Constructive dismissal occurs when an employee resigns due to the conduct of their employer, which leaves them with no reasonable choice but to quit. A recent case in the Federal Court, Tan Lay Peng v RHB Bank Berhad & Anor [2024] MLJU 840, reaffirms the legal standard for constructive dismissal known as the “contract test.” This test evaluates whether the employer’s actions amount to a fundamental breach of the employment contract or show an intention not to abide by its terms.
Brief Facts
- The Employee was employed by a bank and worked at its different branches in Thailand from 2011 to 2014.
- In March 2015, the bank issued a transfer order to transfer the Employee back to Malaysia, whereby his grade and terms and conditions of employment remain the same.
- The Employee objected to his repatriation to Malaysia and treated himself as being constructively dismissed.
- The Employee was awarded RM216,840.00 from the Industrial Court and the bank’s application for judicial review against this award was dismissed.
- The Court of Appeal allowed the bank’s appeal, on the basis that the Industrial Court applied the wrong test of reasonableness rather than the contract test.
- On appeal to the Federal Court, the question before the court was whether there is a difference in the “contract test” and the “reasonableness test” in light of major developments in industrial jurisprudence.
Federal Court’s Findings
- The Federal Court after referring to numerous local and overseas authorities, including the recent Court of Appeal decision of 7- Eleven Malaysia Sdn Bhd v Ashvine Hari Krishnan [2023] 4 CLJ 895, unanimously decided that there is a difference between the contract test and the reasonableness test.
- The test for constructive dismissal remains the “contract test”; as such an employee claiming constructive dismissal must be able to prove that there is a fundamental breach of their employment contract, or that the employer has evinced an intention to no longer be bound by the employment contract.
- Reasonableness of employer’s conduct is very subjective, subject to different opinions by tribunals or courts, too wide and indefinite to be made as a legal requirement for a constructive dismissal case.
- Unreasonableness of the employer’s conduct is insufficient to establish constructive dismissal. However, it can still be a factor in determining overall whether there is any fundamental breach of the contract, or an intention no longer to be bound by the contract.
- The Federal Court agreed with the finding of the Court of Appeal that the Industrial Court had wrongly adopted the reasonableness test. In the Industrial Court’s award, nothing was shown that the contract test was applied to the facts of the case. Such a fundamental error on a principle of law requires the appellate court’s intervention. The Court of Appeal therefore rightfully quashed the Industrial Court’s award.
Key Takeaways
It is not conducive to industrial harmony if an employee can walk out of employment and claim constructive dismissal each time he views his employer’s conduct to be unreasonable.
For employers, the Federal Court decision is welcomed, as using the reasonableness test as the legal requirement, or interchangeably with the contract test, would only entail uncertainty and confusion in industrial relations. It would also impose difficulties on the employer to exercise their management prerogative, since almost any type of conduct of the employer may then be challenged as “unreasonable” and subject to a complaint of constructive dismissal.
By differentiating the contract test from a mere assessment of reasonableness, the Federal Court has provided a balanced approach that protects both employees’ rights and employers’ management prerogatives.
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This article was written by Donovan Cheah (Partner) & Low Rui Thong (Pupil in Chambers). Donovan has been named as a recommended lawyer for labour and employment by the Legal 500 Asia Pacific for 2017-2022, and he has also been recognised by Chambers Asia Pacific and Asialaw Profiles for his employment law and industrial relations work.
Donovan & Ho is a law firm in Malaysia, and our employment practice group has built a reputation for providing strategic employment advice to local and global organisations. Our team of employment lawyers provide advice on employment law and industrial relations including review of employment contracts, policies and handbooks, advising on workforce reductions, and managing dismissals of employees for poor performance or misconduct. We also represent clients in unfair dismissal claims and employment-related litigation. Have a question? Please contact us.
