No Breaking Free: Binding Choices in Negotiated Exits

02 October 2024

In the recent case of B Braun Medical Industries Sdn Bhd v Mugunthan a/l Vadiveloo [2024] 6 AMR 125, the Court of Appeal considered the enforceability of a Mutual Separation Scheme (“MSS”) contract and whether the acceptance of the MSS contract under the threat of redundancy could constitute dismissal without just cause or excuse in the form of a “forced resignation”.

Brief Facts

Due to financial difficulties, B Braun Medical Industries Sdn Bhd (“Employer”) had explored certain restructuring measures including a reduction in the number of employees. On 14 January 2019, the Employer’s Director and Assistant Manager of the Human Resource Department met with Mugunthan a/l Vadiveloo (“Employee”), and handed him a document containing a table for a draft MSS contract and another table showing the terms of a retrenchment package, which would be payable if the Employee did not agree to the MSS.

The Employee made certain requests to be accommodated in the MSS contract, of which two were accepted by the Employer, including a request for a three-month resignation notice period ending on 30 April 2019.

Later, in a second meeting on the same day, the Employee accepted the draft MSS contract which included four of his proposed amendments that were accepted by the Employer. The Employee was also informed that the MSS had the effect of an ordinary resignation of his employment.

Then, in a third meeting on the same day, the Employee submitted his resignation letter.

The Employee subsequently requested an early release in order to take up another job offer. The Employer agreed to this, but nonetheless paid three months’ salary to the Employee despite the Employee not serving his entire notice period.

Notwithstanding the events abovementioned, the Employee filed a representation for reinstatement under Section 20 of the Industrial Relations Act 1967 (“IRA 1967”), claiming that he was forced to accept the MSS and that this amounted to unjust dismissal. His representation was referred to the Industrial Court for an award.

Decision of the Industrial Court

The Industrial Court found in favour of the Employee and held that the Employee had been dismissed by the Employer without just cause or excuse. The learned Industrial Court Chairman found, amongst others, that:

the Employer had the burden to prove the redundancy of the Employee’s employment so as to justify the MSS;

the Employer had failed to discharge the burden to prove that the Employee’s employment had become redundant; and

the Employer failed to explain that the Employee can refuse the MSS contract without being retrenched.

Backwages and compensation in lieu of reinstatement were awarded to the Employee by the Industrial Court.

Decision of the High Court

Dissatisfied, the Employer sought a judicial review of the Industrial Court’s award.

However, the High Court dismissed the Employer’s application for an order of certiorari to quash the Industrial Court award and held, amongst others, that the Employer had failed to discharge the burden to prove that the Employee’s job functions had become redundant.

Decision of the Court of Appeal

The Employer appealed the High Court’s decision to the Court of Appeal.

At the Court of Appeal, the issues for consideration were, amongst others¹, as follows:

If an employee had been forced to sign an MSS contract under threat that his employment had become redundant and that he would otherwise be retrenched from employment if he did not accept the MSS contract but was not actually threatened to be dismissed, whether this could constitute dismissal in the form of “forced resignation” (“Issue 1”); and

In the circumstances of Issue 1, whether the employer bears the burden to prove that the employee had signed the MSS contract voluntarily, or whether the employee bears the burden to prove that he had signed the MSS contract involuntarily and thus, been forced to resign and was therefore unlawfully dismissed (“Issue 2”).

The Court of Appeal allowed the appeal, set aside the High Court decision and issued a certiorari order to quash the Industrial Court award.

In its decision, the Court of Appeal held, amongst others, as follows:

In respect of Issue 1, the court can decide that the employee’s execution of the MSS contract could constitute a dismissal in the form of “forced resignation” premised on the following reasons:

The employer has superior bargaining powers as compared to the employee; where the employer may force an employee to enter into an MSS contract solely by threatening to retrench the employee if he does not agree to the MSS contract.

Neither principle nor policy bars the court from recognising a forced MSS contract as a dismissal without just cause or excuse pursuant to Section 20(1) IRA 1967.

The court’s recognition of a forced MSS contract as an unlawful dismissal of an employee aligns with ‘equity, good conscience and the substantial merits of the case’ as mandated by Section 30(5) IRA 1967.

It is consistent with the intention of Parliament that the IRA 1967 as ‘social legislation’ is intended to safeguard an employee’s constitutional right to livelihood under Article 5(1) of the Federal Constitution (per Nallini Pathmanathan FCJ in Maritime Intelligence Sdn Bhd v Tan Ah Gek [2021] 8 AMR 809).

In respect of Issue 2, The Court of Appeal held that when an employee alleges the existence of a forced MSS contract, it is the employee and not the employer that has the legal burden pursuant to subsections (1) and (2) of Section 101 of the Evidence Act 1950 to prove so on a balance of probabilities. According to the Court of Appeal, the failure by the Industrial Court Chairman and the Judicial Commissioner to impose this legal burden on the Employee, amounted to an error of law.

The Court of Appeal ultimately found that the Employer’s financial difficulties were clear and validated the economic justification for the restructuring. The Court of Appeal held that the restructuring was a lawful exercise and within the employer’s prerogative to do so. It also found that on the facts, the Employee had voluntarily agreed to the MSS contract and was not forced or threatened into signing the same.

In closing, the Court of Appeal also held, obiter, that an Industrial Court Chairperson should be wary in deciding a claim for an unlawful dismissal in the form of a forced resignation by an employee who had willingly entered into a negotiated MSS contract with an employer and had received all the benefits under the concluded MSS contract.

Commentary

The Court of Appeal’s ratio decidendi in respect of Issue 1 is interesting. It underlines that it is inherently open for the courts to decide that there could be forced resignation even in the absence of an actual threat by the employer to dismiss an employee causing the employee to accept an MSS contract. It is easy to appreciate why an employee who is offered a mutual separation would not be wrong to assume that a decision has been made to end his employment and as such feel compelled to accept the terms of separation offered.

The Court of Appeal’s decision in respect of Issue 2 is cognisant of the trite legal position that mutual separation agreements must indeed be mutual to be recognised as such; and that an employee who signs on the dotted line is not precluded from later contending that he did so without free will, especially when he is told that he faces loss of employment either way. At the same time, the Court of Appeal’s decision is a timely reminder that when an employee negotiates his terms of separation and participates in the process, he cannot be said to have been compelled to enter into an MSS against his free will.

Case note by Selvamalar Alagaratnam (Partner), Foo Siew Li (Partner) and Sara Lau (Partner) of the Employment Law Practice of Skrine.

¹ Several other issues were considered by the Court of Appeal but are not discussed in this article as the court’s decisions on such issues were based on an evaluation of the facts of the case and are not significant from the perspective of legal precedent.

This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.

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No Breaking Free: Binding Choices in Negotiated Exits