Unwritten Rule of Employment – Loyalty Towards the Company

In Malaysia, the case of Zainudin Bin Kassim v. Johan Ceramic Berhad [2008] 2 LNS 1447 cited an academic opinion with approval:

“The right to control employees is a distinguishing feature of a contract of employment. The right to control implies the right to ask the employee what work to do. It is a dominant characteristic in the relationship of employer and employee, which marks off the employee from an independent character. As such, the employee must subject himself to the said control and behave accordingly. (See Misconduct in Employment by B.R.Ghaiye at p. 42)”.

These duties of obedience and loyalty subsist in all employment contracts, even if it is not explicitly spelled out.

And perhaps it is because it is not explicitly laid out in the employment contract that some employees, knowingly or unknowingly, embark on activities that breach these duties. This piece will provide some examples of activities that breach these duties and remind employees to avoid them.

Likewise, some employers may also have a misconception that as these duties are not laid down in the employment contract, they have no recourse against the employees when they act in manners as such that harm the company. That is incorrect and this article seeks to bring awareness to that too.

However, as the duty of obedience warrants an article by itself, this piece will focus only on the duty of fidelity, which is a separate duty altogether.

It is hoped that by reading this piece, the reader will understand what the duty of fidelity is, how the duty is breached, and what is the recourse available to the employer (and on the same note, the consequences to the employees).

What is the Duty of Fidelity?

In the case of Zaharen Hj Zakaria v. Redmax Sdn Bhd & Other Appeals [2016] 7 CLJ 380 the Court of Appeal held the following:

“[44] Under the law, an employee of a company has a duty of fidelity to be observed at all times during his employment with the company. What is this duty of fidelity? Every employment contract contains an implied term that an employee will serve his employer with good faith and fidelity (the duty of fidelity). The duty of fidelity is owed by all employees and is to be distinguished from a fiduciary duty. 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. Inherent in that duty to have regard to his employer’s interests must be a duty not to act in a manner that would be to disregard his employer’s interests. Such acts must include acts that are inherently detrimental to his company’s interests.”

In summary, the duty of fidelity requires the employee to have regard to the employer’s interest and avoid engaging in activities that are detrimental to that.

However, what activities are “activities that are detrimental to the interest of the company”?

It is impossible to foresee all the scenarios in which the duty of fidelity can be breached. Moreover, certain actions may be a breach in one scenario, but not in another; each case must be treated with regards to its specific factual matrix, and particularly with regards to the specific employment terms entered between the parties.

Examples of Breach of Duty of Fidelity

However, here are some examples of actions that have been regarded by the Courts as a breach of this duty. They include, amongst others,

1. Working for the benefit of another company other than the employer and obtaining profit from the company without consent or knowledge of the employer[5];
2. Diverting potential or existing customers of the employer to another company, without consent or knowledge of the employer[6];
3. Using confidential information and trade secret of the employer for the benefit of another company, without consent or knowledge of the employer[7]; and
4. Planning team-moves and soliciting employees during employment with the employer to join a competitor or set-up a competing business[8].

In these circumstances, clearly, the interest of the employer has not only been disregarded but positively harmed by such actions of the employee. Therefore, the employee has breached his/her duty of fidelity.

Recourse Available to The Company

When faced with this situation, there are essentially two recourses available to the company, both of which can be undertaken simultaneously. They are:

1. Dismissing the infidel employee; and
2. Taking a civil suit against the infidel employee

Dismissing the infidel employees

Case laws have shown that actions that breach the duty of fidelity amount to misconduct and insubordination, thereby warranting disciplinary actions and even dismissal[9].

In any event, companies are advised to conduct their investigation and gather solid evidence of such breach in silence first before making any moves. This is to avoid pre-maturely and/or wrongly terminating these employees and be complained of unfair dismissal, as well as to avoid alerting the infidel employee leading him/her to destroy evidence.

Taking a civil suit against the infidel employee

Other than terminating the infidel employee, another action that can be taken by the employer is to sue the employees in the civil courts.

The causes of action are breach of the employment contract, specifically breach of an implied term of the contract (that is the duty of fidelity), unlawful interference with trade, and/or breach of confidence, depending on the facts of the matter.

These civil suits will aim to obtain damages from the infidel employee, to have the employee account for profits earned through these unlawful dealings[12], as well as to injunct the employee from continuing such action.

If another company is also knowingly involved in the unlawful dealings, the other company can also be jointly sued to enhance the chances of recuperating the losses suffered by the betrayed company.

In the case of Worldwide Rota Dies Sdn Bhd v. Ronald Ong Cheow Joon [2010] 1 LNS 444, the Court held that the defendant of the case had committed the tort of unlawful interference with the plaintiff’s trade when the defendant encouraged and/or influenced the plaintiff’s employees to leave the employment of the plaintiff, when the defendant failed to keep all information obtained in the course of his employment with the plaintiff confidential, when the defendant divulged the plaintiff’s confidential information to the plaintiff’s competitor, and when the defendant made misrepresentations to the plaintiff’s customers with the sole aim of damaging the plaintiff’s reputation.

The Court also held that the defendant was in breach of his duty of fidelity (albeit in the case said duty was listed in the employment contract) as well as in breach of confidence when he committed the abovementioned activities.

Consequently, the court awarded an injunction that the defendant whether by himself, his agent and/or servant, be restrained from doing any further acts which could damage the reputation of the plaintiff and from encouraging the plaintiff’s employees to leave the employment of the plaintiff. The Court also awarded damages of upwards of RM2 million.

Conclusion

In conclusion, by entering an employment relationship, an employee owes his/her employer a duty to be loyal to the employer and to always have regard for the employer’s interest. This is notwithstanding the employment contract not having any clause to that effect.

And when an employee disregards the employer’s interest in his/her actions, he/she shall be liable to the losses caused to the employer as well as the termination of his/her employment.

Nevertheless, while there is recourse available to the employer, prevention is always better than cure.

In reality, these situations normally occur due to a weakness in the operations of the company, ranging from a lack of check and balance, over-consolidation of power and authority in one individual, a lack of audit, over-trusting of certain staff, and so on.

Hence to avoid these unfortunate situations, employers are advised to hire good human resource managers as well as good legal advisors to put in place a robust system of operation that can deter these misconducts.

Furthermore, this could also be a result of inadequate remuneration to the employees, as ultimately the employees find that the profit gainable from participating in these dealings outweighs the risk of termination and a lawsuit. Therefore, companies are reminded to reward their employees fairly so that their employees do not see it as attractive to betray the trust of their employer.

With a huge stick and a huge carrot in place, it is believed that employees will not only be loyal to their employers because of the duty implied by law but also, on a personal level, chooses to be loyal to their company and employer.