Tried and Tested: The “Contract Test” is the Applicable Test in Constructive Dismissal Cases

Given the diversity of facts surrounding constructive dismissal claims, it is timely that the Federal Court, in the case of Tan Lay Peng (in her capacity as the administratrix of the estate of Tan Leong Huat) v. RHB Bank Berhad, recapitulated the correct test to be adopted in determining whether an employee had been constructively dismissed.

The question of law posed to the Federal Court was “is there a difference in the contract test or reasonable test in light of major developments in industrial jurisprudence?” and the analysis of the case below presents an overview of the Federal Court’s decision.

 

What are the facts?

•    Mr. Tan Leong Huat (“Mr. Tan”) was employed by RHB Bank Berhad (the “Bank”) on 13 June 2011 as the Bank’s Operations Head in Bangkok, the sole branch of the Bank at the time. The Bank opened its second branch in Sri Racha in November 2013. Mr. Tan was assigned to supervise the same. Eventually, another employee was appointed in June 2014 to oversee the Bank’s operations at Bangkok, Sri Racha and the contemplated Ayutthaya branches.

•    On 14 October 2014, the Bank issued a transfer order for Mr. Tan to assume the role of Branch Manager in the Bank’s Ayutthaya branch, effective from 20 October 2014. It was expressed in the transfer order that the assignment was for a period of not exceeding 9 months.

•    A Thai national was later appointed to assume the role of the Ayutthaya branch manager. The Bank issued a transfer order dated 13 February 2015 for Mr. Tan to be transferred to the International Infrastructure, PMO and Operation Support, Group International Business (“GIB”) in Malaysia, which will take effect on 1 March 2015. The new role required Mr. Tan to report to the Head of International Infrastructure, PMO and Operations Support, where Mr. Tan’s grade and terms of employment remained the same.

•    Mr. Tan objected to his repatriation to Malaysia in his letter dated 25 February 2015. Mr. Tan stated in his objection letter that, among others, his transfer would “kill his career” and was without reasonable justification.

•    Mr. Tan did not comply with the transfer order and pleaded that the Bank constructively dismissed him through his letter dated 2 March 2015. In subsequent correspondence with the Bank, Mr. Tan maintained his position that he had been constructively dismissed by the Bank and filed a representation under Section 20 of the Industrial Relations Act 1967. The matter was referred to the Industrial Court (the “IC”) for determination.

 

What were the decisions of the courts?

•    The IC Issued an Award in Mr Tan’s Favour 
The IC found that Mr. Tan had been constructively dismissed without just cause or excuse.
•    The High Court Dismissed the Bank’s Judicial Review Application; IC Award Upheld
The High Court found that the bank failed to prove illegality, irrationality, or procedural impropriety in the IC’s decision.

•    The Court of Appeal Allowed the Bank’s Appeal; IC Award Was Quashed
The Court of Appeal found that the IC had applied the wrong test of “reasonableness” in determining whether Mr. Tan was constructively dismissed instead of the “contract test”.

 

What did the Federal Court decide?

•    The Federal Court Dismissed Mr. Tan’s Appeal and Affirmed the Decision of the Court of Appeal
•    The “Contract Test” Applies in Determining Constructive Dismissal
The Federal Court affirmed that the correct test to be applied is to ask “whether the conduct of the employer, in its action or series of actions, constitutes a fundamental or repudiatory breach that goes to the root of the employment contract or where the employer has evinced an intention no longer to be bound by the express or implied terms of the contract.”
•    “Reasonableness” Is a Factor That May Be Considered; Not a Test
In deciding the correct test to be applied, the Federal Court rejected Mr. Tan’s contention that breach of reasonableness, fairness, good faith and bona fides of the employer (i.e. the reasonableness test) should be adopted in determining whether an employee had been constructively dismissed. Instead, these considerations are “factor(s)” in evaluating whether there was constructive dismissal. The Federal Court found that the “reasonableness test” is subjective and too indefinite for the same to be relied upon as a legal test.
•    The IC Applied the Reasonableness Test; Not the Contract Test
The IC Award set out considerations on, among others, whether the Bank had justified why Mr. Tan was removed in haste and that there were no instructions for Mr. Tan to hand over duties to any other staff, which was odd as the branch was bereft of a manager when Mr. Tan was abruptly ordered home and that the decision taken by management must be above suspicion to satisfy the court that such exercise was devoid of bad faith. The Federal Court found that with such considerations, the IC had adopted the “reasonableness test” and emphasised the lack of bona fides instead of the “contract test”.
•    Overall, the Change of Job Scope Did Not Amount to Constructive Dismissal
The substance of Mr. Tan’s arguments was that the new position was a change in the nature of his initial job scope, and his transfer was done in bad faith as it affected his career and future opportunities where the Bank failed to inform him of his new position, job scope, duties and responsibilities. However, there was unchallenged evidence from the Bank that the scope of work as a Branch Manager in Bangkok and at GIB was not significantly different.

 

Practical consideration

•    Ensure Clear and Unequivocal Terms Are Present
In view that the “contract test” is affirmed to be the correct test to be applied, it is a timely reminder to employers to ensure that their employment contracts, transfer orders, or directives are clear and unequivocal in their terms. With clearly crafted terms and conditions, there is certainty for both employers and employees on the nature, duration and terms of any employment arrangement.

 

•    Exercise of Prudence in “Bona Fides” on Employment Decisions
While the Federal Court confirmed that “reasonableness” is not a test in determining constructive dismissal claims, the Federal Court did remark that “reasonableness” may be considered as a factor in determining whether there has been a fundamental breach of the employment contract or an intention to be no longer bound by the contract. The evaluation of intentions to be bound by a contract may raise factual and subjective considerations. Prudently, care should be taken to ensure that any employment-related decisions are not tainted by elements that may open the door for arguments of bad faith indicative of intentions to be no longer bound by the employment contract.

 

•    Caution Against Less Favourable Changes to Employment Terms
While commercial prerogative is recognised, it is also pertinent for employers to be cautious against effecting or implementing any changes to employment terms which may present less favourable circumstances to an employee in comparison to their existing employment terms.