Going Separate Ways

Trishelea Sandosam explains a landmark Federal Court decision on voluntary separation schemes

 

INTRODUCTION

On 16 July 2012, a full panel comprising 5 judges of the Federal Court in Zainon bt Ahmad & 690 others v Padiberas Nasional Berhad (unreported) unanimously dismissed the appeal of 691 former employees of Padiberas Nasional Berhad (“Bernas”) against the decision of the Court of Appeal which held that these former employees were not entitled to termination benefits pursuant to the provisions of the Bernas Employment Handbook (“the Handbook”) after they mutually agreed to terminate their employment by accepting a package pursuant to a Voluntary Separation Scheme (“VSS”).

 

FACTS

In 2003, Bernas invited applications from its employees to leave their employment under a VSS pursuant to a circular dated 12 September 2003 (“the Circular”). This VSS exercise was undertaken by Bernas as part of a restructuring exercise to improve operations and increase efficiency.

The Circular emphasised that the VSS was a voluntary exercise and employees were at liberty to decide whether to apply for the VSS and Bernas had the discretion to accept or reject any VSS applications made by its employees.

Under the VSS, successful applicants would be entitled to a package which included basic compensation, salary in lieu of notice and unutilised leave and medical benefits for a period of 1 year post-termination.

The Appellants applied for the VSS and were successful in their applications. They were duly paid their benefits in accordance with the Circular by the end of 2003.

Approximately 2 years after they had ceased employment with Bernas and received the benefits under the VSS, the Appellants wrote to Bernas requesting for payment of retirement/termination benefits as contained in the Handbook.

Bernas did not accede to the Appellants’ request, which resulted in the latter commencing a claim in the High Court seeking, amongst others, a declaration that the Appellants were entitled to the retirement/termination benefits under the Handbook.

The Learned Judge of the High Court allowed the Appellants’ claim and concluded that their right under their original employment contract still subsisted as the contract was not rescinded by Bernas or the Appellants.

On appeal, this decision was unanimously overturned by the Court of Appeal. A detailed analysis of this decision can be found in the article entitled “Second Bite of the Cherry”, published in the Issue 1/2011 of LEGAL INSIGHTS.

 

LEAVE TO APPEAL

The Federal Court granted the Appellants’ leave to appeal on the following question of law:

“Whether rights that arise upon the termination of an employment contract are extinguished by a termination pursuant to a Voluntary Separation Scheme Contract (“VSS”) even where the VSS does not contain any of the following:

(i)    an express clause that extinguishes such rights which arise only upon termination;
(ii)    an express waiver of those rights by the party entitled to the benefits flowing therefrom; or
(iii)   an express provision stating that the VSS now encapsulates the entirety of the rights of all parties thereto.”

 

JUDGMENT OF THE FEDERAL COURT

In answering the question for determination in the affirmative, the Federal Court held that a VSS is a separate and independent contract intended to mutually override and terminate an existing contract of employment and the two cannot co-exist. Otherwise, the very objective of a VSS would be frustrated.

The Court applied the leading Indian decision on VSS schemes, AK Bindal v Union of India [2003] 2 LRI 837, where the Supreme Court stated as follows:

“The Voluntary Retirement Scheme (VRS) which is sometimes called Voluntary Separation Scheme (VSS) is introduced by companies and industrial establishments in order to reduce the surplus staff and to bring in financial efficiency … The main purpose of paying this amount is to bring about a complete cessation of the jural relationship between the employer and the employee. After the amount is paid and the employee ceases to be under the employment of the company or the undertaking, he leaves with all his rights and there is no question of his again agitating for any kind of his past rights … If the employee is still permitted to raise a grievance … even after he has opted for Voluntary Retirement Scheme and has accepted the amount paid to him, the whole purpose of introducing the scheme would be frustrated.”

The Federal Court agreed with the reasoning of the Court of Appeal on Section 63 of the Contracts Act 1950and held that the rescission of a contract by mutual agreement would result in an extinguishment of all rights and obligations under the terminated contract, even in the absence of an express provision to that effect.

The Court further held that a contract which is rescinded by agreement is discharged and cannot be revived and it is not intended that after an employee leaves employment under a VSS, they can return and seek benefits contained in their terms and conditions of employment.

The Court disagreed with the Appellants’ contention that retirement/termination benefits survived rescission of the employment contract pursuant to a VSS, thus entitling the Appellants to receive the retirement/termination benefits over and above the benefits under the VSS. It was noted by the Court that the Appellants were well aware of the fact that benefits provided to them under the VSS did not include the retirement/termination benefits.

The Court further observed that under the VSS, the Appellants had the choice to apply for the scheme or to continue in their employment with Bernas and as they had exercised their option and accepted the benefits provided under the VSS on their own volition, no question of unfairness arises.

The view of the Federal Court was clearly summed up in the following statement, “….. an employee who on his own will, accepts the benefits of the VSS, resigns, signs a full and final settlement and walks away cannot then turn around and ask for any other benefits.” 

 

CONCLUSION

Voluntary/Mutual Separation Schemes have become increasingly prevalent in recent times and various organisations have resorted to such schemes, particularly in tough economic climates, to reduce their workforce and increase productivity and efficiency without resorting to retrenchment exercises.  However, the legal implications of such schemes have not been deliberated by Malaysian case law in the past.

This decision of the Federal Court is the first of its kind in Malaysia to discuss the effect of a mutual termination of employment under a VSS and brings much needed clarity to the law pertaining to VSS schemes. It is also one of the few reported decisions on the effect of Section 63 of the Contracts Act 1950 which deals with the effect of novation, rescission and alteration of contracts. 

The commercial practicality of this decision is to be commended as it ensures that organisations are not disinclined to implement these schemes for fear of ex-employees re-agitating their rights even after accepting generous compensation packages under such separation schemes. This decision is also in line with long established principles of contract law which prevent parties who enter into legal arrangements, with free consent, and make a promise in consideration for certain benefits, from reneging on their promises after enjoying the benefits pursuant to a contract.

Bearing in mind the cruxof this judgment that all rights and obligations under a contract terminated by mutual agreement come to an end, employers who still wish to enforce post-termination clauses such as non-solicitation and confidentiality clauses against their ex-employees should insert express clauses saving such rights in their VSS documentation.   

It is hoped that this decision will see a rise in Voluntary/Mutual Separation Schemes, which arguably offer a better alternative to retrenchment as they afford much needed flexibility to businesses which seek to downsize, and enable employees to opt to cease their employment on mutually beneficial terms.

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