Tay & Partners

Departing from Last-In-First-Out: The “Best Fit” Principle

LegalTAPS Jun 2024

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The year 2020 will be remembered as one of the most challenging periods for the airline industry. The enforcement of the travel and border restrictions in many countries during COVID-19 pandemic had drastically reduced the demand for flights, adversely impacting the financial performance of airline companies. According to Malaysian Aviation Commission (MAVCOM), Malaysia experienced a massive drop in air travel in the third quarter of 2020 compared to the same period in 2019. Specifically, the number of international passengers reduced by 98.1%, meaning almost no one was flying internationally. Meanwhile, domestic travel also suffered significantly with a 69.3% decrease in domestic passengers.[1] To keep themselves afloat, many airline companies had to make tough decisions to reorganise their business operations and to retrench their employees.

Retrenchment is often a controversial process due to the need to strike a balance between the competing rights of the employers to run and reorganise its business and the rights of the employees to enjoy security of tenure. Traditionally, the Last-In-First-Out (LIFO) principle has been used in such scenarios to determine which employees to be let go first. However, these unprecedented challenges have forced the companies to rethink and sometimes deviate from this principle. This can be observed from an airline’s recent cases, where the airline opted for a “best fit” selection criteria instead of LIFO principle during its retrenchment exercise.

What is LIFO principle?

The LIFO principle is a method used in retrenchment exercises in a redundancy situation to determine which employees should depart  based on their length of service. This principle is designed to afford a healthy safeguard against discrimination of the employees in retrenchment exercises[2] by ensuring that the most junior employees are retrenched before the more senior ones in the same category. However, the LIFO principle does not apply to cases where there is only one person in a particular position or category that has been identified as redundant.[3]

The LIFO principle comes from the Code of Conduct for Industrial Harmony (“Code”), but it is not a strict law. Clause 22(b) of the Code states that employers should select employees for retrenchment based on objective criteria, with the length of service being one such criterion. Thus, the LIFO principle is only one of these criteria that employers are encouraged to consider when making retrenchment decisions.[4] However, any departure from the LIFO principle must be justified with acceptable or valid reasoning. Otherwise, preferential treatment of junior employees over senior ones can indicate a lack of bona fides in the retrenchment exercise.[5]

Case law reveals that the LIFO principle is traditionally favoured due to its simplicity and the perceived fairness. It retains employees based on their loyalty towards their employers regardless of age, gender, race, colour, or nationality. This approach also helps to maintain transparency, which is essential to ensure procedural fairness in retrenchment exercises.

 “Best fit” policy: was it fair?

In a recent Industrial Court case, the Claimant alleged that an airline (“the Company”) had wrongfully dismissed him by adopting the “best fit” policy in the Company’s retrenchment exercise. The Claimant, a co-pilot with 16 years of service without accident, argued that adherence to the LIFO principle would have preserved his position, questioning the fairness of his redundancy while foreign pilots remained employed.

The Company defended its position by highlighting the severe financial difficulties it faced due to the global economic changes in the Asia Pacific region and the COVID-19 pandemic. As a result, the Company had no choice but to undergo a business alignment exercise to maintain a lean and efficient operations team of crews and pilots, i.e. to retain only a core team of “best fit” employees. The company justified its “best fit” approach by reviewing the performance ratings and disciplinary records of the pilots including the Claimant, since 2016. Despite his 16 years of service, the Claimant’s past ratings of “Must Improve” in 2016 and “Need Improvement” in 2019 had compelled the Company to proceed with the retrenchment.

Considering the Company’s intention for the business alignment exercise to retain the “best fit” employees during the COVID-19 pandemic to mitigate financial adversity, the Industrial Court held that the Company was justified in deviating from the LIFO principle when deciding to retrench the Claimant. The Industrial Court noted that selecting employees for retrenchment based on work locations, special skills/qualifications, performance ratings and disciplinary records was justified to depart from the LIFO principle for the Company to achieve its objective in the face of a financial crisis.

Further, retrenchment exercises should always be guided by objective performance and business needs, not nationality. Whilst recognising the “Foreign Worker, First Out” Policy, it applies only when both local and foreign workers possess equal qualifications and competence. Prioritising local workers over more competent foreign workers can harm the company’s overall performance and productivity.

Is the “best fit” policy a new trend?

The “best fit” policy, prominently used by the Company during the COVID-19 pandemic, represents a notable shift in how some companies approach retrenchment. The Company underwent business restructuring, including retrenchments, downsizing its fleet, and shutting down some of its international operations as part of an effort to weather through the financial hardship during the COVID-19 pandemic. This restructuring led to a series of legal cases brought by affected employees against the Company.

Nevertheless, based on case law, the Industrial Court has consistently upheld the Company’s “best fit” policy as a fair and pragmatic approach given the unprecedented challenges posed by the pandemic. This new trend reflects the flexibility within the industrial relations landscape in times of economic crisis and underscores the importance of applying objective criteria in retrenchment exercises.

Implications of the Recent Decisions

The Industrial Court’s decisions to uphold the Company’s deviation from the LIFO principle in favour of a “best fit” policy has significant implications for both employers and employees. It sets a legal precedent allowing companies to prioritise experience, performance, skills, and overall fit over tenure during retrenchment, potentially leading more companies to adopt similar approach in times of economic and financial crisis. This can enhance operational efficiency by retaining employees who are best suited to meet their current business needs.

However, the potential negative impact on employees who lose their jobs during times of uncertainties should not be overlooked.  There must be a balance between the competing rights of the employers and employees. Whilst employers can choose to depart from LIFO and adopt their own criteria, it also means that the selection criteria are subject to further evaluation by the court.  Therefore, employers are advised to ensure that transparent and fair procedures are implemented and well-documented during retrenchment exercises. Consequently, companies may need to revisit their retrenchment policies to ensure decisions are justified and balanced between operational needs and fair treatment of employees.

[1]              Malaysian Aviation Commission, Waypoint Report: December 2020 (MAVCOM 2020) https://www.mavcom.my/wp-content/uploads/2020/12/201208-MAVCOM-Waypoint-Report-December-2020.pdf accessed 18 June 2024.
[2]              Dynacraft Industries Sdn Bhd v Kamaruddin bin Kana Mohd Sharif & Ors [2012] 4 ILJ 334
[3]              First Allied Corporation Bhd v Lum Siak Kee [1996] 2 ILR 1628
[4]              Supreme Corporation Bhd v. Doreen Daniel & Ong Kheng Liat [1987] 2 ILR 522
[5]              Tan Hong Yak v Nixdorf Computer (M) Sdn Bhd [1997] MELR 347

Leonard Yeoh
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Chen Mei Yan