations, Section 6 of the Regulations provides the following minimum termination benefits for those employees:
Length of employment

Less than 2 years
Termination benefits

10 days wages for every year of employment
More than 2 years but less than 5 years

More than 5 years
15 days wages for every year of employment

20 days wages for every year of employment


To qualify, the employee must also have been under a continuous contract of service for a period of not less than 12 months.

The above termination benefits would therefore be payable to employees covered by the Act, who are terminated on the grounds of closure of business.

What happens in a merger & acquisition?

Sometimes a closure of business occurs because there has been a sale of that business to another party. The sale of business can take many forms; for example, it could be a share acquisition (in which case, the legal entity remains the same but the ownership changes), or it could be an asset acquisition (assets and business are transferred to the acquirer’s entity and the business is run through the acquirer’s entity).

Where there is an asset acquisition and there is a change in the legal entity running the business, the acquirer will sometimes (but not always) offer to continue to employ existing employees to run the business. Are termination benefits still payable if the employees don’t lose their jobs but just switch employers?

The Regulations provide that where a change occurs in the ownership of the business, an employee shall not be entitled to any termination benefits, if:

          • The acquirer offers to continue to employ the employee
        • The terms and conditions of employment offered to the employee are not less favourable than those under which he was currently employed;
          • The offer is made within 7 days of the change of ownership; and
          • The employee unreasonably refuses the offer

Therefore, if an employee unreasonably refuses an offer to continue employment with the acquirer, they won’t be entitled to termination benefits. The Regulations don’t define what is “unreasonable” but it is likely that a rejection will be unreasonable if there is no material change to the terms and conditions of employment (ie: the only difference is the employer’s name) and the new employer agrees to recognise the previous length of service (no breakage in tenure).

If the acquirer does not offer to continue to employ the employee, the employee’s contract with the target company shall be deemed to have been terminated, and both acquirer and target company are jointly and severally liable for payment of termination benefits under the Regulations.

There are of course other issues to consider regarding payment of termination benefits under the Regulations, but are outside the scope of this article.

What about Non-EA Employees?

Employees who earn above RM2,000.00 a month and who are not performing manual labour fall outside the scope of the Employment Act 1955 and are often referred to as “Non-EA Employees”.

Non-EA Employees are not entitled to the statutory termination benefits under the Regulations. Instead, their entitlement to termination benefits will be dictated by their employment contract. If their employment contract is silent, they are prima facie not entitled to any termination benefits. However, employers are still advised to provide some form of termination benefits to Non-EA Employees in a retrenchment or closure of business, since non-payment of termination benefits is one of the factors that the Industrial Court can take into account when deciding whether a retrenchment is unfair.

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