The Federal Court in Tan Lay Peng (in her capacity as the administratrix of the estate of Tan Leong Huat) v. RHB Bank Berhad had unanimously reaffirmed that the “contract test” is the proper standard for evaluating claims of constructive dismissal.[1]
BRIEF BACKGROUND
By way of a background, this concerns a claim for dismissal under Section 20(1) of the Industrial Relations Act 1967 which reads: –[2]
“(1) Where a workman, irrespective of whether he is a member of a trade union of workmen or otherwise, considers that he has been dismissed without just cause or excuse by his employer he may make representations in writing to the Director General to be reinstated in his former employment; the representations may be filed at the office of the Director General nearest to the place of employment from which the workman was dismissed.”
The “Contract Test” that would be referred to below speaks of the test in determining whether or not an employee was indeed constructively dismissed. An employee is deemed constructively dismissed if an employer is guilty of a breach which goes to the root of the contract or if he (the employer) has evinced an intention no longer to be bound by it (the contract). In such situation the employee is entitled to regard the contract as terminated and himself as being dismissed.
In Bayer (M) Sdn Bhd v Anwar bin Abd Rahim, Low Hop Bing (as his Lordship then was) rendered a lucid explanation on the test and the conditions which must be fulfilled in the following paragraphs: –[3]
“In my judgment, in order to succeed in a claim for constructive dismissal, the employee must prove to the satisfaction of the court that the employer is guilty of a breach which goes to the root of the contract or if the employer has evinced an intention no longer to be bound by it. It is only in such a situation that the employee is entitled to regard the contract as terminated and treat himself as being dismissed. Constructive dismissal does not mean that an employee can automatically terminate the contract when his employer acts or behaves unreasonably towards him. Indeed, if it were so, it is
dangerous and can lead to abuse and unsettled industrial relations,…. To claim constructive dismissal, four conditions must be fulfilled. These conditions are:
- there must be a breach of contract by the employer;
- the breach must be sufficiently important to justify the employee resigning;
- the employee must leave in response to the breach and not for any other unconnected reasons; and
- he must not occasion any undue delay in terminating the contract, otherwise he will be deemed to have waived the breach and agreed to vary the contract.”
The “Reasonableness Test” on the other hand assesses whether an employer’s conduct toward an employee was so unreasonable that it undermined the employment relationship, leading the employee to resign. The test centers on whether the employer’s actions breached the implied duty of trust and confidence between the parties, even if there wasn’t a direct violation of the contract terms. Generally, the “reasonableness test” emphasizes the overall fairness and reasonableness of the employer’s conduct, irrespective of whether it directly breached a contractual term.
Now after knowing the difference between the “Contract Test” and the “Reasonableness Test”, lets look at what the Federal Court decided once and for all in the case of Tan Lay Peng (supra).
OVERVIEW OF THE CASE OF TAN LAY PENG (SUPRA)
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FACTS
Tan Leong Huat, the appellant, had been employed by RHB Bank Berhad as the Operations Head for Thailand Operations in Bangkok, which was the bank’s only branch in the country at the time. In November 2013, a second branch was opened in Sri Racha, and Mr. Tan was tasked with overseeing both branches. In June 2014, the bank appointed Marina Chin Yoke Fong as the Head of Thailand Operations, placing her in charge of the Bangkok, Sri Racha, and a planned Ayutthaya branch. Subsequently, Mr. Tan was ordered to transfer to the Ayutthaya branch as Branch Manager for a period of nine months. He complied, and the branch officially opened in November 2014. However, after a Thai national, Irin Chanonthiensink, was appointed as the Ayutthaya Branch Manager, Mr. Tan was reassigned to Malaysia to work in the International Infrastructure, PMO and Operation Support division, effective March 1, 2015.
Ms. Tan objected to this transfer, refused to report to his new position, and claimed constructive dismissal.
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CLAIM FOR CONSTRUCTIVE DISMISSAL
The Industrial Court ruled in his favor, awarding RM216,840.00 in compensation in lieu of reinstatement. The bank’s judicial review application was dismissed by the High Court. However, on appeal the Court of Appeal found that the Industrial Court had applied the wrong test in determining constructive dismissal, leading to the appeal before the Federal Court.
The key legal issue before the Federal Court was whether there was a distinction between the “contract test” and the “reasonableness test” in light of recent developments in industrial jurisprudence.
# Arguments by Mr Tan
Mr. Tan argued that although the contract and reasonableness tests had different characteristics, they shared enough similarities to be used interchangeably when evaluating constructive dismissal claims.
# Arguments by the Bank
The bank, on the other hand, contended that the contract test was the sole relevant standard, and that the development of the implied duty of trust and confidence did not justify replacing the contract test with the reasonableness test. They further argued that unreasonable conduct by an employer was not sufficient to establish constructive dismissal.
The Federal Court sided with the bank, reaffirming that the contract test remains the governing standard for constructive dismissal cases. The court thoroughly reviewed the legal landscape on constructive dismissal, both in Malaysia and internationally, and concluded that the contract test is well-established law, with no reason to deviate from it. The court rejected the Mr Tan’s assertion that factors such as reasonableness, fairness, and good faith should play a decisive role in determining whether there had been a fundamental breach of the employment contract. While the employer’s reasonableness may be a consideration, it is not sufficient to prove constructive dismissal. The court cautioned that using the reasonableness test in place of the contract test would create unnecessary uncertainty in industrial relations.
CONCLUDING REMARKS
This welcome decision highlights that while an employer’s conduct may be evaluated for fairness and reasonableness, such considerations alone do not constitute constructive dismissal unless they result in a breach of the employment contract. This reinforces that the test for constructive dismissal remains primarily legal and reaffirming that legal clarity should prevail over potentially ambiguous standards like reasonableness, which could vary from case to case and lead to inconsistent outcomes.
If you have any questions or queries, please contact our Dispute Resolution Partner, Mr. Brandon Cheah (brandon@nzchambers.com).
Author: Brandon Cheah
References:
[1] [2024] 3 MLJ 506, Federal Court
[2] Industrial Relations Act 1967 [Act 177]
[3] [1995] MLJU 558, High Court