Employment Law – Entitlement to Retrenchment Benefits

By Roslina Baba

Where the contract of employment is governed by Singapore law:

  • there is no legal entitlement to retrenchment benefits unless expressly provided for in the employment contract or in respect of employees who are members of a union that has a collective agreement with the company, in the collective agreement.
  • requirement to pay retrenchment benefits cannot be implied into a contract of employment by past practice or policy of the company.

In Bethlehem Singapore Pte Ltd v Ler Hock Seng and Others [1995] 1 SLR 1, the Court of Appeal considered the issue of whether the former employees of the company were entitled to retrenchment benefits at the rate of one month’s salary for each year of service.

The letters of appointment of the former employees contained varying forms of “Other benefits” clause. One example of the clause is as follows:

“You will be entitled to all other benefits, including but not limited to retrenchment benefits, applicable to your employment status in accordance with the company’s prevailing policies and practices and subject to provisions of relevant law.”

In previous retrenchment exercises, the company had paid retrenchment benefits of one month’s salary for each year of service to all employees who were retrenched whether or not they were union members (union members had the benefit of a collective agreement which made specific provision for payment of retrenchment benefits in the event of retrenchment).

The former employees argued that it was therefore the prevailing policy of the company in relation to retrenchment benefits that when an employee who had worked continuously for the company for three years or more was retrenched, he should be paid retrenchment benefits of one month’s salary for each year of service.

The Court of Appeal stated that payment of retrenchment benefits is purely discretionary as there is no statutory provision compelling an employer to pay such benefits. Reference was made to Section 45 of the Employment Act which provides as follows:

“No employee who has been in continuous service with an employer for less than 3 years shall be entitled to any retrenchment benefit on the termination of his service by the employer on the ground of redundancy or by reason of any reorganization of the employer’s profession, business, trade or work.”

In relation to Section 45, the Court of Appeal stated that:

“Section 45 disentitles an employee with less than three years’ continuous service with an employer from claiming retrenchment benefits on the ground of redundancy or by reason of the employer’s re-organisation. Section 45 cannot be read to imply that in the case of employees with more than three years’ continuous service with an employer, there is legal compulsion on the employer to pay retrenchment benefits.”

The Court of Appeal found that from the wording of the “Other benefits” clause in the letters of appointment, the amount of the retrenchment benefits to be paid was discretionary. The Court further stated that there is “no rule of law to the effect that once a discretion has been consistently exercised in a certain way it can no longer subsequently be exercised in a different way.”

The Court also held that payment of one month’s salary for each year of service could not be implied into the contract of employment of employees with at least three years continuous service as it fails to satisfy the test of necessity for implying terms into a contract and particularly so in this case where the express wording of the “Other benefits” clause provided that the amount of retrenchment benefits payable was in the discretion of the company.

The decision of the Court of Appeal was followed by the High Court in the case of Loh Siok Wah v American International Assurance Co Ltd [1999] 1 SLR 281.

In this case, an employee (who is not a member of the union) claimed for, amongst others, retrenchment benefits of 1 month or 1.25 months’ salary for each year of service. There was no express provision for payment of retrenchment benefits in his employment contract.

The employee had argued that it was an implied term of his contract that he was entitled to retrenchment benefits based on the employer’s previous practice and the collective agreement between the union and the company.

Following the decision of Bethlehem above, the learned Chan Seng Onn, JC, stated as follows:

It will be extraordinary and it will also cause much concern to all employers in Singapore if I were to hold that employers who have paid retrenchment benefits previously will be legally bound to pay retrenchment benefits at the same rates or at reasonable rates for all subsequent retrenchments. Unless contractually or statutorily provided for, there is no legal obligation for any employer in Singapore to provide retrenchment benefits…. No matter how many times an employer may have given ex-gratia retrenchment benefits in previous retrenchment exercises, that per se, does not give rise to any legal obligation to pay retrenchment benefits for the next exercise.” [underlining added]

[Note: Section 45 of the Act applies only to those within the definition of employees under section 2 of the Act. If a person is not an “employee” under the Act, entitlement to retrenchment benefits is determined by the employment contract.]

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