Constructive Dismissal

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Constructive Dismissal –
Employer’s Nightmare

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Introduction
• Statistics of constructive dismissal cases in Malaysia…

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HR Ministry Statistics
Reference : INDUSTRIAL COURT OF MALAYSIA 2016 - 2017

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2016 INDUSTRIAL RELATION COURT STATISTIC
RESOLVED CASE: 1,254 CASES
Note:
**Example:
i. Contract Termination
ii. Merge Organisation
iii. Company Transfer
Reference : Statistik Pekerjaan & Perburuhan Siri Bil. 1/2017

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Handling of Reinstatement
Representation Case
Handled
Case
9,372
Cases Ex-Gratia Values
Compensation for
re-employment
Resolved
Cases
4,627
Cases
RM 29,227,331.83

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Results related to the
dismissal of the case by
the Industrial Court of
Malaysia involving
payments to the
appellant, 2016
Reinstatement with
Back wages
RM 11,412,805.00
Compensation in lieu
of reinstatement
RM 3,251,383.00
Other Compensation
RM 11,115,745.08
Total
RM 25,779,933.08
2016 INDUSTRIAL RELATION COURT STATISTIC
*Reference to January - December 2016
Source: Industrial Relation Court Malaysia

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Employment Dismissal
• There are two basic branches of dismissals — direct dismissals and
constructive dismissals.
– A direct dismissal, as the name suggests, involves the more
straightforward situation where an employer decides to end the
employment relationship, and dismisses the employee, usually by way
of a formal letter of termination.
– A constructive dismissal is less straightforward, it’s a situation where an
employee leaves the organization without notice accusing the employer
of contractual breach and etc.

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Constructive Dismissal
• It’s a common law right of an employee to repudiate the contract of
service and this right is extremely important when we operate in
laissez-faire economic environment.
• Constructive Dismissal – also called as constructive discharge
occurs when an employee leaves because their employer’s behavior
has become so intolerable or heinous or made life so difficult that
the employee has no choice but to resign.
• In this case, the resignation was not truly voluntary, it is in effect a
termination.

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What is Constructive Dismissal
• In employment term :
– Constructive Dismissal refers to an act of an employee in leaving his employment
contract due to the breach of the contract committed by the employer.
– The breach committed must be so severe that it has altered the essential terms of the
employment contract leaving the employee no choice but to resign.
– Although there is no direct dismissal by the employer, it could still amount o unfair
dismissal due to the actions of the employer …hence....the word “constructive” in
“constructive dismissal”

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Employment Act 1955 – Provisions
• Constructive Dismissal provision in EA 1955:
Section 13 – Termination of Contract Without Notice
–Section 13(2) - Either party to a contract of service may terminate such contract of
service without notice in the event of any wilful breach by the other party of a
condition of the contract of service.
Section 14 - Termination Of Contract For Special Reasons
–Section 14(3) - Termination of contract by the employee without notice where he
or his dependants are immediately threatened by danger to the person by violence
or disease such as the employee did not by his contract of service undertake to run.

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What exactly amounts to a breach of
contract by the employer that would fall
under the ambit of constructive dismissal?

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Breach of Contract by the Employer
• Whenever there is a claim of constructive dismissal that is referred to the
Industrial Court for determination, the Court will usually examine whether
these 4 essential elements are proven in order to establish constructive
dismissal:
– There must be a breach of contract by the employer;
– The breach must sufficiently important to justify the employee resigning;
– The employee must leave in response to the breach and not for nay
other unconnected reasons;
– The employee must not delay.

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Element 1: There must be a breach of
contract by the employer
• In law, the threshold for constructive dismissal is governed by the “contract test” which essentially states that the
breach committed by the employer must have been so severe that it goes to the very heart of the employment
contract. This would include taking into account whether the responsibilities and duties of an employee have been
significantly altered that it constitutes a fundamental breach of an employment contract.
• The test is not a test of “reasonableness“. In other words, unreasonable conduct of an employer may not
necessarily give rise to a valid claim for unfair dismissal, especially if there is no breach of contract.
• Otherwise, it would be virtually impossible for an employer to run their business or to exercise their management
prerogative, if employees could claim constructive dismissal every time they view an employer’s conduct to be
unreasonable. The main thing that will be examined by the Court is whether the employer had breached a
fundamental term of the employment contract.

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Element 2:The breach must be sufficiently important to
justify the employee resigning
• Even if there is a breach of the employment contract, the breach committed
must be significant enough to justify a claim of constructive dismissal. Petty
arguments or disagreements with one’s superiors cannot be seen as a
grave breach. The severity of each breach will be examined on a case by
case basis but the case laws have pointed several circumstances that have
been identified as examples of significant breaches:-
– Deliberate substantial reduction of wages, commissions, allowances or benefits without a
good reason.
– Failure to provide a safe working environment
– “Forced resignations” – ie resignations clearly made pursuant to threats or duress
– Non bona-fide reduction of duties or change to job scope

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Element 3: The employee must leave in response to the breach and not
for any other unconnected reasons
• Where there is a constructive dismissal claim, the employee must leave or
resign due to the breach.
• Prior to leaving employment, it is essential that an employee sets out the
exact reasons for their resignation and the cause of the resignation.
• The employee’s reason for departure must coincide with the breach alleged.
If at the material time, the employee provides a different reason for
resignation (eg: better job offer elsewhere, relocating to another city), it may
be difficult for them to later claim that they left due to the breach by the
employer.

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Element 4: The employee must not delay
• The length of time in filing a claim for constructive dismissal is a crucial
factor.
• When the breach occurs, the employee is expected to take immediate
action by either protesting, writing a notice to the employer or resign from
their post.
• By staying on board, an employee may be seen as having accepted the
breach committed and waiving their right for legal recourse. In some cases,
a delay of one month to act was even held to have been too long to entitle
an employee to claim for constructive dismissal.

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Key Point for Employer: Claims for
Notice
• Constructive dismissal allegations are not a matter to be taken lightly as the
law places a high threshold to be met for constructive dismissal.
• As the law requires employees to prove the alleged breach committed by
the employers, one should contemplate hard to make sure the above
elements are ticked off before deciding to jump ship and wage war against
their employers.
• A poorly thought out claim of constructive dismissal could backfire as an
employee may find themselves being sued for payment in lieu of notice.

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Some Circumstances for Constructive Dismissal
① Arbitrary reduction of wages, commissions, allowances, etc.
② Withdrawal of contractual benefits e.g. car, housing, entertainment, free meals, free
laundry services etc., provided they are provided in the Contract of Service.
③ Demotion to a lower post, with or without reduction of salary, fringe benefits, etc.
④ Transfer to a different location if such transferability is not clearly stated in the
Letter of Appointment.
⑤ Substantial changes in the job function.
⑥ Behaviour by the employer, intended to humiliate the employee.
⑦ Threatening with dismissal if the employee does not resign from the job.

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① Arbitrary reduction of wages,
commissions, allowances, etc
• Employer decides to reduce wages of employees due to financial
circumstance?
• Employer decides to change commission structure realizing their
margin is lower now?
• Employer decides to remove an allowance after a few years?

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② Withdrawal of contractual benefits
• Withdrawal of contractual benefits i.e. car, housing, entertainment, free
meals, free laundry services etc., provided they are provided in the Contract
of Service.
• Change of contractual employment benefits i.e. medical coverage,
insurance plan and etc.
• Change is updated in employee handbook but contradicts employment
contract.

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③ Employee Demotion
• Demotion to a lower post, with or without reduction of
salary and fringe benefits.
• Demotion to lower post with or without reduction of
salary and fringe benefits due to punishment for
misconduct.

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④ Employee Transfer and Secondment
• Employee is transferred to a different location/branch or division and
its not clearly stated in the Letter of Appointment.
• Employee is transferred to different location/branch or division and
the clause is clearly stated in the Letter of Appointment.
• Employee is constantly transferred from location/division/duties and
clause is in the Letter of Appointment but employee decides no
longer willing to comply to another transfer.

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⑤ Changes in Employee’s Job Function or
Role
• Employee is hired as a finance manager and employer decides that
he is not suitable and transfer and changes his job role to payroll
manager.
• Employee was a CFO in his previous job but was hired as a COO
and subsequently after probation employer changes his job function
to CFO.
• Employer decides employee is doing well and decides to add more
responsibilities to the employee.

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⑥ Employer’s Behavior
• Employer’s behavior of humiliating the employee in front of other
employees or even customers.
• Male employer brings a female employee to attend outstation trip
and books only one room and tells her that the company budget.
• Employer verbally made sexual insinuating remarks to an employee.
• Employer threatens employee of beating him up using gangsters.

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⑦ Dismissal Threat - Forced Resignation
• Threatening with dismissal if the employee does not
resign from the job.
• Proposing or suggesting that employee should resign or
else life will be difficult in this company.
• Preparing resignation letter and asking employee to sign.

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Halting the Advance of Constructive Dismissal
• The burden of proof
– The most effective tool that is available in employer’s armory to rebut an
allegation of constructive dismissal is the burden of proof principle.
Unlike those cases where, the fact of dismissal is not in dispute and the
only issue to be determined is whether or not the said dismissal admits
just cause or excuse in a constructive dismissal case the employee
carries the primary burden of establishing that there was a fundamental
breach of contract.
– In Malayan Banking Bhd v Association of Bank Officers, Peninsular
Malaysia 1988 3 MLJ 204

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Burden of Proof
• The burden of proof in cases of constructive dismissal lies in the hands of the
employee.
• In the case of Intra Marine (PK) Sdn Bhd vs. Thomas A/L Pappu (1995), the Industrial
Court is of the opinion that in cases of victimisation (mala fide), the burden of proving
victimisation is on the employee.
• Victimisation is a serious charge and must be properly and adequately pleaded giving all
particulars, upon which the charge is based to enable the employer to fully meet the same.
• Wong Chee Hong Vs Cathay Organisation (M) Sdn Bhd (1988) : Clearly in the case of
Wong, this is not a problem for the employee as it can be proven that the acts of the
employer was not based on good faith. Generally, the law does not expressly require
employers to treat their employees fairly or provide a stress-free working environment.
Instead, employers are required NOT to act in a discriminatory manner or in
otherwise unlawful manner.

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What’s Section 20(1) of IRA 1967?
• Under Section 20(1) of the IRA, constructive dismissal must connote
the following:
– Where the employer, manifestly, has dismissed him without any
reasonable ground; or
– Where the employee involuntarily or voluntarily, terminates his
employment because of the conduct of the employer which caused him
to be driven out of the employment. In other word, the act or conduct of
the employer towards him in the course of his employment could not be
accepted or borne by him any longer and the conduct of the employer
has forced him to leave his employment.

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Judicial Recognition of Constructive Dismissal
• As there is no legislation governing constructive dismissal, the concept of
constructive dismissal was given judicial recognition by the then Lord
President Salleh on Wong Chee Hong Vs Cathay Organisation (M) Sdn Bhd
(1988):
– “The common law has always recognised the right of an employee to terminate
his contract of service and therefore to consider himself as discharged from
further obligations if the employer is guilty of such breach as effects the
foundation of the contract or if the employer has evinced or shown an intention
not to be bound by it any longer. It was an attempt to enlarge the right of the
employee of unilateral termination of his contract beyond the perimeter of the
common law by an unreasonable conduct of his employer that the expression
‘constructive dismissal’ was used.”

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Judicial Recognition of Constructive Dismissal –
Contract Test
• In the same case, the Courts had established that the correct test to form the basis
for a complaint of constructive dismissal is the “contract test”. In order to claim
constructive dismissal, the employee should be absolutely certain that the employer’s
actions are significant breaches the fundamental term of the contract and therefore,
the employee is entitled to deem that the contract of employment is being terminated.
The emphasis here is the contract. The Court said:-
– “It has been repeatedly held by our Courts that the proper approach in deciding whether
constructive dismissal has taken place is not to ask oneself whether the employer’s conduct
was unfair or unreasonable (‘the unreasonableness test) but whether “the conduct of the
employer was such that the employer was guilty of a breach going to the root of the contract
or whether he evinced an intention no longer to be bound by the contract”.

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To Sum It Up
“the employer’s actions are such that it is certainly impossible for the
employee to continue in his employment with the said employer. The
employee should also make up his mind and resign reasonably soon
after the employer’s action, to avoid being accused of condonation. Any
failure on the part of the employee to ensure these two conditions are
fulfilled may result in his resignation not meeting the criteria for
constructive dismissal and result in his claim being dismissed by the
Court”

Constructive Dismissal

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Constructive Dismissal