Reorganization & Unfair Termination

One of the strategies which may be implemented by businesses facing fiscal hardship is to undergo reorganization; generally this can be initiated by having staff increase their workload to cover more responsibilities (thus reducing the need for more staff), it can also be achieved through reducing work area which should it turn reduce leasing and service fees which could be substantial if an employer rents a large work area. However, if such reorganization strategies have already been made, and the entrepreneur is still facing economic hardship then a short-term measure could be undertaken which involves the employer negotiating with their employees to decrease salaries or other work benefits, withholding salary raises or canceling bonuses. If such measures are taken but financial problems still persist, then, an employer may, as a last resort, terminate staff employment contracts and make applicable severance payments.

With regard to terminating staff under a business reorganization, many employers often believe that if they terminate their employees with severance payments and compensation in lieu of giving an advance notice in addition to wages for accumulated annual leave, it will be considered fair and comply with Thai labor protection law. However, if an employer relies upon the excuse of the reorganization staff terminations being necessary to overcome economic crisis it may not be considered reasonable enough and as such the Thai Labor Court may find it unfair for affected employee(s). The Thai Labor Courts take a careful approach to terminations in such circumstances due to the fact that sometimes such staff terminations are not made because an employer’s business faces a loss, rather they are carried out because the employer wishes to increase their profits by cutting costs. Moreover, the Court realizes that some employers have a personal problem with their employee(s) and as such decide to terminate them using the justification of reorganization. Before terminating staff under a reorganization an employer should carefully consider the following matters lest terminated staff commence legal action at the Labor Court by claiming unfair termination and compensation or requesting that they be recalled back to work.

First of all, employers should contemplate the legal provision regarding unfair termination which is found at section 49 of the Labor Court and Labor Procedure Law Act B.E. 2522 which provides that:

“With regard to the trial regarding a case where an employer terminates an employment contract. If the Labor Court considers that the employee has been unfairly terminated, the Labor Court may order the employer to call the employee back to work at the same wage rate as the employee received before being terminated. However, if the Labor Court considers the employer and the employee may not work together anymore, the Labor Court may specify the compensation which the employer will have to pay to the employee instead. With regard to the compensation, the Labor Court will consider from the age of the employee, the period of work of the employee, the hardship of the employee if he/she is terminated, the employment contract, the cause of termination and the severance pay which the employee is entitled to receive”.

In relation to whether a termination will be considered by the Court as being ‘unfair’, it requires one to consider the reasons which an employer uses to terminate their employee. With respect to a reorganization, an employer must also use one of the following essential reasons to justify the termination of their staff:

1. Loss- Employers usually use this excuse along with the reason of reorganization to terminate their staff as long as it does not violate an employer rule. With regard to this justification, the Supreme Court has specified the following criteria:

1.1 The loss must be a loss of money excluding a loss of profit. Moreover, such loss must be significant enough for the employer to be unable to carry on their business. The word “significant” must be considered on a case by case basis; or
1.2 The termination(s) must be necessary to prevent an employer’s company from dissolving or being unable it to carry on as a viable business; or
1.3 The Company that terminates its staff under a reorganization must face a lack of cash flow and be unable to find new investor(s) to provide additional capital for its business.

2. An employer cannot provide work for their employee to do- In relation to this justification, the Supreme Court has held that an employer who confronted with a loss uses this excuse to terminate staff needs to explain to the Labor Court that the terminated employee worked in a specific job position that was unique and different from other job positions and as such they could not be transferred to another job position such as “a chef” etc.

Employers should also be aware that according to the termination criteria mentioned under points 1 and 2 above, they are not permitted to persecute or discriminate against specific employees; for instance an employer is not permitted to use a reorganization to terminate staffs that management dislikes or remove less capable employees and keep the more efficient and effective staffs.

With regard to the amount of compensation payable to terminated staff under a business reorganization, if for instance an employee was an executive who received a salary of 100,000 Baht/month, such employee may seek to claim unfair termination compensation from their employer of approximately 10,000,000 Baht or more, the reason being that they may argue that they could have worked until reaching official retirement age. Specifically, such an employee may feel entitled to claim compensation which equates to their present salary calculated from their termination until reaching retirement age, plus applicable bonuses, moreover such staff may also wish to claim compensation for damage to their reputation. However, using this example, it is highly unlikely that the Labor Court will make such an order regarding compensation because the nature of an employment contract is that both parties have an obligation to reciprocate to one another whereby an employee has a duty to work for an employer and in consideration thereof the employer pays them a salary and other associated benefits. In determining the amount of compensation the Court will consider the period of time which such employee worked for their employer and it will be determined in the following manner. An employee will likely receive compensation averaged at 1-2 month(s) wages per year of service. Hence, if an employee works for an employer for 10 years, they will be likely to receive compensation for the unfair termination calculated at the rate of no more than 20-months of wages (using their last salary wage rate). Furthermore, it is worth noting that in most cases where employees claim excessive compensation for unfair termination in order to punish or pressure their previous employer, the Courts usually decide against the employee.

In concluding, it is difficult for employers to successfully defend against unfair termination cases given the detailed nature of Thai labor law. If an employer engages a lawyer to handle their case who is not a labor law expert, such lawyer may provide inaccurate or poor advice which may cause the employer to lose or undermine its case at the Labor Court. Therefore, I, the author would strongly urge employers who terminate employees under a business reorganization to carefully consider the circumstances of the termination and the factors justifying this action because if your business can prove that your terminations were fair it could save you a considerable amount of time, money and stress. On the other hand, employees who are terminated under a reorganization should also be careful to claim their due compensation according to their right under the law and as such should be mindful of the various factors which determine if a termination under a reorganization is fair or not.