Retrenchment

The word 'retrenchment' never fails to send shudders down the spines of employees. Deborah Barker, SC, opens our eyes to the legal issues involved in retrenchment and outlines the various acts that govern an employment contract and their limitations.


Retrenchment News
In these uncertain times, reports in the media of employees being 'laid off', 'let go' or, more crudely put, 'fired' or 'axed' have become common. A variety of reasons has been offered for these lay-offs; for example: (a) on 5 September 2001, the Straits Times reported that Hewlett Packard planned to lay off 15,000 staff worldwide, following its purchase of Compaq Computer; (b) on 7 November 2001, the Business Times reported that Singtel had retrenched about 100 people since April due to restructuring; (c) on 25 December 2001, the Straits Times reported that Sunevision Holdings had cut jobs when it closed its Software Units' Singapore office due to changing market conditions; and (d) on 28 February 2002, the Straits Times reported that the Stock Exchange had retrenched a dozen staff as it had outsourced certain services and that OCBC would be retrenching 700 staff following the completion of its recent merger. The most common reason offered for reported retrenchments, however, is cost cutting and the difficult economic situation.

Meaning of Retrenchment
Is there a legal definition of the terms 'retrenchment' or 'redundancy'? The words 'redundancy' or 'retrenchment' are not defined in Singapore's Employment Act (Cap 91). These terms were considered in the Malaysian case of Steven Bong v FCBM Sdn Bhd [1999] 3 MLJ 411 which cited the definition of retrenchment in the Indian case of Pipraich Sugar Mills v Pipraich Sugar Mills Mazdoor Union AIR 1957 SC 95 quoted: 'Retrenchment connotes in its ordinary acceptation that the business itself is being continued but that a portion of the staff or labour force is discharged as surplusage'. In that Malaysian case, Hashim J concluded that 'it is not the law that redundancy means the job or work no longer exists. Redundancy situations arise where the business requires fewer employees of whatever kind'.

Bearing in mind the meaning attributed to the terms 'redundancy' or 'retrenchment' in the Commonwealth cases (mentioned above) and the ordinary meaning of these words, retrenchment means the termination of employment where the employees' services are no longer required for economic or business reasons, such as the need for cost cutting, restructuring, the sale or purchase of business operations or the reorganisation of business due to a merger or takeover.

Section 45 of the Employment Act (Cap 91)
Singapore's Employment Act (Cap 91) ('the Act') contains a rather unusual provision as to retrenchment. Section 45 of the Act provides as follows:

No employee who has been in continuous service with an employer for less than three years shall be entitled to any retrenchment benefit on the termination of his service by the employer on the ground of redundancy or by reason of any re-organisation of the employers' profession, business, trade or work.

The effect of this section on employees with less than three years' employment is clear, but the effect on employees with more than three years' service is less obvious. Does the section carry an implication that an employee with more than three years' service has a statutory right to retrenchment benefits? This issue was considered by the Court of Appeal in the case of Bethlehem Singapore Pte Ltd v Ler Hock Seng & Ors [1995] 1 SLR 1, and the court answered the question with an emphatic negative. Karthigesu JA in the judgment said: 'Section 45 cannot be read to imply that in the case of employees with more than three years' continuous service with an employer there is legal compulsion on the employer to pay retrenchment benefits.'

Limited Application of the Act
It should be noted that the Act does not apply to all employees in Singapore. The definition of 'employee' under the Act excludes 'any seamen, domestic worker or any person employed in a managerial, executive or confidential position or any person belonging to any other class of persons whom the Minister may, from time to time by notification in the gazette, declare not to be employees for the purposes of this Act'. From the viewpoint of commercial concerns, the most important category of employed persons excluded from the Act is persons employed in managerial, executive or confidential positions.

Retrenchment Benefits are Discretionary in the Absence of a Contractual Provision
With respect to retrenchment benefits, subject to the dis-entitling provisions of s 45 of the Act, the legal position in Singapore is the same for both employees covered by the Act and those falling outside it. There is no right to retrenchment benefits in the absence of a contractual term providing for it. This was settled in the case of Loh Seok Wah v American International Assurance Co Ltd [1999] 1 SLR 285, where Chan Seng Onn JC held that in the absence of any statutory provision, written law or contractual term compelling an employer to pay retrenchment benefits, the payment of any such benefit to the employee is entirely at the unfettered discretion of the employer. In Singapore, therefore, retrenchment benefits are ex-gratia unless the benefits are provided for by:

Can a Right to Retrenchment Benefits be Implied?
In view of the state of the law mentioned above, the issue of whether or not the right to retrenchment benefits can be implied often arises. This issue arose both in the Bethlehem case and the Loh Siok Wah case. In the Bethlehem case, the Court of Appeal made it clear that they do not accept the view expressed in 16 Halsbury's Laws of England (4th Ed) that 'Orthodox contract law on the implication of terms may need to be stretched in the context of employment, in particular by placing more emphasis on what would be reasonable terms and by allowing the court to look at the parties' behaviour during the employment but subsequent to the entering of the contract of employment'. The Court of Appeal held that in deciding whether a term is to be employed in a contract, it does not matter whether the contract is an employment contract or not, the same principles are applicable. The court adopted the viewpoint of Scrutton LJ in Reigate v Union Manufacturing Co Rams Bottom Ltd and Elton Cop Dyeing Co Ltd [1818] 1 KB 592 that '... an implied term is not to be added because the court thinks it would have been reasonable to have inserted it in the contract. A term can only be implied if it is necessary in the business sense, to give efficacy to the contract; that is, if it is such a term that it can confidently be said that if at the time of the contract was being negotiated, someone had said to the party "What will happen in such a case?" they would both have replied, "Of course, so and so will happen; we did not trouble to say that; it is too clear". Unless the court comes to some such conclusion as that, it ought not to imply a term which the parties themselves have not expressed'.

In the Bethlehem case, the Court of Appeal applied the above test and reversed the decision of the court below that there was an implied term for retrenchment benefits based on a past consistent policy and practice of paying one month's wage for every year of service on retrenchment. In the Loh Siok Wah case, Chan Seng Onn JC re-examined the principles pursuant to which a term may be implied in a contract of employment and applied the test laid down by the Court of Appeal in the Bethlehem case.

The employee in Loh Siok Wah's case was a non-unionised employee, but he contended that he should be paid retrenchment benefits of one month or, alternatively, 1.25 months' salary for each year of service, based on previous payments of retrenchment benefits to other employees and on the collective agreement made by the employer with the Singapore Insurance Employees Union. Applying the test of necessary implication, the court found that there was no implied term for the payment of retrenchment benefits, which were in the employers' discretion. He was not persuaded by the employers' previous practice of giving retrenchment benefits and relied on the statement of the Court of Appeal in the Bethlehem case that there is 'no rule of law to the effect that once a discretion has been consistently exercised in a certain way it can no longer subsequently be exercised in a different way'.

Section 17 of the Industrial Relations Act (Cap 136)
Under s 17 of the Industrial Relations Act (Cap 136), a trade union may serve on an employer (or vice versa) a notice setting out proposals for a collective agreement and inviting negotiations. It is not unusual for collective agreements to contain provisions for employees to receive retrenchment benefits calculated on the basis of a formula involving a percentage of monthly salary and the number of years of service.

It has been recently reported that one of the major local banks involved in a merger had agreed on a retrenchment package based on a percentage of monthly pay and the number of years of service plus a lump sum payment for members of the Singapore Bank Employees Union and Singapore Bank Officers Association. Yet another major local bank had announced retrenchment packages of this nature for both unionised and non-unionised staff.

It should be noted, however, that s 17(2) of the Industrial Relations Act (Cap 136) provides that one of the matters which a trade union is not entitled to include in a notice under s 17 of this Act (ie one of the non-bargainable matters) is: 'the termination by an employer of the services of an employee by reason of redundancy or by reason of the reorganisation of an employers' profession, business, trade or work or the criteria for such termination'.

Veiled Retrenchment
If there are no contractual provisions providing for the payment of retrenchment benefits to an employee, the employer may terminate the contract by giving such notice as may be stipulated therein or reasonable notice, if no such period of notice is agreed, or by paying salary in lieu of notice.

In the case of Noor Mohd Bin Mumtaz Shah v Apollo Enterprises Ltd [2001] 1 SLR 159, an employee who was dismissed with one month's pay in lieu of notice, successfully claimed retrenchment benefits on the ground that the termination was in fact a disguised retrenchment to avoid paying substantial redundancy payments which the employee was contractually entitled to. In this case the employee had worked for Apollo Hotel for almost 25 years and was entitled to retrenchment benefits under a collective agreement applicable to him.

The court accepted that there was a general right to effect a termination with notice. Nevertheless, the court held that it was entitled to examine the circumstances to determine whether redundancy was the sole or main ground for termination. The court found that in the particular circumstances of the case, the onus shifted to the employer to show that the termination was not solely or mainly due to redundancy. The dismissal having taken place during a time of severe economic difficulty for the hotel industry and at a time when the employers were engaged in cost cutting measures, the court found that the employers had failed to rebut the presumption.

Redundancy Payments for Directors
Directors are often also employees of the company, holding executive positions. Retrenchment packages to such employee-directors must be examined in the light of s 168 of the Companies Act (Cap 50). Section 168(1)(a) provides that:

It shall not be lawful -

(a) for a company to make to any director any payment by way of compensation for loss of office as an officer of the company or of a subsidiary of the company or as consideration for or in connection with his retirement from any such office; ... unless particulars with respect to the proposed payment, including the amount thereof, have been disclosed to the members of the company and the proposal has been approved by the company in general meeting and when any such payment has been unlawfully made the amount received by the director shall be deemed to have been received by him in trust for the company.

Goh Joon Seng J in the case of Britannia Brands (S) Pte Ltd v Sushil Premchand [1995] 1 SLR 128, described the purpose of the section as being 'to prevent secret payments/golden handshakes to directors and other executives of the company'.

Scope of s 168(1)(a) of the Companies Act (Cap 50)
The scope of this section was considered in that case and by the Court of Appeal in the subsequent case of Grinsted v Britannia Brands (Holdings) Pte Ltd [1996] 2 SLR 97. It should be noted that the wording of this section differs from similar sections appearing in the English Companies Act and in previous versions of the New Zealand, Victoria and New South Wales Companies Acts. Section 168(1)(a) refers to compensation for loss of office as an officer of the company. Under the Singapore Companies Act (Cap 50), the word 'officer' is defined as 'any director or secretary of the corporation or a person employed in an executive capacity by the corporation'. Section 121(1)(a) of both the Victoria and the New South Wales Companies Act 1961, however, refer to compensation for loss of office as a director, whereas s 191 of the New Zealand Companies Act 1955 and s 312 of the English Companies Act 1985 refer to 'compensation for loss of office', without including the words 'as a director' or 'as an officer'.

In the New Zealand case of Taupo Totara Timber Co v Rowe [1978] AC 537, the Privy Council held that s 191 of the New Zealand Companies Act 1955 did not apply to payments made by a company to a director in connection with some employment held by him, nor to payments which the company was contractually bound to make.

In the Australian case of Lincoln Mills (Australia) Ltd v Gough [1964] VR 193, the court held that payments which the company were bound to make to a managing director under his service contract, upon the termination of his office as managing director, were not rendered unlawful by s 129(1)(a) of the Companies Act 1961, Victoria.

The wording of s 168(1)(a) was considered by Goh Joon Seng J in Britannia Brands v Premchand and by the Court of Appeal in Grinsted's case. The Court of Appeal held in Grinsted that the difference in wording between s 168(1)(a) of the Singapore Companies Act (Cap 50) and s 121(1)(a) of the Companies Act 1961, Victoria, is material and must have been intentionally made. Accordingly, the Court of Appeal found that s 168(1)(a) of the Companies Act (Cap 50) does have a broader scope than the equivalent Victorian provision considered. Nevertheless, the Court of Appeal in Grinsted's case found that severance payments which the company had agreed to make to an executive director under his service contract were not rendered unlawful by s 168(1)(a). The court found that the severance benefits were part and parcel of the remuneration package agreed with the executive director and were, therefore, not paid with the object of compensating him for the loss of his office or in consideration of his retirement therefrom.

Exclusions from s 168(1)(a)
Section 168(5) of the Companies Act (Cap 50) expressly provides that payments to a director of a company by way of compensation for loss of office or as consideration for or in connection with his retirement from office shall exclude:

(a) any payment under an amount entered into before 1 January 1967;
(b) any payment under an agreement particulars of which have been disclosed to and approved by special resolution of the company;
(c) any bona fide payment by way of damages for breach of contract;
(d) any bona fide payment by way of pension or lump sum payment in respect of past services, including any superannuation or retiring allowance, superannuation gratuity or similar payment, where the value or amount of the pension or payment, except in so far as it is attributable to contributions made by the director, does not exceed the total emoluments of the director in the three years immediately preceding his retirement or death; or
(e) any payment to a director pursuant to any agreement made between the company and him before he became a director of the company as the consideration or part of the consideration for the director agreeing to serve a company as a director.

In Grinsted's case, the court held that severance benefits were also excluded under s 168(5)(d) of the Companies Act (Cap 50). Whether or not any retrenchment package is caught by s 168(1)(a) of the Companies Act (Cap 50) will, of course, depend on the particular circumstances of the case. On the authority of Grinsted's case, however, payments made under a retrenchment package included in an executive director's contract of service will be outside s 168(1)(a) of the Companies Act (Cap 50) if the package is part and parcel of the executive director's remuneration package pursuant to which the executive director had been induced to accept employment with the company, and the payments were not made with the object of compensating the director for loss of his office or in consideration of his retirement therefrom.

A retrenchment package may arguably also fall within the exceptions set out in
s 168(5)(c) or (d) of the Companies Act (Cap 50). The best course for any executive director whose contract of service includes a retrenchment of severance package is to have the particulars of the contract disclosed to and approved by a special resolution of the company, so as to bring monies payable under such a package within the exception set out in s 168(5)(b) of the Companies Act (Cap 50).

Deborah Barker, SC
Khattar Wong & Partners