My employer recently decided to go through the process of employee downsizing. Retrenchment, layoff, and downsizing - they all mean the same to me. I prefer to use the word 'layoff' though, as the definition from the Webster dictionary about this much-feared word is 'the act of withdrawing an employee from business activity'. In this write-up, the word 'retrenchment' would also be used interchangeably with layoff as it means 'to cut down expenses' and this is exactly what the ultimate purpose of this exercise.
I would be the first to admit I did not have any direct experiences in this unfamiliar territory. After all, not everyday or every year (for that matter!) an HR practitioner goes through this exercise; and thus began the process of searching for the appropriate modus operandi for laying employees off.
From my search, I understand there are at least 6 basic steps in layoff exercise. 1. Making decision on retrenchment date and compensations: Last Working Day Compensation Calculations 2. Notification to Labor Office (Form PK I/98) 3. Application for tax waiver benefits from Income Tax Dept 4. Communications Retrenched employees Existing (surviving?) employees Press Holding Statement 5. Q&A Session(s) with remaining employees 6. Outplacement Services
I. Decision on Retrenchment Date & Benefits There are many reasons why a business decides to layoff, and the moment this is finalized, certain information needs to be confirmed foremost. They are:
1. Last working day of retrenched employees 2. Compensation calculations
This may seem like a simple decision, but the truth is, it is not. Layoff exercise is a stressful process for both employer and employee. For the employer, this means letting go some of its employees who have been with the company through thick and thin. Very often, the employer is having the hardest time to pinpoint the last working day for the affected employees. As for the employee, the emotional stress is about losing a job. Losing a job means losing a source of steady income. You feel helpless, and not so beautiful.
As an HR practitioner who represents the employer, it is incumbent upon me, to minimize the stress that the employees might be experiencing as a result of losing a job. Others may take a different perspective, but on my part this is how I would play my role throughout this exercise.
Last Working Day While there are no guiding rules when is the 'best' time to layoff employees, I found out that the more compassionate employers often carry out layoff activity towards the very end of the year. The reason being, when a new year kicks in, other employers would have new budgets to play with (and the previous year's budget unfrozen)-- thus hiring decisions are more prevalent during the beginning of a year. This will facilitate the laid-off employees to seek another employment, hence cutting down the 'unemployment' period and stress factor.
I also found out that some employers go to the extent of choosing the 'best' day when to make the announcement. Announcement to retrench is best made either on Wednesday or Thursday. Very often right after the announcement, the retrenched employees will be allowed to leave the company immediately, with the understanding that he is allowed to come back in the next few days to pack. This will also allow the employees to seek further clarifications from the employers during the immediate next few days. Naturally such practice differs from one company to the next depending on the base location of the parent company. Most American companies have been known to ask the employees to leave the very same day right after the announcement.
Having the retrenchment announced on Friday would mean the employees have to wait for the weekend to be over before he can come back to the office to ask more questions. When in need to get answers immediately, such waiting period could very well beget anxiety, which leads to stress. Monday or Tuesday are bad for announcement, as employees will feel 'psychologically crushed' amidst his enthusiasm and high spirit to start a new working week.
Compensation Calculations The Malaysian Employment Act 1955 and its 1980 regulations on termination and layoff benefits, provides minimum compensation requirements for retrenched employees whose salary are within RM1,500 monthly. Irrespective of wages, those who work as manual laborer and their supervisors will also be covered under this act. The compensation has to be paid out to the retrenched employees within 7 days of the retrenchment period.
The compensations awarded (minimum) are tied-in with length of service:
Service Length.........Compensations 1-2 years...................10 days' wages for each year of service 2-5 years...................15 days' wages for each year of service > 5 years...................20 days' wages for each year of service
Other employees who are entitled to the above compensation include all employees under CA (with termination clause). An employee serving less than 1 year of service, is by law, not entitled to retrenchment compensation.
While doing compensation calculation, I have taken the following components under considerations:
Leave-in-lieu The number of unused vacation/leave entitlement will be paid according to wages/salary per day. This amount is subject to tax and EPF deductions.
Notice period As retrenchment usually is effective within 24 hours, the employer will have to pay the notice period that otherwise would have been served by the employee. This amount is subject to tax and EPF deductions.
Service Length This usually forms the biggest chunk of the compensation pie. Generally, an employer is seen as taking a very humanistic approach when it compensates the employee more than the minimum as what is required by the Employment Act.
In my survey of other companies (bear in my mind, there is no way I could do an exhaustive survey, the criteria I chose was multi-national companies, and big local players), I found that on the average reputable employers would pay from 1.5 to 2 months of salary for each year of service. For some reasons, local companies are more generous in their terms. I suspect MNCs have to follow the respective company's global practice when compensating hence the more conservative figure when the deciding the quantum of pay.
This part of the compensation, also known as 'severance pay', receives a tax waiver from the Income Tax Dept. For year 2003, the tax exemption is for RM6,000 for each compensated year of service. Severance pay is not EPFable.
Contractual Bonus As bonus is contractual in my company, I have factored this amount in the layoff compensation package. The amount however will be prorated in case an employee has not completed a full year of service. This amount is subject to tax and EPF deductions.
Once I have all the information intact, it is time to visit the Labor Office.
II. Notification to Labor Office (Form PK I/98) At the labor office, I got the Form I-98 from the counter without much hassle. The form can also be downloaded from its website. The form PK I/98 has several sections (with a lot of pages in between!) and once all information is in, I submitted the form back to the Labor Office. Here, my responsibility, as a representative from the employer, is to just notify the Labor Office that we have decided to carry out a retrenchment exercise. You might be asked by one of the officers on the nature of your business, the reason for the layoff, the number of employees involved…just a small talk, really.
Upon this formal notification to labor office, an employer will be allowed to start its layoff exercise 30 days after the notification is filed. Should the Labor Office have any query; it would do so during the 30-day notification period.
Within 10 days after the retrenchment exercise, I had to present myself back to the Labor office with another section of the Form PK 1/98. Again, I made a small talk with the officers about what had happened during the exercise.
And after 30 days from my last meeting with the Labor Office, again I had to bring back myself to see them one last small talk. I submitted the final section of the Form PK 1/98 to them, and that was that. It is a bit of a hassle to be visiting the Labor office so often, but I figure they are just there to watch over the employees, interest incase some employers got some funny ideas to victimize its employees.
III. Application for Tax Waiver Benefits at Income Tax Department. I was under the impression that after filing Form PK-1/98, the tax waiver benefits for laid-off employees would come automatically. This however was not to be the case. Tax waiver benefits have to be applied at the Income Tax Department. I was to write a letter and it looked something like this:
EMPLOYEE's NAME, EMPLOYEE's TAX NO. PAMPASAN BAGI KEHILANGAN PEKERJAAN
Dengan segala hormatnya kami ingin memaklumkan bahawa pihak syarikat kami adalah didalam proses memberhentikan pekerja di atas selepas pada tarikh______________________
Syarikat kami kini berada di dalam proses penyusunan semula dari segi hal pentadbiran. Oleh itu, bagi mengurangkan kos pembelanjaan, pihak kami telah membuat keputusan untuk menamatkan kontrak pekerjaan beberapa pekerja-pekerja kami. Sehubungan dengan ini, pihak kami akan membayar wang pampasan kepada mereka-mereka yang diberhentikan. Butiran salah seorang pekerja yang terbabit adalah seperti berikut:
Nama Tempoh Perkhidmatan Jumlah Pampasan
Di sini kami lampirkan juga dokumen-dokumen yang berkaitan dengan permohonan kami:
-- salinan surat kepada Lembaga Hasil Dalam Negeri (Tarikh) -- borang EA bagi tahun berakhir 31 Disember 2003
Pampasan di atas dibayar mengikut syarat pembayaran Seksyen 83(3), Akta Cukai Pendaptan 1967.
Kami berharap pihak tuan dapat mengeluarkan surat penyelesaian cukai secepat mungkin bagi mempercepatkan proses pembayarn pampasan kepada pekerja di atas. Jika pihak tuan mempunyai sebarang soalan, bolehlah menghubungi penandatangan seperti tertera di bawah di talian __________
Kerjasama dari pihak tuan kami dahului dgn ucapan terima kasih.
This should take care of the job!
As mentioned before, the current ruling (year 2003) benefit is RM 6,000 tax waiver, for each year of service. The tax waiver is only applicable for year-of-service compensation. Other forms of compensation such as leave-in-lieu, contractual bonus, and notice period are all NOT eligible for tax –waiver. Sample of calculation is as follows:
Eg. Employees earning RM6,500 month who completes 4.3 years of service. Notice Period and Contractual Bonus is 1 month. Retrenchment takes place on Dec 31st.
1. Payment for Leave in lieu..................500 2. Payment for Notice Period..............6,500 3. Severance Pay*............................27,950 4. Contractual Bonus..........................6,500
TOTAL COMPENSATION...... 41,450
The severance pay is entitled to a tax waiver of RM6,000/year (2003). Calculation is as follows:
4 years of service = RM6,000 x 4 = RM24,000
Severance Pay to be taxed = RM27,950 - RM24,000 = RM3,950
TOTAL TAXABLE INCOME : 1. Payment for Leave in lieu..................500 2. Payment for Notice Period..............6,500 3. Severance Pay*..............................3,950 4. Contractual Bonus..........................6,500
TOTAL TAXABLE INCOME.......7,450
IV. Communications Three forms of communications have to be handy: 1. For the Employees When the time comes to inform the employees that he has been retrenched, it is most advisable to find a place where privacy if of the utmost essence. Just in case--- should the employees have a breakdown or cause a scene, certainly you don't want other existing employees to feel alarmed. Some companies choose to make announcement a few weeks before the retrenchment day while others opt to only announce the very day of the layoff exercise (watch out for the CA clause in unionized environment which requires minimum layoff notice to be given). I personally prefer the former, as it will be seen as mentally preparing the affected employees for any eventualities. The best person to break the news is usually his immediate superior, in the presence of an HR representative and the CEO.
This being done, you need to give him a few documents: 1. a document notifying him the amount of compensation he would receive and how the calculation is made; 2. a document outlining his understanding of the retrenchment exercise and accepting it (requires his signature); 3. an EA Form, detailing his yearly income as at layoff date; 4. a CP 22A, detailing his yearly income as at layoff date; 5. a CP 39 Form, detailing his monthly income tax deductions as at layoff date for the year.
More often than not, the affected employees will be asked to leave immediately after the announcement. Most MNCs will require the affected person to be escorted out (ugh!) or supervised during packing. Pretty de-humanizing, I think. Damage Control, they call it, in the event that the affected employees decide to harm the employer by destroying important documents or write malicious e mails to competitors.
The retrenched employees will then be required to visit the income tax department and bringing with him all the above documents. Income Tax officers will be helping him to figure out how much tax he still owes the government (if any), and will give him a letter (sometimes right there and then) to bring back to his employers, instructing payment for tax and the compensation balance to the employees. Finally!
2. For the Existing Employees While a company is not required to disclose in detail the reason for laying off its employees, it is advisable to do so for propriety's sake. A company would be better off giving feedback to employees rather than keeping the employees guessing. Besides, when emotions run high (some of the employees have just lost their best friends), it is always to be upfront about the reason(s) for the layoff exercise. I found that some of the common reasons are: A. To cut down expenses B. To minimize headcount C. Redundancy D. Restructuring
A simple announcement is all that is necessary. While it is unnecessary to announce who got the axe, it is good business strategy to announce if some remaining employees have changed responsibilities as a result of the layoff. When a company is prone to speculations (like in unionized environment), the earlier the announcement the better it is.
3. For the Public Some companies that are very high profiled would usually get their Public Affairs Department to prepare a holding statement just in case the media gets a whiff of the news. Again, damage control at work.
The Effects of Layoff Exercise
From NST-Dec 16, 2003, by Genevieve Wordsworth (summarized by tHRive)
Employers often focus on laidoff employees, rather than those who remain. The effects of layoff on those who remain are plenty. These include:
1. a lack of executive commitment to their functions; 2. confusion about the priorities of organization; 3. increased workloads; 4. confusion about mandate; 5. a sense of betrayal by organization; 6. sense of distrust; 7. sense of futility w/ respect to long term planning; 8. undervalued and unappreciated.
With such demotivations, the following will arise from operational terms: 1. Less risk taking and innovations; 2. destructive conflicts on the rise; 3. internal competition for resources increases; 4. employee puts less effort to become a team player; 5. general listlessness & lethargy; 6. decreases service levels & increase public hostility.
Clearly, organizations need to have intervention plans to turn the downcycle around, as long term projects. Left neglected, the problems of employees being demoralized will only get worse. Organizations should as quickly as possible, revisit its mandate, priorities, vision and commitment levels. Sharing this information with the remaining employees will improve long term health of the organization.
