Thursday, 16 May 2019

Case Spotlight: Conflict of Interest in Employment

by Donovan Cheah (Partner, Donovan & Ho)
www.dnh.com.my

This article was first published on Donovan & Ho's website on 8 April 2019.

Do you find anything wrong with this scenario?
“Employee X is working for a multinational corporation (“MNC”) as its purchasing officer. Her husband owns a company called Renovator ABC that specialises in office renovations. When the MNC announces its plans to open another branch office in Kuala Lumpur, Employee X recommends that Renovator ABC carry out the office renovations since they are experienced in the industry and can offer a good discount. As per company policy, 3 quotations are obtained from different renovation companies and Renovator ABC ends up being the cheapest priced. Employee X did not specifically tell anybody in MNC that her husband owns Renovator ABC. MNC appoints Renovator ABC to carry out the renovation work at a fee of RM1.2 million."

Situations like the above are referred to as potential “conflicts of interest”. This is because the employee’s personal interests are in conflict with the interests of her employer. In the scenario above, Employee X stands to benefit financially from Renovator ABC’s appointment, since it is her husband’s company. However, as a purchasing officer of MNC, she also has obligations to ensure that the best supplier is selected, and price may not be the sole criteria.

If challenged, it’s likely that Employee X would argue that MNC did not suffer any losses anyway, and in fact benefited from the arrangement since Renovator ABC was the cheapest priced. Does this make the entire situation acceptable from an employment law standpoint?


The Industrial Court in Azliyah binti Samsi v Petronas Management Training Sdn Bhd (Award No. 1033 of 2019, 25 March 2019) dealt with the issue of conflict of interest. 

These were the facts:
  • The Employee was alleged to have introduced and recommended two suppliers to the Company, for the purposes of supplying certain items for events organised by the Company:
    • Hatech Design & Trading (“Hatech”), an entity owned by the Claimant’s son-in-law; and
    • Eminent Rich Networks (“Eminent”), an entity owned by the Claimant’s son.
  • The Company’s Code of Conduct and Business Ethics policy expressly states that an employee and the members of that employee’s family/household may not own any business which derives income or receives payment from contractual or other business arrangements with the Company, and/or is an entity which is the Company’s list of registered contractors. In the event a situation such as the above arises, the employee will be considered to be in a potential conflict of interest situation and will be under a duty to inform their head of department or the Human Resources Department in writing.
  • The Employee did not disclose her relationship with the owners of Hatech and Eminent, to the Company.
  • As a result of the above, the Employee’s employment was terminated. The Employee claimed unfair dismissal.


Court's Findings

The Industrial Court dismissed the Employee’s claim for unfair dismissal. In so holding, the Court made the following observations:
  • Conflict of interest is a misconduct, and as such the test is not whether the employee did it, but rather whether the employer acted reasonably in thinking the employee did it; and whether the employer acted reasonably in dismissing her.
  • The Company therefore did not need to prove that the Employee committed the misconduct with malicious intent, or even establish for certain that the misconduct caused the Company financial loss or suffered loss in reputation or prestige.
  • Therefore, in order to discharge its burden, the Company just needs to show that an investigation into the matter was carried out as was reasonable in all the circumstances, and the employee was given a fair opportunity to explain her position before her dismissal. In this case, a domestic inquiry was conducted and the Employee had in fact pleaded guilty at the domestic inquiry in hopes of getting a lighter sentence.
  • The Industrial Court found that the Employee’s lack of ethical responsibility in breach of the Company’s policy points directly to her integrity of an employee. The Claimant’s conduct in failing to disclose her conflict of interest was found to be lacking in honesty, truthfulness sand accuracy of dealings.


Takeaways

The Industrial Court decision above takes a firm position against employees who are found to have violated their company’s code of ethics or code of conduct. Violation of an ethics policy may therefore be misconduct warranting termination.

It is often tempting to argue that situations like the above are harmless, or that they are “victimless” crimes especially if there is no fraud, or if the Company does get the goods/services that they paid for. The Industrial Court’s decision makes it clear that there is no requirement for the Company to have suffered any financial loss or reputational loss in a conflict of interest situation.

The core wrong is not the conflict of interest itself, but the non-disclosure of that conflict. In some situations, a Company may still proceed to appoint an employee’s family member as a supplier or vendor after disclosure. In those situations, there is no misconduct since there is full disclosure by the employee, and the Company made an informed decision to proceed with the vendor.

Employers should also look into having a written ethics policy if they wish to promote the right culture for their organisation. As noted by the Industrial Court:
“The Company created an overall impression upon this Court that its Code of Conduct and Business Ethics, part of its mission statement, so to speak, and more particularly its ethics policy on conflicts of interest contained therein, was obviously intended to instil a “value based” culture in which its employees could be trusted to do the right thing because they knew what the Company stands for. Succinctly, the intent was to build and sustain an insightful and ethical organisational and corporate culture to reflect that the way the Company conducts its business matters as much as what they do and how they do it – i.e: it is not only the end result that matters but also the integrity of the route taken to get there. Everyone in the Company was to be guided by that set of core values and principles, which were meant to inspire every employee to align around the Company’s mission…”

This article was written by Donovan Cheah. Donovan has been named as a recommended lawyer for labour and employment by the Legal 500 Asia Pacific 2017, 2018 and 2019, and he has also been recognised by Chambers Asia Pacific and Asialaw Profiles for his employment law and industrial relations work.
Donovan & Ho is a law firm in Malaysia. Our practice areas include employment law, dispute resolution, tax advisory and corporate advisory.  Have a question? Please contact us.

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