The recent Court of Appeal decision in Saharunzaman bin Barun v Perodua Sales Sdn Bhd & Anor [2025] CLJU 3 reinforces that the test for constructive dismissal remains the “contract test” rather than the “reasonableness test.” However, when an employer expressly incorporates reasonableness as a contractual requirement, the courts are entitled to scrutinize whether the employer has adhered to this obligation.
Brief facts
- Perodua Sales Sdn Bhd (“Company”) issued a letter to its employees at the Bukit Beruntung and Sungai Choh branch that the business operations at those branches had been taken over by, an associated company, Nagayoga Automobile Malaysia (“NAM”). The letter further stated that they should take up the employment offer made by NAM.
- All employees taking up the employment offer of NAM would have to tender their resignation from the Company, and be re-engaged by NAM for a fixed term of 2 years. After the 2-year term with NAM is over, NAM would have the sole discretion on whether to retain them and if not, they can reapply to the Company and the Company would make decisions depending on the availability of vacancies and the needs of the Company then.
- 3 employees felt that the employment offer by NAM was a raw deal. Their employment with the Company was on a permanent basis, but they are now being subject to a 2-year fixed term contract with NAM with no certainty of being retained by NAM nor re-employed by the Company. These 3 employees didn’t take up the offer to work with NAM.
- However, these employees were then issued a Notice of Transfer, requiring them to report for work within 3 days: one to Kota Kinabalu, another to Kuching and the other to Kuala Terengganu.
- They requested the Company to reconsider the transfer to these faraway locations.
- The Company instead issued them a show cause notice of insubordination for failing to follow orders of the Company, and for being absent from work for 2 or more continuous days at their new postings.
- The 3 employees implored the Company to reconsider its position after restating why the transfer would be unreasonable. When the Company didn’t reply, they treated themselves as constructively dismissed.
Industrial Court’s Decision
- The Industrial Court held that the employees had proved constructive dismissal against the Company.
- The Company had not been reasonable in considering the financial and emotional burden that the transfer may bring upon each employee depending on their circumstances, particularly when an element of reasonableness was expressly set out in their transfer clauses.
- The Company’s actions had clearly shown their intention not to be bound by the contract of employment entered into with the 3 employees.
High Court
However, the High Court found that the Industrial Court erred and quashed the Awards of the Industrial Court. The High Court found that the Industrial Court had wrongly applied the “reasonableness test” and that the correct test is the “contract test”. As there is a transfer clause in the employment contract, the transfer was part and parcel of the exercise of managerial prerogative of the Company.
The employees then appealed to the Court of Appeal.
At The Court of Appeal
The Court of Appeal allowed the appeals and reinstated the awards of the Industrial Court.
- Whilst the correct test in determining constructive dismissal claims is the “contract test” and not the “reasonableness test”, as “reasonableness” is an agreed contractual term of the parties relating to transfers, the Industrial Court was not wrong to examine consider the conduct of the Company in the transfer in determining whether the Company’s action therefore met the “contract test”.
- The Court of Appeal ruled that the Company, under the pretext of corporate restructuring, attempted to change employment terms unilaterally. The once permanent employees had to resign before joining NAM on a 2-year contract with no job security afterward. The Court noted that alternatives like secondment or transfer were available but not used.
- The Company unreasonably transferred three employees who refused to resign and join NAM to distant locations with just three days’ notice. They received a one-time allowance, but their salary and other terms remained unchanged, with no consideration for their personal circumstances.
- The Court of Appeal cannot help but make the inference that the transfer was a “punishment” meted out to those employees for not resigning and accepting the NAM employment. The transfer exercise was, in reality, meant to drive the employees out of employment without having to pay termination or lay-off benefits.
- The Company’s bona fides also came into question when the Company not only required 2 of the employees to report for duty in East Malaysia without valid work permits, exposing them to immigration violations. Despite this, the Company proceeded to issue them show cause letters for failing to report to work.
- Ultimately, the manner and motive of the transfer exercise do not pass muster. The Company had expressly promised the employees in their contracts that any transfer would be “as reasonably directed by the Company”. The Company’s unreasonable actions therefore went to the root of the contracts and was a fundamental breach, justifying the employees to claim constructive dismissal.
Key takeaways
The Court of Appeal reaffirmed that the test for constructive dismissal remains the “contract test“.
However, the inclusion of the phrase “as reasonably directed by the Company” in the transfer clauses of the employees’ contracts meant that the employer had a contractual obligation to ensure that any transfer decision met a standard of reasonableness. This meant that reasonableness was not just a mere consideration, but a contractual term.
As such, even though this is a constructive dismissal claim, the reasonableness of the Company’s transfer exercise was open for scrutiny by the Courts. Considering the element of reasonableness in this situation was still part of the contract test, and did not convert it into a reasonableness test.
Employers may incorporate an element of reasonableness in their contractual terms to assure employees that decisions will not be made arbitrarily, thereby making their employment offers more attractive. However, by doing so, they must be prepared for their decisions to be subject to scrutiny and cannot rely on “managerial prerogative” as an absolute shield.
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This article was written by Th’ng Yan Nie (Partner) with assistance from Laveenia Ganapathy (Legal Executive) from Donovan & Ho’s employment law practice.
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.
