Employment relationships in Malaysia are governed by statutory frameworks, contractual principles, and judicial interpretation. Two frequently misunderstood concepts in Malaysian employment law are Voluntary Separation Scheme (VSS) and constructive dismissal in Malaysia. Although both situations may result in an employee leaving employment, their legal nature, consequences, and remedies differ substantially.

This article explains the legal principles, procedural requirements, risks, and strategic considerations relating to VSS in Malaysia and constructive dismissal claims under Malaysian law.

Part I: Voluntary Separation Scheme (VSS) in Malaysia

1. What Is a Voluntary Separation Scheme (VSS)?

A Voluntary Separation Scheme (VSS) is an employer-initiated program offering employees the option to resign voluntarily in exchange for compensation. It is commonly implemented during:

• Corporate restructuring
• Mergers and acquisitions
• Business downsizing
• Cost rationalisation exercises
• Automation or redundancy restructuring

VSS differs from retrenchment because it is based on voluntary acceptance by employees. It is also distinct from termination for misconduct or poor performance.

In Malaysia, employment rights are primarily governed by the Employment Act 1955, though common law principles and Industrial Court jurisprudence also play critical roles.

2. Legal Nature of VSS

Legally, VSS is treated as a mutual termination of employment. Once an employee accepts the VSS offer:

• The termination is deemed consensual.
• The employee usually signs a release and discharge agreement.
• The employee waives rights to future claims, including unfair dismissal claims.

Because it is voluntary, employees who accept VSS typically cannot later claim they were unfairly dismissed—unless they can prove coercion, misrepresentation, or undue pressure.

3. Key Components of a VSS Package

A properly structured VSS package generally includes:

(a) Ex-Gratia Payment

Often calculated based on years of service (e.g., one month’s salary per year of service).

(b) Notice Pay

Payment in lieu of notice, if applicable.

(c) Accrued Benefits

• Unused annual leave
• Bonuses (if contractually due)
• Statutory contributions

(d) Release and Waiver Clause

A critical legal document where the employee agrees not to pursue future legal claims.

4. Employer Obligations When Offering VSS

While VSS is voluntary, employers must ensure:

• Transparent communication
• No intimidation or coercion
• Equal treatment (unless objective criteria justify differentiation)
• Clear explanation of compensation terms

If pressure tactics are used—such as threats of dismissal if VSS is not accepted—the “voluntary” nature may be challenged.

5. Risks for Employees Accepting VSS

Employees should consider:

• Future employability
• Financial sustainability
• Tax implications of compensation
• Whether retrenchment benefits might be more advantageous

Once accepted and signed, VSS is generally final and binding.

6. Differences Between VSS and Retrenchment

Retrenchment may trigger protections under labour law if conducted unfairly. VSS, by contrast, reduces litigation risk if properly executed.

Part II: Constructive Dismissal in Malaysia

1. What Is Constructive Dismissal?

Constructive dismissal occurs when an employee resigns because the employer has fundamentally breached the employment contract. Although the employee technically resigns, the law may treat it as dismissal.

Constructive dismissal is recognised under the Industrial Relations Act 1967, which governs disputes relating to unfair dismissal.

2. Legal Test for Constructive Dismissal

Malaysian courts apply a contractual test derived from common law principles. The employee must prove:

1. There was a fundamental breach of contract by the employer;
2. The breach goes to the root of the contract;
3. The employee resigned in response to that breach;
4. The resignation was prompt and without undue delay.

If these elements are satisfied, the resignation is deemed a dismissal without just cause or excuse.

3. Examples of Constructive Dismissal

Constructive dismissal may arise from:

(a) Unilateral Salary Reduction

Reduction without consent may amount to fundamental breach.

(b) Demotion Without Justification

Stripping responsibilities or reducing rank unfairly.

(c) Harassment or Hostile Work Environment

Severe bullying or toxic workplace conditions.

(d) Forced Transfer

Relocation that significantly prejudices the employee without contractual basis.

(e) Non-Payment of Wages

Failure to pay salary on time.

Not every dissatisfaction amounts to constructive dismissal. The breach must be serious and fundamental.

4. Procedure to Claim Constructive Dismissal

An employee who believes they have been constructively dismissed must:

Step 1: Resign

The resignation letter should clearly state that it is due to employer’s breach.

Step 2: File Representation

Within 60 days of dismissal, the employee must file a representation at the Industrial Relations Department under Section 20 of the Industrial Relations Act.

Step 3: Conciliation

The matter is first referred to conciliation.

Step 4: Referral to Industrial Court

If unresolved, the Minister may refer the dispute to the Industrial Court for adjudication.

5. Remedies for Constructive Dismissal

If the Industrial Court finds in favour of the employee, remedies may include:

(a) Reinstatement

Returning to previous position (rare in practice).

(b) Back Wages

Typically capped at 24 months (or 12 months for probationers).

(c) Compensation in Lieu of Reinstatement

Calculated based on years of service.

The goal is to compensate for unjust loss of employment.

Comparing VSS and Constructive Dismissal

Strategic Considerations for Employers

Employers must carefully distinguish between genuine VSS and disguised forced resignation.

Avoiding Constructive Dismissal Claims

• Do not unilaterally vary employment terms.
• Ensure contractual clauses permit transfers or restructuring.
• Maintain documented performance management processes.
• Avoid pressuring employees into VSS acceptance.

If VSS is poorly managed, employees may allege constructive dismissal, arguing they were indirectly forced to resign.

Strategic Considerations for Employees

Employees facing workplace changes should assess:

• Whether changes are contractually permitted.
• Whether employer conduct amounts to fundamental breach.
• Whether resignation is strategically advisable.
• Whether VSS package is commercially beneficial.

Resigning without proper legal assessment may weaken constructive dismissal claims.

Burden of Proof in Constructive Dismissal

The burden initially lies with the employee to prove:

• Existence of breach
• Seriousness of breach
• Causal link to resignation

If established, the employer must then justify its actions.

The Industrial Court evaluates fairness, equity, and good conscience—not merely strict contractual interpretation.

Common Misconceptions

Misconception 1: Any Unhappiness Equals Constructive Dismissal

Minor grievances or personality conflicts do not satisfy the legal threshold.

Misconception 2: Accepting VSS Can Later Be Challenged Easily

Once waiver is signed voluntarily, overturning it is difficult unless coercion is proven.

Misconception 3: Employer Can Change Terms Freely

Material variation without consent may constitute breach.

Financial Implications

For Employers:

• VSS requires upfront financial allocation.
• Constructive dismissal litigation can lead to back wages and compensation.
• Reputational risk if claims are publicised.

For Employees:

• VSS provides immediate lump sum.
• Constructive dismissal claim may take 1–3 years.
• Litigation carries uncertainty.

Role of Documentation

In both VSS and constructive dismissal contexts, documentation is critical.

Employers should maintain:

• Written VSS offers
• Clear timelines
• Signed acceptance forms
• Employment contracts

Employees should retain:

• Employment contract
• Correspondence
• Evidence of alleged breach
• Resignation letter citing reasons

Documentation often determines case outcome.

Industrial Court’s Approach

The Industrial Court in Malaysia adopts a “substance over form” approach. It examines:

• Actual conduct of parties
• Whether resignation was truly voluntary
• Whether employer acted fairly

The court is empowered to look beyond technicalities to achieve industrial harmony.

Conclusion

VSS and constructive dismissal represent two very different legal pathways leading to termination of employment in Malaysia.

A Voluntary Separation Scheme is a consensual mechanism designed to reduce workforce with minimal conflict. When implemented transparently and fairly, it minimises litigation risk and provides financial certainty for employees.

Constructive dismissal, on the other hand, arises from serious employer misconduct that effectively forces an employee to resign. It requires legal adjudication and carries significant financial and reputational consequences.

For employers, the key lies in procedural fairness, contractual compliance, and careful communication. For employees, the decision to accept VSS or pursue constructive dismissal claim must be informed by legal, financial, and strategic considerations.

Understanding the legal distinctions ensures that both parties can navigate employment termination scenarios within the framework of Malaysian labour law, reducing unnecessary disputes and ensuring rights are properly protected.