Responsible retrenchment in a changing landscape

As the markets shift around us and ways of working evolve, companies must adapt. An unfortunate consequence could be that, in order to remain competitive, it is necessary for some companies to make reductions to the company’s workforce. No company is exempt as even titans of the tech industry have engaged in multiple layoffs. It’s important, therefore, to be aware of the law surrounding retrenchment in Singapore.

It is imperative to remember that retrenchment should always be considered a measure of last resort. The Singapore Ministry of Manpower (MOM) has released a series of guidelines known as the Tripartite Advisory on Managing Excess Manpower and Responsible Retrenchment (Tripartite Advisory). The advisory uses the term “responsible retrenchment” and urges employers to explore other cost-saving options first before retrenchment, which should be seen as a means of last resort. Such options include flexible work arrangements, redeployment of the employee to other teams or other companies, wage-related cost savings measures, and government support schemes.

In some cases, there will be no other way forward. Following the MOM’s advisory on responsible retrenchment would ensure the smoothest process and limit the scope of any potential claims against the company by affected employees. We elaborate further on some of the key obligations to take note of when conducting a retrenchment exercise.

What is retrenchment?

First, businesses should always consider whether the decision to terminate an employment contract is to be legally defined as a retrenchment or redundancy. Retrenchment or redundancy refers to the situation where a portion of the staff or labour force of a company is being discharged due to surplusage. As the Tripartite Advisory further elaborates, an employer who terminates an employment contract with no plan to fill the vacancy any time soon is presumed to have retrenched an employee.

Making the decision

When considering which employees would be affected by the retrenchment, it is vital to take into account the protected characteristics in the MOM’s Tripartite Guidelines on Fair Employment Practices (TAFEP).

Specifically, TAFEP indicates that selection of employees for retrenchment should be on an objective basis – meaning without bias towards the employee’s race, gender, age, religion or marital status. Additionally, TAFEP specifies the need for a strong “Singaporean core” of the workforce, which is echoed in the Tripartite Advisory on Retrenchment, emphasizing the proportion of the workforce which should be Singaporean as a factor.

It is important to note two specific situations which are protected by MOM guidelines and from which a claim is likely to arise. Firstly, if a pregnant employee is selected for retrenchment, as a result of the enhanced maternity protection offered by the MOM since 2017, the employer will still be obligated to pay the entire sum of maternity pay that would ordinarily be due to the employee.

As for employees who are offered re-employment under the Retirement and Re-employment Act 1993, there is no issue of retrenchment benefits. This is because they have already reached the statutory retirement age. That said, employers are encouraged to negotiate and offer financial assistance to help tide these employees for a period of time while they seek alternative employment.

Giving notice

Before any public notice of a retrenchment exercise, employers should always seek to constantly communicate and be open with employees about ongoing efforts to manage business challenges. Early communication, compassion and respectful dialogue are strongly encouraged in managing any retrenchment exercise. This could include:

• Offering employees a longer-than-usual notice period to be negotiated with an employee. This will give them a longer runway to find alternative employment after being notified of retrenchment.
• Notifying employees via a face-to-face discussion with their managers.
• Having Human Resources present in such discussions with employees to manage the sensitivities of the situation and answer any queries from retrenched employees.
• Always giving employees time and space to adjust to the news of their retrenchment, and to give lead time. Employees should not be asked to leave workplaces abruptly or have their employment end in an abrupt, curt manner.
• Help affected employees look for alternative jobs in related entities, other companies or even seek assistance from the unions, SNEF, Singapore Business Federation and agencies like Workforce Singapore NTUC’s e2i and other organizations that can assist affected employees in finding alternative employment.

Notice of the retrenchment must be given not just to the affected employees, but also to the MOM (and to the union, if applicable). Companies registered in Singapore with at least 10 employees are required to notify MOM within five working days after affected employees are notified of retrenchment.

Retrenchment packages

Generally, retrenchment benefits are not a statutory entitlement. Payment of the same is a matter to be privately negotiated with employees (whether in the employment contract, company policies or private negotiations), whether they are employees under Part IV of the Employment Act 1968 or otherwise.

The Tripartite Advisory particularly states that the employer’s ability to pay retrenchment benefits depends on the financial circumstances of the employer.

However, employers may wish to consider the guidelines as to the quantum of such retrenchment benefits to be negotiated. Generally, employees with two years’ service or more are eligible for such benefits, while those with less than two years’ service can be provided ex-gratia payments to be negotiated between parties privately.

The quantum depends on what is provided for in the contract of service or negotiated privately between parties. However, the Tripartite Advisory provides that the prevailing norm is to pay a sum of between two weeks to one month’s salary per year of service, taking into account industry norms and the financial situation of the employer. For unionized companies, the quantum of retrenchment benefit will be stated in the collective agreement and the norm is one month’s salary for each year of service.

If any employee selected for retrenchment is also a director of the company, section 168 of the Companies Act 1967 should be considered. In summary, companies are prohibited from compensating a director for loss of office or as consideration for or in connection with his retirement from his office, unless particulars with respect to the proposed payments have been disclosed to and approved by the company’s shareholders at a general meeting. The exception to this is if the director is holding salaried employment or is compensated under the terms of his employment agreement.

Separation and release

While a separation agreement is not required under Singapore law, it is generally best practice to do so with the retrenched employee. The agreement should cover details of the employee’s retrenchment benefit, as well as any obligations or covenants parties may further agree to such as confidentiality, mutual non-disparagement, or non-competition clauses. The letter agreement should also detail full and final settlement with the employee in respect of any payments due on cessation of employment.

This agreement can further act as protection for the employer, as it ensures that employees do not bring further claims against the employer in respect of their employment.

Are you considering retrenchment?

Downsizing as part of business transformation can be daunting. Legal and practical considerations must be balanced; and sound decisions made despite the sensitive nature of multiple dismissals. We hope that the information helps to highlight some of the key issues to consider and pitfalls to avoid during the process.

Peter Doraisamy is Managing Partner, Cathryn Neo was a Partner (until 31 August 2023), and Vincent Lee is an Associate, all at PD Legal in Singapore. The writers are grateful for the contribution of the firm’s intern Theo Southgate.