Monthly Journal (April 2020)
MCO Special Edition
|“Throughout the MCO, is time to to check and revise the existing contract .. especially employment contract..”|
On 18th March 2020, Government of Malaysia officially implemented the Movement Control Order (MCO) pursuant to the Prevention and Control of Infectious Diseases Act 1988 and the Police Act 1967 to prevent the continued spread of the coronavirus pandemic (COVID-19) whereby effective 18th March 2020 to 31st March 2020, all government and private premises are ordered to be closed, save for premises and/or businesses falling within the ambit of essential services.
The spreading of COVID-19 has inevitably caused several drawbacks. On 25th March 2020, the Prime Minister of Malaysia Tan Sri Dato’ Muhyiddin Yassin announced that the movement control order measure had been extended to 14th April 2020. Many businesses are expected to be affected by the implementation of the movement restriction. On 9th April 2020, again Prime Minister of Malaysia Tan Sri Dato’ Muhyiddin Yassin announced that the movement control order measure had been extended to 28 April 2020. Extended again until 12 May 2020 after that.
As a result, parties to commercial agreements and employment agreements may be unable to perform its obligations under their respective agreements. An issue then arises as to whether a party may be relieved from performing its obligations amidst COVID-19. The question is especially relevant to an innocent party who is unable to perform its obligations as a result of the COVID-19 pandemic
Highlights of this Journal
This journal is a special edition in light of the recent Movement Control Order (MCO) measure and addresses the following areas:
- Invoking a Force Majeure Clause in a Contract;
- The Doctrine of Frustration of Contract;
- Cut down the salary to Avoid Redundancy and/or Retrenchment and/or Termination;
A. INVOKING A FORCE MAJEURE CLAUSE
It is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, pandemic or an event described by the legal term act of God such as hurricane, flood, earthquake, volcanic eruption and so on whereby prevents one or both parties from fulfilling their obligations under the contract. In practice, most force majeure clauses do not excuse a party’s non-performance entirely, but only suspend it for the duration of the force majeure
A party seeking to rely on a force majeure clause must also show that:
- The force majeure event was the cause of the inability to perform or delayed performance. The fact that performance is more difficult or expensive is insufficient. Therefore, if work can be performed through work-from-home arrangements, the parties will not be protected from liability for failing to perform obligations under the contract. However, if the nature of the work cannot be performed through work from home arrangements such as workers working in construction site, this clause is applicable.
- Their non-performance was due to circumstances beyond their control; and
- There were no reasonable steps that they could have taken to avoid or mitigate the event or its consequence.
Therefore, the legal consequence of the COVID-19 outbreak (epidemic) on any contractual relationship will vary depending on the nature of the contract, the type of obligations, the circumstances in which the obligations are to be performed and the foreseeability of the change in circumstances.
There is another example, there is sale and purchase agreement, whereby the Vendor can claim late payment interest in the event the Purchaser failed to pay the balance purchase price on time agreed in the agreement. In the event the deadline is fall in between the MCO, and if the sale and purchase agreement has incorporated this clause then
Companies should therefore appoint legal counsel to carefully consider the terms of the contracts and the laws which are applicable to safeguard their interests in the wake of the COVID-19 outbreak.
It Is strongly advised that for those companies whom did not incorporate this clause in their employment contracts, should revise the whole contracts.
B. THE DOCTRINE OF FRUSTRATION
In the event, the agreements do not contain the force majeure clause, then the Companies can look at the doctrine of frustration.
Invoking a force majeure clause is one of the ways by which parties to an agreement may relieve themselves from performing their obligations. Parties to a contract which does not contain a force majeure clause or where the force majeure clause does not cover events such as COVID-19, may rely on alternative defences such as material adverse change/effect or the doctrine of frustration
Applicability of the Doctrine of Frustration in an Employment Contract during Covid-19
The existence of the COVID-19 is undoubtedly an event that no party would have
contemplated and expected. However, based on the above reasons mentioned, the COVID-19 pandemic and MCO cannot be deemed as a frustrating event in an employment contract.
This is due to the enforcement of the MCO is temporary in nature which means that the employee is suspended from performance of his obligations as opposed to not being able to continue to perform his obligations of the said employment contract at any time whatsoever from the commencement of the MCO and henceforth.
The COVID-19 pandemic and the MCO does not radically alter the type of work as per the stated in the said employment contract, but merely changes the manner and/or duration for the performance of the work. For those works whereby the tasks may be performed from home, the work ought to be done from home. This would thus change the manner in which the work is performed albeit not frustrating performance of the same in its entirety. For professions whereby the tasks cannot be carried out from an alternative location and/or via an alternative medium, then the performance of their obligations as per the said employment contract is suspended temporarily and will continue upon the ceasing of the MCO.
Therefore, in short this doctrine is only applicable if the contract become totally impossible to be performed.
C. Cut the salary to avoid Retrenchment and Lay-off
There are some clients asked us whether the employer is entitled to cut the salary of the employee in order to avoid retrenchment and lay-off.
If employer want to deduct the salary of the employee, it is advised that the employer must seek the consent of the employee before doing so. If the employee turn down the request of the employer then the employer may go for the last option i.e. termination of employment. Companies may also resort to a Mutual Separation Scheme (MSS) or Voluntary Separation Scheme (VSS)
A deduction of salary if is without the consent of employee, it may be called as unilateral variation of employment of contract of employees may this maybe lead to unlawful dismissal and eventually may lead to some court cases in Industrial Court.
However, there are certain circumstances in which a unilateral variation of employment contract is allowed. For example, where the employee is legitimately demoted with a salary reduction which is permitted by terms stated in his employment contract or by virtue of section 14(c) of the Employment Act 1955.
This is due to if the purpose of Employer to deduct the salary of employees is in good faith i.e. not to lay-off or retrench the employee , the Industrial Court may look at the intention of the Employer as a whole to determine whether the salary deduction though done in in a unilateral way is lawful or unlawful.
According to Section 2 of the Employment Act 1955, “wages” means basic wages and all other payments in cash payable to an employee for work done in respect of his contract of service. Essentially wages is paid for work done. During the period of MCO some of the works cannot be done from work from scheme, therefore the Employer shall be entitled to cut the salary.
The Code of Conduct for Industrial Harmony 1975 (the Code) was agreed upon between the then Ministry of Labour and Manpower, Malaysian Council of Employers Organisation and the Malaysian Trade Union Congress to lay down principles and guidelines to employers and workers on the practice of industrial relations for achieving greater industrial harmony.
Clause 20 of the Code Of Conduct For Industrial Harmony states as follows for situations where there is inevitable redundancy and retrenchment:
“Redundancy and retrenchment”
(20) In circumstances where redundancy is likely an employer should, in consultation
with his employees’ representatives or their trade union, as appropriate, and in consultation with the Ministry of Labour and Manpower, take positive steps to avert or minimise reductions of workforce by the adoption of appropriate measures such as:
- (a) Limitation on recruitment
- (b) Restriction of overtime work
- (c) Restriction of work on weekly day of rest
- (d) Reduction in number of shifts or days worked a week
- (e) Reduction in the number of hours of work
- (f) Re-training and/or transfer to other department/work
It is to be taken note that reduction in the number of work indirectly means that the Employer is entitled to deduct the salary as during MCO, there are a lot of workers cannot be work from home. The main purpose of this Code of Conduct is to try to minimize the cases of retrenchment and lay-off.
Now come to the main concern, the Ministry of Human Resources has issued circular/guidelines whereby in the part of FAQ has clearly highlight that no reduction of salary is allowed during the period of MCO.
However, in our law firm opinion that these guidelines are general and simple in nature and without looking at the actual scenario. If the so called approaches are taken, we believe that the employer will go for the options of retrenchments and lay-off. Then, a lot of employees become unemployed.
Some employers concern that since government has launched the stimulus packages to assist the employers but the packages unable to meet all the employers needs. t is our view that despite the assistance provided by the government, where employers are still unable to meet salary payments, a pay-cut or salary reduction would be a preferred option compared to a termination of the employees’ services. This would be arguably in line with the government’s initiatives.
Our legal firm perspectives: –
- During MCO, some of the employees cannot fulfil their obligations of the employment contracts and the definition of the wages is well defined as payment in exchange for work-done;
- Code Of Conduct For Industrial Harmony 1975 though no a binding contract mentioned very clearly the employers can reduce the work time and this indirectly mean the employers are entitled to deduct the salary;
- Though some employees might argued that the deduction of salary is done without the consent or permission of the employees but if in overall the employers are acting in good faith i.e. deduction of salary is to avoid retrenchment and lay-off then the decision of employers is justifiable;
- Though Government of Malaysia has launched some stimulus packages to assist the employers but in our view the packages are not sufficient to help the employers. The actual intention of the stimulus packages is also to avoid retrenchment and lay-off. Therefore, if the intention of the employers is only to prevent the retrenchment and lay-off by deducting the salary employee, then the decision of the employers is justifiable.
- It is as a result of a government order which effectively states that it is illegal to attend work and perform duties pursuant to the ministry’s directives derived from the Prevention and Control of Infectious Diseases Act 1988 and the Police Act 1967.It is not the decision of employers to enforce the deduction of salary due to circumstances within their control and therefore cannot be argued to be unilateral.