Employee pay cut and retrenchment due to Covid-19

Things may not look so promising for businesses in the several months. Last week, read that four out of ten startups and social enterprises surveyed by MaGIC, a government entrepreneurship agency may close shops if the Covid-19 pandemic continues after the Aidilfitri holidays.

We’ve been speaking to some of our startup clients and we can only imagine the challenges as they find new ways to navigate this new gloomy business climate. Some of you have also been asking us what can you do if you have cashflow issues and may not be able to continue paying your staff salaries.

In this post, we take a quick look at what are the key legal principles to look at when it comes to an employee pay cut or even laying off an employee.

Pay cut or laying off should be the final step

At the outset, the employment contract is a sacred document and legally binding between the employer and the employee. As an employer, you may not simply deduct annual leave or unilaterally impose an employee pay cut as they are usually not provided in an employment contract.

However, the Covid-19 pandemic is not just unprecedented but the disastrous effect over businesses have been so damaging that so many small businesses may not even survive in the next several months.

First, as CEOs or founders, the law mandates you to show that you’ve made all reasonable efforts to cut expenses and costs. We’re talking about subscriptions or allowances which may be optional or not really essential when it comes to businesses. Things like travelling and parking allowances may no longer be relevant for now as many would be working from home may be removed to cut costs.

The idea is that you must show that you have cut all expenses that you can within your abilities to ensure that business continues to operate as usual and they are all done in good faith.

Retrenching employees due to Covid-19

Let’s be clear about retrenchment. It’s a form of dismissal of employees who have become surplus to the needs of the organisation.

Usually, retrenchment happens due to a loss of profit, change of business direction, outsourcing of functions, or even a restructuring exercise.

At the outset, the law allows employers the right and prerogative on how they want to manage their workforce, so long as they comply with the faiir labour practice.

This is where it gets a bit tricky.

As CEOs or founders, you must show that you have a a legitimate commercial ground to retrench an employee. If there’s a dispute on the dismissal, the court will look at whether the exercise was done in good faith. In other words, there was no element of ill will or trying to take an advantage of the scenario to victimise an employee.

Based on the above explanation, if a startup is legitimately facing financial difficulties as a result of the pandemic, it looks like there may be a legitimate ground to reduce its team and may be able to retrench some of the staff that may be surplus.

We know it can be a challenge to manage this process. Schedule a call if you’d like to speak to a corporate lawyer and we’ll get into a call with you.

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