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Coronavirus Guide to Business Hibernation

Jeff Wall’s photograph based on the prologue of “Invisible Man” a celebrated novel by Ralph Ellison considered to be the greatest African-American writer of all time.

” Please, a definition: a hibernation is a covert preparation for a more overt action.”
– Ralph Ellison, Invisible Man, 1952

In harsh climates when food is scarce, bears and some other animals sleep through winter because they use up more energy maintaining their body temperature and in foraging for food than they would receive from eating the food they are able to find. This is also true of businesses now during this pandemic and forced lockdown.

Professionals such as accountants and lawyers who are normally very circumspect, compliant and coy about selling themselves in public, have recently very quickly jumped into the business guru bandwagon by dispensing webinar wisdoms and live-streamed tips to clients and strangers they have never met on how to survive through this unpredictable period that each day is looking leaner and tougher.

Companies are advised to tighten their belts at a time when they are also told that they have a legal and moral duty to pay full salaries to all their staff who are not working and staying at home.

Business owners are exhorted to stay positive and be willing to adapt and innovate. But they must if possible keep everything the way it was so that the situation can and will return smoothly and quickly back to before. As employers they are not allowed to change any job position, working hours and pay. To get staff to accept any of these changes a business owner must first convince them (via Zoom of course) that his plan is good for everyone in the long run and by appealing to their sense of desperation, gratitude or pity.

Like the latest memes such as stay at home to save lives, be responsible by not working or being alone in this together, the advice about the law we have been hearing sums up the paradoxes and dilemmas of Covid-19.

This pandemic is different from all past crises we know, not just because it affects and can harm more people and spread to more places but also because the response it brings out in people is so contradictory and confusing.

We are now dealing with the ‘unknown unknowns’, to use a term coined by ex-US Secretary of Defense Donald Rumsfeld when he was asked about the alleged weapons of mass destruction during the war on Iraq in 2002.

With so much that we don’t know and not knowing even more of what we don’t know, isn’t it better for us to postpone planning or committing too much until we figure things out? Shouldn’t a business be like a bear in the depth of a long dark winter adapt for survival by going into hibernation to conserve energy and resources till when the season is kinder and food becomes more plentiful and easier to find?

Malaysian labour laws only give companies the choice to either continue with terms they have agreed with their staff or lay them off if they cannot afford to keep them. Options such as pay reduction, shorter working hours or unpaid leave are core changes to the terms of employment. To carry out any such cost cutting, companies must first get their employees to agree. A boss, under labour law, has no right to force his workers to take a pay cut or insist that they take unpaid leave.

Covid-19 is a textbook case of commercial frustration. This is a crisis on a dramatic and shocking scale. Countries across the world, on lockdown mode to contain the virus, are creating the conditions for the worst economic downturn since the Great Depression.

In Malaysia employment contracts are at the risk of frustration under section 57(2) of the Contracts Act 1950. Due to restrictions on movement and commercial activities by MCO that have now lasted for 6 weeks and are still continuing with no indication of when these will end or what social distancing laws will there be after that, many employers should now be able to legally say that their contracts with their workers have been frustrated. To be fair, these companies ought to be allowed to treat their employments as ended and no longer valid.

Labour is a special species of contracts where government often steps in in time of crisis on the side of workers. But this time the problem is so much larger in size and repercussions. Tackling it will overwhelm any policy makers in the period ahead unless countries pass laws to freeze contracts and save them from breach. This is what Singapore and Denmark did recently in passing their Covid legislations. Since 2009 Australia has its Fair Work Act that allows the employees to be stood down on no wages when they cannot do useful work due to matters outside the employer’s control such as inclement weather and now Covid-19.

While most companies are making hard decisions about cashflow, income and monthly survival, more of them have reached a point where they must cut staff back to the number they really need in order to protect the jobs of those that stay.

As the country enters further into an indefinite period of lockdown and an uncertain social, financial, commercial, health and logistical aftermath, the logic of hibernation will be harder to ignore.

A clear-headed way out of this quagmire is first for both employer and workers to accept that a situation giving rise to frustration of contract exist now. Next is for both sides to agree in good faith to avoid frustration by allowing the employment contract to hibernate and to stand down the workers so that money, jobs, and relationships can be protected and preserved. By hibernating, companies and staff are in fact agreeing to save the employment from frustration.

Any staff who is willing and able to work remotely or at home should be given freelance assignments and income to sustain himself during hibernation. The rest will need to think of ways to monetize their other skills or hobbies. Companies can only help those who are willing to learn new skills to prepare for life and work after Covid 19. Paying a person just to sit at home without having to work or contribute does not make social or commercial sense even in weird times like this.

This will give the company the time, money and focus it needs to conserve its resources, plan its recovery and transform itself internally for the big changes and opportunities that will certainly come its way when the crisis is over.

Asking staff to sacrifice by taking a pay cut or go on unpaid leave now so that they will have the same pay and job waiting for them is committing to a promise you may be forced to break. Neither does it make sense to pay staff in full for not working or decide now whom to sack or keep when things and situations are so unclear and changing day by day.

“If it is to your advantage, make a forward move; if not, stay where you are. Anger may in time change to happiness, annoyance can revert to joy. But a State that has been destroyed cannot be brought back to life. Hence the enlightened ruler is heedful, and the good general full of caution. This is the way to keep a State at peace and an army intact.”
(19-22, The Art of War, 12)

In our next post we will tell you about HERA – the Hibernation of Employment and Resumption Agreement and the steps to take in hibernating your business and standing down your employees while at the same time providing them with freelance work and alternative income.

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Lim Yew Yi and Kerk Boon Leng

1 Comment

Posted on April 26, 2020 by legatare

ARTICLES, CORPORATE, LABOUR

Business hibernation, employment suspension during lockdown, furlough during covid, hibernation of employment, Malaysia employment law, MCO, stand down employee, stand down workmen, suspending salary

Employment and Covid-19

*The Plague of Athens (429 – 426 BC) painted by Flemish artist, Michiel Sweerts in 1654*

A. Law in the time of Corona

Extraordinary times are upon us, foretelling a period of massive social, political and economic dislocation and change. Countries around the world have been put on a war footing to combat a virus that is causing the biggest peacetime lockdown and immobilisation of population in living memory.

The economy will surely be a casualty in these unprecedented upheavals. Globally many businesses will be forced to close down making millions of people jobless and destitute in the coming months.

Malaysia’s newly-installed government eager to prop up its popularity with its worried, wearied and physically-restricted masses, has issued statements through the Ministry of Human Resources (MOHR) that companies must not cut staff salaries or retrench workers during the period of Movement Control Order (MCO), which tentatively is now extended by another two weeks to 14 April.

B. Hire and Fire

The law used to give Employers, as a corollary to their entrepreneurial risk-taking, the right to hire or fire workers as they pleased. Such capriciousness and not to mention callous disregard for the welfare of workers were reasons for Karl Marx labelling law as a capitalist tool of oppression and exploitation.

These days in times of greater social enlightenment and media, companies can of course still be free to allocate manpower and resources to maximise profit but they are required by law to have just grounds and genuine reasons before terminating a worker.

The only accepted lawful grounds for termination are misconduct and poor performance.

Under section 20 of the Industrial Relations Act 1967, an employee who finds himself unfairly dismissed by his employer without just cause or excuse, may complain to the Director General of Industrial Relations within 60 days from the date of his termination to get his job back or alternatively be paid compensation for losing his job.

The Government has even gone as far as judicially pre-empting in the MOHR’s website FAQs of 20 March 2020 (‘ the Guidelines’) that staff cannot be terminated on the grounds of ‘frustration’ of employment since the MCO does not involve a long period of disruption to their contractual relationship!

Seriously? Are you kidding me?

So what can Employers and Companies legally do when they are squeezed between continuing costs and zero or disappearing incomes during the MCO and even after?

C. Reducing Hours and Salaries

In clause 23 of the Guidelines, MOHR says that before any company is allowed to lay off staff, it should try to delay or avoid it altogether by first reducing their duties, shortening their work hours, suspending operation or cutting their salaries.

Salary is understandably a vital term. It is an important term binding on every employer who has promised in the contract of employment the remuneration the employee can expect to receive for the job and services he renders to the company.

Workers’ pay is protected by the Employment Act which prohibit companies from making any deduction from monthly salaries except under limited circumstances or for statutory payments such as EPF. Although, interestingly, salary can also be deducted of an employee for time he has stayed away from work due to imprisonment and custodial detention.

A cut in salary would be a crucial change to a key term in the contract of employment that requires the employee’s consent.

Any company contemplating cutting salaries should first discuss the plan with the employees giving them details and reasons for such a move and getting their signed consent. The proposed cut in salaries should be non-discriminatory. It should ideally cut across all ranks and positions by taking into consideration factors such as job scope, amount, length of service and contribution.

D. Retrenchment

No business can be expected to run for long and meet its overheads and costs including the salaries it pays its staff unless it has recurring and sustainable income.

It is socially responsible and admirable of MOHR to exhort and direct on its website and online videos that companies keep their staff and salaries throughout the MCO period.

But in the end it will be the realities of the market and on the ground that force upon employers the hard decision finally to let their workers go.

Technically, a retrenchment is by law only allowed to take place in a situation of redundancy when a company has more staff than it needs to remain profitable and in business.

There are requirements that are laid out in the Employment Act and its regulations ( for employees who are citizens and permanent residents earning less than RM2,000 per month) and provisions under the Code of Conduct for Industrial Harmony 1975 for companies undertaking staff retrenchment to adhere to.

That being said, the Guidelines admit that retrenchment is an employer’s right of prerogative but one that must be undertaken responsibly, in good faith and only as a last resort.

E. Frustration

A party to a contract is excused from having to do what he has promised to do for the other, if something terribly big and unexpected turns out making what he has promised to do either impossible or unlawful to carry out. This is termed in law “frustration of contract”.

Given that employment is in essence a contract of supply of labour, it too can be affected by the doctrine of frustration which in Malaysia is found under section 57 of the Contracts Act 1950.

Since by this stage almost everyone agrees that the current Covid-19 pandemic is a global emergency of economy-shattering and society-changing proportion, the idea that employment like other types of contracts of supply can be frustrated by MCO is not a remote or fanciful one.

Not every company can operate away from its physical premises or location by ordering its employees to work from home. In dire times like this telling companies especially most SMEs to obey the MCO and the Guidelines is like sending a trainee Taliban on a suicide mission. For a company to give all their staff a one month or more paid staycation at a time of zero income and running fixed costs is committing financial harakiri.

It is respectfully proposed here that the current types of work or occupation (other than those classified by law as critical and essential industries) can be grouped under 3 rough categories:

1) Location bound – these are work that requires employees to be at the office or factory site to carry it out. Working remotely or at home is physically and conceptually either impossible or out of the question for the forseeable future

2) Location dependent – these are work that can potentially be done from home but physically and conceptually requires technological, mental and institutional changes to happen first in order to do so.

3) Location flexible – these professions and jobs do not require a specific site and can be performed on a lap top anywhere including in a cafe or on the beach at the sound of lapping waves.

A reasonable case can be made that employers in categories ( 1) and ( 2) can justifiably treat their staff’s employment as frustrated if their work premises are forced by MCO to close – an act of government that clearly is beyond the employer’s control or calculation that affects business radically or fundamentally.

This can happen not just during the MCO when it is both impossible and unlawful to work, but also after. The end of MCO does not mean the end of the Covid-19 pandemic. When MCO is lifted, other forms of legal, social or health restrictions could still be in place then rendering the contracts of employment radically and unexpectedly different from what they were meant to be originally.

There are already a number of case law in both Malaysia and especially in England supporting frustration of employment under exonerating circumstances.

The Appeal Tribunal in the case of Spencer v Paragon Wallpapers (1977) allowed the frustration of employment contract of an employee on the grounds he wasn’t able to report back to work in a mill north of Manchester due to prolonged illness at a time when his company faced with increased customers orders was in urgent need of his service. In a careful judgement read out by Phillips J. the English court has this to say:

” It is obviously a hardship to any employee to be dismissed when he has been absent due to illness for only a few weeks …Every case depends on its own circumstances. The basic question which has to be determined in every case is whether, in all circumstances, the employer can be expected to wait any longer and, if so, how much longer?”

This too is the question a lot of SMEs are asking, especially after they are informed that under the Government’s recently announced RM250 billion Economic Stimulus package only RM600 per month will be paid for three months to company for each staff earning a monthly salary of less than RM4,000 that it retains on full salary and not retrench.

by Kerk Boon Leng & Rean Chang