Federal Court Reaffirms Test of Constructive Dismissal

by MH Law | July 11, 2024 | Case Spotlight

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Overview

Constructive dismissal occurs when an employee chooses to resign due to their employer's actions, leaving them with no alternative. A recent judgment in the Federal Court, Tan Lay Peng v RHB Bank Berhad & Anor [2024] MLJU 840, strengthens the legal standards for constructive dismissal, known as the "contract test." This evaluation assesses whether the employer's conduct breaches the employment agreement significantly or suggests a lack of commitment to uphold its terms.

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Background Facts

An employee worked at various branches of a bank in Thailand from 2011 to 2014.
In March 2015, the bank ordered the employee's transfer back to Malaysia with the same grade and terms.
The employee objected to this transfer, considering it as constructive dismissal.
The Industrial Court awarded the employee RM216,840.00, which the bank tried to challenge through judicial review.
The Court of Appeal sided with the bank, citing the Industrial Court's use of the wrong test.
The Federal Court reviewed the case to determine the distinction between the "contract test" and the "reasonableness test" in light of industrial jurisprudence changes.

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Federal Court Findings

After examining various local and international precedents, including the recent Court of Appeal ruling in 7-Eleven Malaysia Sdn Bhd v Ashvine Hari Krishnan [2023] 4 CLJ 895, the Federal Court unanimously determined a distinction between the contract test and the reasonableness test.
The standard for constructive dismissal remains the “contract test.” Therefore, an employee claiming constructive dismissal must demonstrate a fundamental breach of their employment contract or prove that the employer has shown an intention to no longer abide by the terms of the contract.
The reasonableness of an employer's actions is subjective and can vary among tribunals or courts, making it too broad and indefinite to be a legal prerequisite in a constructive dismissal case.
Simply proving an employer's actions as unreasonable does not suffice to establish constructive dismissal. However, it can still play a role in determining whether there is an overall breach of the contract or an intention to dissolve the agreement.
The Federal Court upheld the Court of Appeal's decision that the Industrial Court incorrectly applied the reasonableness test. The Industrial Court's ruling lacked evidence of applying the contract test to the case's specifics, warranting the appellate court's intervention. Consequently, the Court of Appeal rightfully overturned the Industrial Court's ruling.

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Key Takeaways

It is not conducive to industrial harmony when an employee can resign and claim constructive dismissal due to finding their employer's behavior unreasonable.

For employers, the recent decision by the Federal Court is seen as a positive step. By making the reasonableness test a distinct legal requirement rather than using it interchangeably with the contract test, this ruling aims to reduce uncertainty and confusion in labor relations. It also aims to prevent almost any employer conduct from being challenged as "unreasonable," which often leads to claims of constructive dismissal.

The Federal Court's clarification on the difference between the contract test and assessing reasonableness provides a fair balance that respects both employees' rights and employers' management authority.

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