Case Update: Unfair dismissal due to poor handling of mutual separation agreement

In this Case Update series, I share summaries of recent Malaysian court decisions to explore the current approach taken by the courts when deciding on employment-related issues. You can find all the posts in the series by clicking here, including case updates on other legal areas by TheMalaysianLawyer co-founder Lee Shih.

The COVID-19 pandemic has resulted in constant pressure on employers across almost all industries. There have been widespread measures to manage the financial fallout from the global effects of the pandemic, including salary reductions, employee redesignations, retrenchments, and separation schemes.

It has become a common practice for employers to use Mutual Separation Agreements (MSAs) — which also go by various other names such as “settlement agreements”, “separation agreements”, and “termination agreements” — to bypass or shortcut the usual termination processes. Many employers, as well as employees, view MSAs as a “cleaner” way of ending the employment relationship — instead of feeling like s/he has been “sacked”, the employee can be made to feel that the exit is on his/her terms, and employers prefer the certainty of clearly documented and mutually-agreed terms.

However, it is not uncommon for MSA exits to be improperly handled, resulting in a successful unfair/constructive dismissal claim by an employee, and a high financial cost to the employer. Some of my earlier articles would also be relevant for readers interested in this topic:

  1. Retrenchments in Malaysia — some recent cases (29 May 2020).
  2. Case Update: Insufficient justification and improper handling of Voluntary Separation Scheme may give rise to unfair dismissal (20 March 2019).
  3. Case Update: Can an employee bring an unfair dismissal claim after accepting a severance payment? (16 November 2017).
  4. What you need to know about the law on retrenchment of employees (22 January 2016).
  5. Handling employee dismissals properly under Malaysian law (13 January 2016).

In this article, we will review the Industrial Court case of Thanasegaran C Munusamy v. Vale Malaysia Minerals Sdn Bhd (Award No. 1647 of 2020), where the employee, Thanasegaran (the Employee) had signed an MSA, but then lodged an unfair dismissal claim against the employer, Vale Malaysia (the Company).

Brief facts

The Employee commenced employment with the Company in April 2017.

He received an Annual Incentive Payment (AIP) in 2017 and 2018. The Company’s employee handbook provides that the AIP is discretionary, based on individual and company performance and KPIs. The Employee also received a salary increment in January 2018, and a promotion in December 2018.

On 28 January 2019, the Employee was called to a meeting, where his manager (COW1), and two HR personnel (COW2 and COW3) were present. According to the Employee, COW2 informed him that the Company had decided to terminate his employment due to poor performance. The Employee said COW2 gave him two options:

  1. Resignation: Resign voluntarily and receive one month’s salary in lieu of notice (PILON)(less than the three months’ contractual notice entitlement), encashment of unused annual leave, and the AIP payment due in February. The Company would also give the Employee a good testimonial and reference.
  2. Suspension, DI, and potential dismissal: Alternatively, if the Employee opted not to resign, the Employee would immediately be suspended for 14 days pending a domestic inquiry (DI) on poor performance. The Employee was told that at the DI he would have to prove his work performance was good, failing which he would be dismissed — and in which case he would not receive the PILON, encashment of annual leave, AIP, testimonial, or reference.

The Employee said he was given 24 hours to decide, and that the following day, he was asked to attend another meeting, where he was informed that the Company had agreed to increase the compensation by one month’s salary as an ex gratia payment. He was asked to attend another meeting later that day, with COW1, COW2, and COW3, and two other employees in the same situation as the Employee. All three employees were reminded of the two options — either sign the Termination Agreement, or go through a suspension, DI, and potential dismissal without any of the payments and other settlement terms.

The Employee said, following his objections to some of the terms in the Termination Agreement, he was informed by COW2 that the terms were non-negotiable. The Employee claims that he was confused, and agreed to the Termination Agreement under pressure.

The Employee contended that —

  • the Company had not completed or discussed a work performance appraisal for 2018 with him;
  • he had not been issued with any warning letters regarding unsatisfactory performance; and
  • he had not been issued with a show cause letter in relation to the mentioned DI.

He also said that the proper process in the event of poor performance would have been to place him under the Company’s Performance Improvement Plan (PIP).

The Employee said he felt he had to sign the Termination Agreement in order to receive the payments, especially the large AIP due in February 2019. As such, he claimed that his termination was without just cause or excuse.

The Company’s contention was that the Employee had performed poorly, and that COW1 had always kept him informed of his performance standards. The Company claimed it had reached out to the Employee to discuss these issues, and during the discussion a mutual separation proposal was discussed and agreed, following which the Termination Agreement was prepared.

The Company’s position therefore was that the Employee had always been aware of his performance status throughout his employment, understood the contents of the Termination Agreement, and signed it voluntarily. The Company contended that there were no threats made by them towards the Employee to pressure him into signing the Termination Agreement.

Issues to be decided

In cases such as Thanasegaran, there is a two-step process in relation to the issues:

  1. Firstly, as the Company’s position is that there was no dismissal (instead, the employment relationship had ceased by mutual agreement via the Termination Agreement), the Employee would have to prove that there was a dismissal on the facts.
  2. Secondly, if the Employee succeeded in proving that there was a dismissal, then the Company would have to prove that the dismissal was with just cause or excuse.

Was there a dismissal?

The Court noted that all three Company witnesses — COW1, COW2, and COW3 — did not deny that it was suggested that the Employee would be put through a DI. However, the Court found that “the testimonies of the Company’s witnesses were evidently contradictory to each other”. The oral testimonies of the three witnesses were inconsistent, including COW1 testifying that it was not a poor performance issue, but instead that it was about the Employee’s attitude. The witnesses also pointed fingers at each other regarding who suggested that the Employee be put through a DI instead of a PIP. Meetings referred to by the witnesses were also unclear — the minutes were incomplete, unsigned, undated, and without attendance lists.

The Court also found that the Company failed to show that the Employee was given any warnings in respect of his purported attitude or performance issues, and stated that “it is imperative that if an employee’s work performance or attitude is deemed to be unsatisfactory, sufficient warning and opportunity must be given by the employer for the employee to improve in the areas concerned and if he continues to slack in his performance and/or attitude, only then would the employer be justified to put that employee on a domestic inquiry to show cause why he ought not to be dismissed from his employment”. The Court concluded that the Company “evidently failed to give any warning or opportunity to the claimant to improve” and that “the Company ought to have put the claimant under a PIP or a performance counselling”.

Regarding the payment of the AIP to the Employee in 2017 and 2018, COW2 explained that the AIP was paid to all employees, regardless of performance standards. However, the Court was not convinced, finding that this contradicted the provisions in the Company’s employment handbook, which clearly stated that the AIP was discretionary, and based on performances of the individual, the Company, and KPIs.

The Court found that COW2’s testimony that it was the Employee who suggested a mutual separation agreement was “highly circumspect” — the Employee wasn’t even aware of the attitude/performance issues prior to the meeting, and it was obvious that the Company had already prepared the compensation offer. Further, the Court stated that “the speed in which [the Company] acted in getting [the Employee] to execute the Termination Agreement by the very next day is rather telling” and concluded that the Court “[could] only deduce that both COW1 and COW2 planned the meeting of 28 January 2019 to force the [Employee] into signing the Termination Agreement”.

The Court looked negatively upon the fact that —

  • when the Employee and his colleagues attended the final meeting, COW1, COW2, and COW3 were already waiting with the finalised Termination Agreement;
  • the Employee only received the Termination Agreement at the meeting and was not allowed to take it back to review; and
  • the Employee and his colleagues were not allowed to make any amendments to the Termination Agreement, as it had apparently been pre-prepared by the Company’s lawyers,

concluding that these factors “[do] not show the very essence of a mutual separation agreement to exist” and that it was rather “a unilateral imposition of terms by the [Company] on the [Employee]”.

The Court referred to several previously-decided cases, including the following:

  1. Suseela Devi Balakrishnan v. INTI International College Kuala Lumpur Sdn Bhd [2019] 1 ILR 421 (Award No. 343 of 2019), where it was held that: “If the VSS was applied involuntarily that is to say it was carried out by use of force subtle or otherwise or by coercion or duress in any form or by any unfair labour practice, then it may amount to dismissal without just or excuse.”
  2. Timber Master Trading (M) Sdn Bhd v. Jane Wang Sing Fang [1994] 2 ILR 1293 (Award No. 553 of 1994), where the Court stated: “The duty of the court is to determine whether there had been a termination which had been mutually and freely agreed upon between the parties. The court cannot in equity and good conscience give effect to a purported mutual agreement which had not been genuinely consensual.”

The Court in Thanasegaran decided that “it cannot be said by any stretch of imagination that there had been a meeting of the minds (consensus ad idem) between the [Employee] and the [Company]” and that the Employee “was evidently put in fear of an impending disciplinary action via the holding of a domestic inquiry”. The Court rejected the Company’s submission that there was no threat of dismissal, stating: “COW2’s representation alone that a domestic inquiry will be held was cause for concern already that the eventuality of a termination, amongst other forms of punishment, was a possibility and that in itself had affected the [Employee’s] state of mind that he would be left with nothing if he did not execute the Termination Agreement”.

The Court also shared that it was guided by the High Court decision in Phileo Allied Bank (M) Bhd v. Tan Mon Nee & Anor [2010] 1 LNS 813. In that case, the court held, in response to the employer’s contention that the employee had to prove that the employer told her “either you resign or be sacked” that: “Whether or not the [employee] was ‘told’ to resign depends on the facts. There are no specific words or terms that an employer is required to use or utter to communicate to his employee the message that the employee ought to resign or otherwise dire consequences in the form of disciplinary action and dismissal will follow. So long as from his words and/or conduct the employer makes it known to the employee in unmistakable terms that resignation is a better option to disciplinary action and dismissal, and acting on that basis the employee was induced to resign, to my mind that is sufficient to amount to ‘telling’ the employee to resign.

[One of my previous case updates would also be relevant for those who would like to read more about these issues — Case Update: Factors considered when determining whether a resignation is forced or voluntary (15 September 2017).]

The Court in Thanasegaran concluded: “Upon analysing the evidence in its entirety, the court finds that the Termination Agreement had not been voluntarily entered into by the [Employee]. He had been clearly forced by the [Company] to resign from his employment. The [Employee] has succeeded in proving, on a balance of probabilities, that he had been dismissed by the [Company] in the guise of a mutual separation scheme.”

Was the dismissal with or without just cause or excuse?

The Court reiterated that the manner in which COW1, COW2, and COW3 conducted themselves — informing the Employee that there was a problem with his attitude, that a DI would be held, and then “at the drop of a hat” producing a Termination Agreement, all within 24 hours — “clearly shows that the Termination Agreement was clearly not entered into voluntarily by the [Employee]”.

Further, the Court held that “the [Company’s] contention that the [Employee] had displayed unsatisfactory performance or attitude was not proven by any contemporaneous documents”. The Company did produce committee meeting minutes, but these were “undated, unsigned and clearly lacked details and clarity”.

The Court concluded that —

  1. the Termination Agreement was not entered into by the Employee voluntarily;
  2. the Employee was dismissed by the Company; and
  3. the dismissal was without just cause and excuse.

The Employee was awarded:

  • compensation in lieu of reinstatement at the rate of one month’s salary per year of service; and
  • 22 months backwages, reduced by 5%,

with the sums already paid to the Employee under the Termination Agreement to be deducted from the award.

Takeaways and practical tips

This case further highlights a common misconception, where employers think that once an employee signs off an MSA, the termination is agreed and unlikely to be deemed unfair. The process must be carefully handled, and cannot be rushed. The Industrial Court looks at all the evidence, facts, and actions/inactions of the parties in deciding whether an employee was fairly treated.

Here are some brief bullet-points on my advice to clients when approaching a mutual separation discussion:

  1. All discussions/meetings should be clearly documented. This is particularly important where the employee issue pertains to poor performance (as in the Thanasegaran case), or misconduct. Proper documentary evidence is often very strong evidence to show that an employer acted reasonably/fairly and with proper justification.
  2. The communication with the employee must be clear, and well-strategised. HR/management should have appropriate scripts or talking points prepared before discussing a potential mutual separation. This ensures that the situation is communicated clearly to the employee. Without a clear structure, these discussions are often derailed, and both parties come away with differing interpretations of what was discussed/communicated.
  3. The company’s lawyer should prepare some basic documents. This ties in with the previous point. Depending on the complexity of the matter (for example, an exercise involving large numbers of employees would require more comprehensive preparation and documentation), I would prepare —
    • a discussion script for HR/management to read through beforehand;
    • a talking points checklist or summary of the discussion script for HR/management to refer to during the discussion to ensure that all points have been addressed; and
    • a Q&A document addressing the FAQs that would usually be anticipated (this can also be two separate Q&A documents — one for HR/management to refer to, and a simpler one which can be given to the employee).
  4. HR/management must use discretion and common sense. The human factor is always relevant to employment situations, and besides all the documentation and legal preparation above, HR/management will also have to rely on their own judgement based on the situation on the ground. Most HR personnel would be able to anticipate how an employee will respond to the discussions based on their previous knowledge of him/her. They will also have to gauge the employee’s reactions and attitude during the discussion, and not apply undue pressure on an employee who is obviously against the idea of signing an MSA.
  5. The employee must be given sufficient time to consider the options, and review the MSA. This is an important factor that is very often overlooked by employers (what happened in the Thanasegaran case is not at all uncommon). What a sufficient/reasonable time period is will depend on the circumstances, but 24 hours would very rarely be reasonable.
  6. The employer should be open to negotiating/amending the MSA. Standing firm on a “non-negotiable” position would be a strong indication that the MSA was in fact not “mutually agreed”, and that the time given to the employee to review the MSA was not genuine.

 

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