The Industrial Court recently upheld the Company's decision to terminate the COO's employment after finding that he had incorporated and operated a separate company without the Company's approval while remaining in employment.

The decision is significant for employers, particularly those with senior executives and key managerial personnel, because it reaffirms that employees occupying positions of trust and confidence are subject to heightened duties of loyalty, fidelity, and good faith.

• The Company's position was that the claimant's conduct constituted a conflict of interest and a breach of his contractual and fiduciary obligations. The termination letter alleged that the claimant had established and operated a side business without the approval of the company's shareholders or board of directors, contrary to the conflict-of-interest provisions in his employment contract.
• The claimant, on the other hand, contended that the company was aware of and had allowed the establishment of a new venture as part of a broader business initiative involving cast film operations.

The Industrial Court dismissed the claimant's unfair dismissal claim and upheld the Company's decision to terminate his employment.

Notwithstanding the claimant's contention that the Company was aware of the venture, the Court found that he had established and operated the side business in his own name without the requisite approval, thereby placing his personal interests in conflict with those of his employer.

In arriving at its decision, the Court placed significant emphasis on the claimant's position as a senior executive and company director. The Court recognised that individuals occupying such positions are entrusted with confidential information, strategic responsibilities, and corporate opportunities, and are therefore subject to heightened duties of loyalty, fidelity, and good faith. As a senior executive, the claimant was expected to avoid conduct that could give rise to conflicts of interest or compromise his obligations to the Company.

Importantly, the Court emphasized that the employment relationship, particularly at senior management level, is founded upon trust and confidence. By operating an undisclosed external business while serving as COO, the claimant had committed a serious breach of his obligations of loyalty and good faith, resulting in an irretrievable breakdown of the trust necessary for the continuation of the employment relationship.

The Court's findings included the following:

"The Claimant's acts of misconduct cannot be accepted and condoned as such acts were inconsistent with the fiduciary relationship between the Company and him. He had blatantly breached the express and implied terms of his contract of service, in particular, the provision in the Employment Contract on conflict of interest. The Claimant had misplaced the trust the Company reposed on him. His actions also constitute a serious breach of his duty of confidentiality and good faith, destroying the trust and confidence necessary to sustain the employment relationship."

"No reasonable employer can be expected to retain such an employee in its service in light of the gravity of the Claimant's acts of misconduct. The punishment of summary dismissal is thus proportionate to the severity of the Claimant's acts of misconduct. This Court finds no reason to disturb the Company's decision to terminate the Claimant's employment with the Company."

The Industrial Court Award may be downloaded here. The decision has also been covered by various local media outlets, including New Straits Times and Free Malaysia Today.

This award serves as a timely reminder that conflict-of-interest obligations extend beyond direct competition with an employer. There is little direct authority by the Industrial Court on this exact point.

The Industrial Court recognized that even where a new venture may have originated from discussions connected to the employer's business plans, a senior employee cannot unilaterally appropriate the opportunity, assume personal ownership of the venture, or operate it in a manner that places his interests in conflict with those of the employer.

Importantly, the Court was prepared to assess the matter through the lens of trust and confidence rather than merely examining whether the employee had caused actual financial loss to the employer.

The decision also highlights that misconduct involving conflicts of interest may justify dismissal even in the absence of prior warnings, particularly where the employee occupies a senior managerial or fiduciary position. The decision provides valuable guidance for employers dealing with conflicts of interest involving employees and reinforces that misconduct which undermines trust and confidence may justify dismissal.

Employers should consider the following measures:

1. Maintain robust conflict-of-interest provisions

   Employment contracts for senior executives should clearly prohibit involvement in external businesses, directorships, consultancies or other ventures without prior written approval. Such provisions should also require ongoing disclosure of potential conflicts.

2. Implement comprehensive codes of conduct

   Conflict-of-interest policies should be incorporated into employee handbooks and codes of conduct, accompanied by clear reporting and approval mechanisms.

3. Require periodic declarations

   Organizations may wish to require periodic declarations from senior management regarding external directorships, shareholdings and business interests to identify potential conflicts at an early stage.

4. Document approvals carefully

   Where employees are authorized to participate in external ventures, employers should ensure that the scope of approval is documented in writing. Disputes frequently arise where parties rely on informal conversations or assumptions concerning consent.

5. Recognize the higher standards applicable to senior employees

   Ultimately employers should remain particularly vigilant in monitoring and addressing potential conflicts of interest, breaches of fiduciary duties, and other misconduct involving senior executives, directors, and key managerial personnel. As reflected in this Industrial Court decision, individuals occupying positions of trust and confidence are held to a higher standard of loyalty, honesty, and accountability. Early identification of warning signs, prompt investigation of concerns, and decisive action where misconduct is established are critical to protecting the organization's interests and preserving trust within the leadership structure.

Wong & Partners represented the Company in its succesful defence of the unfair dismissal claim. Our Employment & Compensation and Fraud Investigation teams regularly advise employers on navigating these issues. In particular, Eddie Chuah and Joanne Lim have extensive experience acting for employers to investigate and represent them in complex disputes involving employee and director misconduct, including successfully pursuing civil claims arising from breaches of fiduciary duties, conflicts of interest, and other forms of misfeasance, as well as defending wrongful dismissal and unfair dismissal claims brought by senior management and key executives.

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Joanne Lim, Associate, has contributed to this legal update.

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