Case Update: Court of Appeal rules that employee demotion amounts to constructive dismissal

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.

It is recognised that it is a management prerogative for companies to decide on the best way to run their business, and that the courts will be slow to interfere with such management decisions. However, we do still see the courts stepping in when the decisions made by employers are deemed to be unfair, or in breach of the employment contract. I previously wrote about a case where an employee transfer was deemed by the Industrial Court to constitute a constructive dismissal (Case Update: When an employee transfer can amount to a constructive dismissal).

In this case update, I consider the Court of Appeal (“CoA”) case of Ng Teck Fay v. Mahkamah Perusahaan Malaysia & Anor. [2021] 10 CLJ 73, where the CoA found that an employee demotion or re-grading amounted to a constructive dismissal.

Brief facts

These are the brief facts of the Ng Teck Fay case:

  • The appellant (“Employee”) started working for the Company in 2008 as an Assistant General Manager.
  • After an incident in 2014 where the Employee accidentally shared an internal email with an outside party, the Company issued the Employee a show cause letter, followed by (after the Employee apologised) a warning letter.
  • The Company also issued the Employee with two further letters — the first one entitled “change of job scope” where the Employee’s scope of duties was reduced, and the second one entitled “job re-grading to senior manager” whereby the Employee was downgraded and demoted from Assistant GM to senior manager.
  • When these letters were issued, the Employee was also told that he could resign if he disagreed with the contents of the letters. Four days after the demotion, the Employee opted to leave the Company, and claimed that he was constructively dismissed.
  • The Industrial Court dismissed the Employee’s claim on the grounds that — (i) the re-grading did not involve any changes to his salary and seniority, and only changed his benefits arising from the alignment of the new job grade, scope of work and accountability; and (ii) the Employee failed to prove that the Company breached the relevant terms of his employment contract, which went to the root of the employment contract, which would entitle him to consider himself constructively dismissed. The Employee filed a judicial review application to the High Court, which the High Court dismissed, which is how the matter came before the CoA.

1. Employee satisfied the conditions to prove constructive dismissal

The CoA outlined the established position that Employee must satisfy four conditions to successfully claim constructive dismissal:

  • There must be a breach of contract by the employer.
  • The breach must be sufficiently important to justify the employee resigning.
  • The employee must leave in response to the breach and not for some other unconnected reasons.
  • The employee must not unduly delay in terminating the contract, or he would be deemed to have waived the breach and agreed to vary the contract.

The CoA decided that the Employee fulfilled these four conditions, and succeeded in proving that he was constructively dismissed by the Company.

2. Industrial Court erred in law

The CoA found that the Industrial Court had erred in law and took into consideration irrelevant matters and failed to consider relevant matters when dismissing the Employee’s claim.

3. Company’s re-grading of the Employee was a breach of employment contract

The CoA decided that the Company’s decision to re-grade the Employee to align his new job scope with the Company’s reorganised structure amounted to a breach of the employment contract which entitled the Employee to deem himself constructively dismissed, despite the Employee’s acceptance of the Company’s decision. The re-grading resulted in the Employee having reduced responsibilities, and the demotion also involved the removal of two other employees who used to report to the Employee, as well as reduced benefits.

The CoA found that both the Industrial Court and High Court failed to consider that an employee could not be demoted or re-graded to a post which he never held before (the Employee was hired as an Assistant General Manager and was now asked to assume the post of Senior Manager), and that there was insufficient judicial appreciation of the totality of the evidence.

Two Indian Supreme Court cases were cited by the CoA:

  • Hussain Sasansaheb Kaladgi v. State of Maharashtra (1987) AIR 1627, where the court stated that an employee recruited to a post cannot be demoted to a lower post, and that it is only an employee who has been promoted in the past who can be reverted to the previous post.
  • Nyadar Singh v. Union of India & Others (1988) AIR 1979, where the court held that an employee initially recruited to a certain time scale grade or service or post cannot be demoted to a post with a lower time scale grade or service or post which he had never held before.
  • Both the Hussain Sasansaheb Kaladgi and Nyadar Singh cases had been previously adopted by the Malaysian High Court in Aidiladha Sulaiman v. Mahkamah Perusahaan Malaysia & Anor [2016] 1 CLJ 439. On this point, in the Aidiladha Sulaiman case, the High Court stated that when an employee is demoted, the reduction in position must not be lower than the position from which the employee was last promoted.

4. Company failed to show the dismissal was with just cause or excuse

The CoA concluded that the Company had failed to show the dismissal was with just cause or excuse, and the appeal was allowed. The Industrial Court was ordered to hear the case and award appropriate remedies.

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