Introduction
Every employee owes a duty of fidelity / loyalty to their employer even if there is no such explicit clause in their employment contract.[1]
By that duty, employees are expected to serve their employers faithfully and avoid situations where their interest would conflict with the employer’s interest or that would conflict with their duty owed to their employers.[2]
In fact, employees who place themselves in a position of conflict of interest, whether direct or indirect,[3] may be guilty of a serious misconduct and may be dismissed.[4]
This article explores this concept and how employers can best manage conflict of interest in the workplace.
The Implied Duties of Fidelity / Loyalty
In the workplace, the relationship of mutual trust and confidence between an employer and employee is fundamental.
If an employer engages in any “trust-destroying conduct”,[5] the employee may leave his employment and consider himself constructively dismissed.
Similarly, if an employee does anything to cause his employer to lose the trust and confidence placed in him, the employer too has a right to dismiss him.
A clear explanation of the employee’s obligation of loyalty and fidelity can be seen in BR Ghaiye’s Misconduct in Employment at page 650-651:
“…The obligation to serve his master with good faith and fidelity arises out of necessary implication which is deemed to be engrafted on each and every contract of service. This implied condition is recognized on account of realization of the need of full confidence between the employee and the employer and this implied condition continues even after an employee has left the service.”
“…The implied condition of fidelity may involve a number of requirements on the employee. It requires him to act in a faithful manner and not to place himself in a position where his interest conflicts with his duties. … If he does … that will be inconsistent with the contract of employment and as such will be an act of misconduct.”
Fiduciary Duty owed by Employees
Now, besides the duty of fidelity / loyalty, some employees may owe an additional, fiduciary duty, to their employer.
The case of Zaharen bin Hj Zakaria v Redmax Sdn Bhd and other appeals [2016] 5 MLJ 91 discusses the difference between a fiduciary duty and duty of fidelity owed by an employee to their employer:
“A fiduciary duty requires an employee to act in the interests of his employer, whereas the duty of fidelity requires an employee to have regard to his employer’s interests.”
The court in Soh Chee Gee v. Syn Tai Hung Trading Sdn Bhd [2019] 6 CLJ 516 explains who and when an employee may owe such fiduciary duty:
[47] The learned authors of the texbook Labour Law considered the case of Fishel (above) and commented as follows:
…The issue becomes instead one of determining when ‘within a particular contractual relationship there are specific contractual obligations which the employee has undertaken which have placed him in a situation where equity imposes [on him] these rigorous [fiduciary] duties’ (per Elias J in Fishel). The introduction of a fiduciary element into the relationship is not dependent on the seniority of the employee concerned, since the most junior of employees can be entrusted with the employer’s property in such a way as to give rise to a specific obligation to restore it (together with any secret profits that may have been made through its use). Nevertheless, very senior employees who are in a position of special trust and responsibility with regard to the management of the employer’s organisation and assets will almost necessarily incur extensive fiduciary duties to the employer. (emphasis ours)
This was also further explained in Muniandy Nadasan & Ors v. Dato’ Prem Krishna Sahgal & Ors [2016] CLJU 592:
- when the employment contract imposes specific contractual obligations on the employee which place the employee in a situation where Equity imposes fiduciary duties on the employee;
- when the employee owes a special duty of “single minded or exclusive loyalty” to the employer; and/or
- when the employee is in the “top management” of the employer with duties similar to those owed by company directors.
The Court went on to list two considerations which are relevant to ascertain whether an employee owes fiduciary duties to their employer:
(a) the position of the employee in the organisation, structure and hierarchy of the employer, namely how senior is the employee; and
(b) the nature and extent of the duties, functions and responsibilities of the employee.
In essence, a fiduciary duty owed to the employer goes further than a mere fidelity duty.
An employee who breaches his fiduciary duty may face a potential civil suit by his employer to be personally liable for the losses arising from the said breach besides facing the threat of termination. The remedies available to the employer for a breach of fiduciary duty include amongst others, but not limited to restitution, rescission, an order for accounts of profits[6] and damages (in contract or tort)[7].
Where limited companies are involved, the corporate veil may be pierced to ensure that directors who breach their fiduciary duty to their company made personally liable. This can be seen in Simmah Timber Industries Sdn Bhd v. David Low See Keat & 2 Ors [1999] CLJU 14 where the first defendant (the director of the Plaintiff / Company) and the second defendant were ordered to return the monies received from their secret profits transaction and pay damages for conspiracy to injure to the Plaintiff.
Common Situations Giving Rise to Conflict of Interest
The following non-exhaustive situations are common instances where an employee will be considered to have placed themselves in conflict of interest with their employer’s interest:
1. Accepting kickbacks / monies from suppliers, contractors and other third parties in exchange of engaging them
In Mohd Pauzie Abdullah v Tan Chong Ekspres Auto Servis Sdn Bhd [2021] 2 ILR 309, the Claimant was dismissed because he had accepted angpaus from the Company’s contractors and other monetary gifts even though his company expressly prohibited such actions (evidenced by the Company’s memo and policy on conflict of interest).
2. Working for a competing business
In Teh Seng Kay v United Coatings Technology Sdn Bhd [2014] 2 LNS 0572, the Claimant was the Company’s Sales Manager and his wife registered a business which was discovered to be in competition with the Company. The Claimant did not reveal this conflict of interest and the Company found out on their own and thus, under the circumstances the Court held that the Company was justified in dismissing the Claimant for they had lost their trust and confidence in the Claimant.
3. Setting up new company providing similar services to their employer
In Yap Siew Deen v M3 Technologies (Asia) Berhad [2023] 2 LNS 1926, the Claimant (Employee) was discovered to have misused her company’s confidential information and trade secrets by setting up a new company selling similar products. The Claimant was found guilty of a conspiracy to deceive her employer by making discreet profits by the rebranding of her employer’s products as if the products were her own invention. *The Employer in this case was represented by Louis Liaw.
In Siti Noorbaiyah Abdul Malek v UKM Holdings Sdn Bhd / UNIPEQ Sdn Bhd [2019] 1 ILR 587, the Claimant also set up her own business which was in the similar business as UNIPEQ without their prior consent and knowledge. As the Claimant was the CEO of UNIPEQ, she was required to adhere to the Company’s Handbook and to strictly comply with the duty of disclosure as she “had been expected to set the correct ‘tone at the top’ and be an example to her subordinates, in matters relating to integrity and compliance with the company’s procedures”. As such, her failure to disclosure her business warranted her dismissal.
4. Failure to disclose relationships with any person or organisation
In Azliyah binti Samsi v Petronas Management Training Sdn Bhd (Award No. 1033 of 2019, 25 March 2019), the Claimant had introduced to the Company 2 suppliers, one of which was owned by her son-in-law and the other owned by her son but she failed to disclose her personal relationship with the suppliers and thus, she was dismissed (with just cause or excuse).
5. Promoting another business
In Mohamad Muda v M3NERGY Berhad [2015] 2 ILR 64 (Award No. 127 of 2015), the Court upheld the Claimant’s dismissal as the Claimant had acted in conflict of interest by promoting another business apart from the Company he was working for, the rationale being that “an employee should not be associated with any firm or company which competes with the employer”.
It is important to note that employers need not prove or suffer actual losses and that it is sufficient if employers can demonstrate possible detriment or possible loss.[8]
Can a Conflict of Interest Misconduct Be Serious Enough to Warrant a Dismissal?
When an employee’s interest conflicts with that owed to his employer and he fails to disclose it, he may be considered to have committed a serious misconduct.
The rationale behind this is due to the fact that such misconducts are considered serious in nature which affects the “very root of employer-employee relationship which advocate mutual trust and confidence”.[9]
In the case of Ghazali Abdullah v FGV Plantations (Malaysia) Sdn Bhd [2023] 1 ILR 278, the Claimant was a senior manager in FGV Plantations’ technical department and was involved in the tender process committee of a housing development project but failed to disclose that he was senior engineer in Jajaran Pertama Sdn Bhd, a company which had submitted a tender to FGV Plantations. The court described the Claimant’s conduct as one which “no employer placed in a similar situation would tolerate and continue employing such employee in the company” and that the Claimant had “failed to reciprocate the trust and confidence placed on him by the Company”. Essentially, the seriousness of the misconduct had warranted FGV Plantations to dismiss him.
See also the case of Yap Siew Deen v. M3 Technologies (Asia) Berhad [2023] ILRU1926; [2023] 2 LNS 1926 mentioned above where the Claimant’s dismissal was upheld because she had committed a misconduct “at the highest order that must never be tolerated by any slightest degree”.
In short, failing to disclose a conflict of interest constitutes a serious misconduct and can warrant a dismissal.
Advice to Employers
So how can employers more effectively manage conflict of interest at the workplace? Here are some tips:
- Have clear provisions on Conflict of Interest in Contracts, Handbooks & Policies
In the case of Mohd Pauzie Abdullah v Tan Chong Ekspres Auto Servis Sdn Bhd [2021] 2 ILR 309, the Claimant was the Company’s Regional Operation Manager for the Company’s Bintulu and Sibu branches and he was terminated after he was found to have received money from the Company’s contractors in several instances. He claimed ignorance towards the Company’s policy against conflict of interest despite working for the Company for 14 years.
The Court rejected his defence due to his seniority in the Company and the fact that the Company’s policy against conflict of interest was available both in the Company’s Employee Handbook and Inter-Office Memo.
In summary, having clear provisions addressing conflict of interest in the workplace serves both as a reminder to employees and a safety-net for employers against employees who wish to rely on ignorance as a defence to their wrongful conduct.
- Proactive vs Reactive – Annual check up and disclosures
Employers should be alert towards fellow employees who are found to be in potential or actual conflict of interest situations (whether it be direct or indirect).[10]
They are advised to be ‘proactive’ by encouraging their employees to make annual declarations of any potential conflict of interest to determine the nature and extent of the conflict and to address such situation promptly rather than be ‘reactive’ by terminating their employee for their failure to disclose their conflict of interest.
- Check and Balance & Clear Mechanism for Reporting
While most employers rely on their Human Resource (HR) Department to handle any conflict of interest issues, employers should consider setting up a separate committee to handle such issues.
Having a separate committee ensures that there are appropriate systems in place within the company to monitor compliance with the company’s conflict of interest policies and prevent a “monopoly” of functions by the HR Department, especially in a situation where a HR employee is being investigated by their own department.
Employers should also consider creating clear reporting mechanisms like establishing a hotline or forum to enable their employees to report incidents of conflict of interest. Doing this will provide a safe space for employees to make disclosure of their own conflicts of interest or their colleagues while maintaining their anonymity.
Additionally, having a whistleblowing policy which sets out the protections offered to whistleblowers will encourage employees to make disclosures or report incidents at the earliest opportunity without fear of retaliation and/or victimisation.
Conclusion
The duty of loyalty / fidelity is core to an employer-employee relationship for without it, there cannot be mutual trust and confidence between the parties. Sometimes, employees are even imposed with an additional burden to act in the interests of their employer, with that being their fiduciary duty due to the special position or responsibilities that they hold.
If an employee finds him/herself in a “potential” conflict of interest situation, he/she must actively avoid it, or at the very least, disclose the same to his/her employer, whom can then decide whether that position can be accommodated.
Unfortunately, not all employees act with such transparency and integrity and therefore, employers must always be on the look out and employers must take the initiative to come up with clear policies against conflict of interest whether it be in the employment contract itself, handbooks or company memos.
If you need any further information or assistance on this, feel free to Contact Us.
*This article is written with the assistance of Ms Amelia Lo, pupil-in-chambers of Louis Liaw Chambers.
[1] Azahari Sharom v Associated Pan Malaysia Cement Sdn Bhd [2010] 1 ILR 423 [47]
[2] Mohd Pauzie Abdullah v Tan Chong Ekspres Auto Servis Sdn Bhd [2021] 2 ILR 309 [32]
[3] Cellular Communications Network (M) Sdn Bhd v Johari Tahar [2001] 1 ILR 387
[4] Pearce v. Foster [1886] (71) OBO 536
[5] Commonwealth Bank of Australia v. Barker [2014] 312 ALR 356
[6] Order 43 Rules of Court 2012; Wescourt Design Sdn Bhd v. Wescourt Furnishing (M) Sdn Bhd [2015] 1 LNS 656; [2015] 11 MLJ 735
[7] Section 74 Contracts Act 1950
[8] Siti Noorbaiyah Abdul Malek v UKM Holdings Sdn Bhd / UNIPEQ Sdn Bhd [2019] 1 ILR 587
[9] Mohamad Muda v M3NERGY Berhad [2015] 2 ILR 64 (Award No. 127 of 2015)
[10] Cellular Communications Network (M) Sdn Bhd v Johari Tahar [2001] 1 ILR 387