Constructive Dismissal: How Employers Can Protect Themselves from Legal Risks

‍Introduction

Constructive dismissal occurs when an employer’s actions or omissions fundamentally breach the terms of an employment contract, leaving the employee with no viable alternative but to resign. Such conduct must be significant enough to alter the core of the employment relationship, rendering it untenable for the employee to continue working. Examples include reducing salary without consent, demoting an employee, substantial changes to job duties, or subjecting the employees to harassment or discrimination.^[1]

To challenge a constructive dismissal claim, it is essential for the employer to understand the key elements required to establish such a claim. The onus is on the employee to demonstrate the following:

• The employer, through its actions, breached a term or terms of the employment contract or demonstrated an intention to no longer uphold the contract.
• The breach was fundamental, affecting the core of the contract.
• The employee's decision to resign was a direct response to the breach and not for unrelated reasons.
• The employee did not delay excessively in terminating the contract following the breach.

Once these criteria are satisfied, the responsibility shifts to the employer to prove that the dismissal was for a just cause or excuse.

Importance

Defending against a claim of constructive dismissal is critical, as these claims can severely damage an organisation’s reputation and result in substantial financial penalties. For instance, in 2019, Tengku Mohd Hasmadi bin Tengku Hashim was awarded nearly RM 2.45 million from Konsortium Transnasional Berhad (KTB) for constructive dismissal.^[2] In the same year, Sharifah Faridah MAG Abdul Rashid, a former company secretary, received RM780,850 in compensation and RM465,600 in back wages for the same claim.^[3]

Defences

Employers can defend against constructive dismissal claims by arguing several points.

1. Acted within contractual rights

When the employer has acted strictly within their rights in the employment contract, the employee would not be able to argue constructive dismissal, although the conduct may be unreasonable. This was affirmed in the recent Federal Court case of Tan Lay Peng v. RHB Bank Berhad [2024] 5 MLRA 171, where it was unanimously held that the applicable test in constructive dismissal cases is the contract test. In essence, the test means that the focus in deciding such a claim is not on whether the employer's actions were unfair or unreasonable but instead, whether the employer's conduct breached a fundamental aspect of the employment contract or indicated an intention to no longer abide by the contract.

As mentioned above, such fundamental breach includes changing an employee’s remuneration, benefits, job content, job status, job duties, or demoting the employee without prior consent. It is also important to note that the breach can involve both violations of express terms and implied terms, namely the implied term of mutual trust and confidence inherent in employment contracts. This fundamental term effectively means that every employment contract contains an unspoken commitment by the employer not to engage in conduct that could erode or severely damage the essential trust and confidence between the employer and employee.

2. Causal Link

The employee’s resignation must be a direct result of the employer’s actions. If the resignation was on the employee’s voluntary accord or for unrelated reasons, the claim would not stand.

3. Timeliness

The timing of the employee’s resignation can also play a crucial role. A delay in resignation after the alleged breach may suggest that the employee accepted the situation, waiving their right to bring an action for constructive dismissal. In Ng Yin Fun v. Crystalball Advisory Services Sdn Bhd [2024] 3 ILR 163, the employee’s one-month delay in resigning after a demotion was viewed as acceptance of the breach, leading to a dismissal of her claim.

Additionally, claims of constructive dismissal must be filed within legally prescribed timeframes. Under Section 20 of the Industrial Relations Act 1967, employees are required to file a representation to the Director General for Industrial Relations within 60 days of the alleged dismissal. Failure to adhere to this deadline renders the claim time barred.

4. Just and Fair Cause

An employer would be able to rebut a claim for constructive dismissal if their actions were just and fair. This includes conducting proper disciplinary procedures, such as giving employees opportunities to respond to allegations, conducting impartial enquiries, and acting transparently. Ensuring that employees are aware of the reasons behind decisions that affect their employment can minimise the risk of litigation.

In any event, employers must demonstrate that any changes or decisions were made in good faith and aligned with the best interests of the business. The absence of malicious intention is critical in defending against constructive dismissal claims.

3 steps an employer can take

Constructive dismissal is a significant issue that warrants careful attention. To avoid or mitigate the risks of a constructive dismissal claim, employers must be proactive in maintaining a healthy, transparent, and fair working environment. The following are 3 steps an employer can take:

1. Clear and Consensual Communication on Role Changes

It is essential to ensure that any changes to an employee’s role, responsibilities, or remuneration are communicated clearly and consensually, before implementation. Getting their consent and ensuring they understand the reason behind these changes help prevent misunderstandings, and ultimately, reduce the likelihood of employees feeling their contract has been breached.

2. Adherence to Employment Contracts and Fair Procedures

Employers should act within the bounds of the employment contract and avoid actions that might be perceived as undermining the terms of the contract, including implied terms like mutual trust and confidence. When disciplinary actions or changes are necessary, it is crucial to handle them with fairness, following proper procedures and allowing employees to respond to any actions affecting their employment. Documenting these processes and maintaining transparency can strengthen an employer's defence in case of legal claims.

3. Proactive Handling of Employee Grievances

Lastly, employers should foster a work culture that respects employees' rights, addressing grievances promptly to prevent escalation into potential constructive dismissal situations. By prioritising communication, fairness, and contract adherence, employers can significantly reduce the likelihood of such claims.

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By implementing the above measures i.e. maintaining open communication, respecting the terms of employment contracts, and fostering a culture of fairness, companies can significantly reduce the risk of constructive dismissal claims.

‍This article is written by  Raja Nadhil Aqran (Partner) and Lam Zi Wei (intern). It only contains general information. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such.

If you would like to fix an appointment with one of our lawyers for a consultation, contact us at info@aqranvijandran.com.

^[1] For an overview of constructive dismissal from the employee’s perspective, see our article here: https://www.aqranvijandran.com/blog/constructive-dismissal-in-malaysia-what-should-you-do-when-your-employer-is-trying-to-force-you-to-resign.

^[2] Anbalagan ‘Court awards RM2.45 mil to ex-COO for constructive dismissal’ (Free Malaysia Today, 24 May 2019) <https://www.freemalaysiatoday.com/category/nation/2019/05/24/court-awards-rm2-45-mil-to-ex-coo-for-constructive-dismissal/> accessed 15 September 2024.

^[3] Tony Lai ‘Ex secretary wins RM 780,000 compensation for constructive dismissal’ (HRnews.my, 11 September 2019) <https://hrnews.my/2019/09/11/ex-secretary-wins-rm780000-compensation-for-constructive-dismissal/> accessed 15 September 2024.

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