Contractual Reasonableness and Constructive Dismissal: A Landmark Case for Employment Law in Malaysia

BY EMPLOYMENT LAW MALAYSIA

Contractual Reasonableness and Constructive Dismissal: A Landmark Case for Employment Law in Malaysia

Contract Test Prevails, but Contractual Reasonableness Is Binding: Key Lessons from a Landmark Employment Law Decision in Malaysia

A recent Court of Appeal ruling in Saharunzaman bin Barun v Perodua Sales Sdn Bhd & Anor [2025] CLJU 3 has reshaped the interpretation of constructive dismissal Malaysia under employment law Malaysia. While reaffirming that the "contract test" remains central to such claims, the court introduced an important nuance: when an employment contract includes a "reasonableness" clause, employers are legally bound by it. This case is vital reading for HR professionals, employers, and employees seeking clarity on termination of employment Malaysia.

Case Overview: What Happened?

Perodua Sales Sdn Bhd initiated a corporate restructuring that involved transferring employees to Nagayoga Automobile Malaysia (NAM) on fixed-term contracts. Three affected employees refused the transfer, fearing loss of permanent status and job security. In response, the company reassigned them to distant locations within three days and later served them with show-cause letters for insubordination. The employees claimed constructive dismissal in Malaysia.

The Industrial Court ruled in their favor, citing the company’s disregard for the “reasonableness” clause in the contracts. The High Court reversed this, applying the strict “contract test.” However, the Court of Appeal reinstated the Industrial Court’s decision, ruling that Perodua’s actions breached the contractual promise of reasonable treatment.

Legal Principles Established

1. The Contract Test Remains Supreme The court reiterated that the core test for constructive dismissal is whether there has been a fundamental breach of the employment contract by the employer.

2. Reasonableness as a Contractual Obligation The inclusion of the phrase “as reasonably directed by the Company” transformed reasonableness from a guideline into a binding contractual term. Employers must uphold such obligations.

3. Managerial Prerogative Is Not Absolute While employers enjoy discretion in managing staff, they must not abuse this power. Abrupt transfers without consultation or consideration can constitute a breach.

4. Bona Fides Are Critical Actions aimed at indirectly forcing employees out, such as sudden transfers without valid permits or fair notice, undermine employer credibility and could result in findings of unfair dismissal Malaysia.

Key Takeaways for Employers and HR Teams

• Always ensure employment contracts are clear and avoid vague promises.

• Treat “reasonableness” clauses as enforceable obligations.

• Exercise managerial discretion in good faith and with documented justification.

• Seek legal input before restructuring or making significant employment decisions.

Get Legal Help: Protect Your Rights and Business

Navigating labour law Malaysia and employment law Malaysia can be complex, especially when facing potential employment contract dispute Malaysia or claims of wrongful dismissal Malaysia. Whether you’re an employee facing discriminatory practices or an employer restructuring your workforce, legal guidance is crucial.

Employees should consult:

• An employee rights lawyer Malaysia for advice on unfair treatment

• A workplace discrimination lawyer Malaysia if experiencing bias or harassment

• A wrongful dismissal lawyer Malaysia for claims involving unjust termination

• An employment tribunal Malaysia expert for dispute representation

Employers should engage:

• An employment lawyer Malaysia or labour lawyer Malaysia to review contracts and HR policies

• An industrial relations lawyer Malaysia for legal advice on restructuring and retrenchment

• A labour court Malaysia lawyer to defend against employment-related claims

• Legal professionals for HR legal compliance Malaysia to avoid costly litigation

Need Help? Contact Employment Law Malaysia

Employment Law Malaysia is your trusted partner for all workplace legal issues. Our experienced team offers support in:

• Drafting and reviewing employment contracts

• Addressing employment dispute resolution Malaysia

• Providing legal advice for employees Malaysia and employers alike

• Managing retrenchment law Malaysia and constructive dismissal concerns

Searching for an employment lawyer near me? Reach out to Employment Law Malaysia today for tailored legal strategies that prioritize fairness, compliance, and your legal rights.

Contact us today for a free consultation via WhatsApp (+6011-1630-0091) or email (general@employmentlawmalaysia.com) for expert advice tailored to your employment needs.