Salary Reduction = Forced Pay-Cut, How To Make It Legal?

Q1. What is salary deduction?

Answer: 

Salary deduction simply means when the Employer deduct and/or cut some amount from the employee’s salary for specific purpose such as monthly contributions like EPF and SOCSO as well as pension fund contributions.

Q2. Is the Employer allowed to cut the employee’s salary?

Answer: 

Generally, the Employer is not allowed to deduct employee’s salary or impose a pay cut without obtaining the employee’s consent. This is based on Section 24 (1) of the Employment Act 1955 which provides that:-

“No deductions shall be made by an Employer from the wages of an employee otherwise than in accordance with this Act”.

If the Employment Act 1950 does not provide the purpose and manner of deductions from wages, deduction from wages will automatically becomes unlawful.

Q3. Under what circumstance which allow the Employer to deduct the employee’s salary?

Answer: 

• Salary deduction that does not need the employee’s and Director General’s approval in writing

1. Deductions of any over-payment of wages made during the immediately preceding three months from the month in which deductions are to be made, by the employer to the employee by the employer’s mistake1;

2. Deductions for the indemnity due to the employer by the employee under subsection 13(1)2;

3. Deductions for the recovery of advances of wages made under section 22 provided no interest is charged on the advances3; and

4. Deductions authorised by any other written law4.

• Salary deduction that requires employee’s request (in writing)

1. Deductions in respect of the payments to a registered trade union or co-operative thrift and loan society of any sum of money due to the trade union or society by the employee on account of entrance fees, subscriptions, instalments and interest on loans, or other dues5; and

2. deductions in respect of payments for any shares of the employer’s business offered for sale by the employer and purchased by the employee6.

• Salary deduction that requires employee’s request and Director General’s approval

1. Deductions in respect of payments into any superannuation scheme, provident fund, employer’s welfare scheme/insurance scheme established for the benefit of the employee7;

2. Deductions in respect of repayments of wage advances made to an employee under section 22 where interest is levied on the advances and deductions in respect of the payments of the interest so levied8;

3. Deductions in respect of payments to a third party on behalf of the employee9;

4. Deductions in respect of payments for the purchase by the employee of any goods of the employer’s business offered for sale by the employer10; and

5. deductions in respect of the rental for accommodation and the cost of services, food and meals provided by the employer to the employee at the employee’s request or under the terms of the employee’s contract of service11.

Q4. During this Covid-19 pandemic and the imposition of movement control order (“MCO”) and restriction from the Government, some companies may not be able to operate as usual and it affect the company’s income. As Employer, am I allowed to cut the employees’ salaries in this kind of situation?

Answer: 

Yes. Salary deduction or pay-cut may be allowed under certain circumstances especially when it is the only option to prevent termination and or retrenchment of employees. The Employer may deduct the employees’ salaries to cut their losses. This is justifiable by reducing the employees contracted hours of work.

However, it must not be carried out unilaterally. It is good practice for you, as the Employer to obtain consent from your employees before imposing salary deduction or pay-cut. According to the Code of Conduct for Industrial Harmony issued by the Ministry of Human Resource, the Employer is encouraged to have prior discussions with its employees to explain the company’s financial standing if they resort to pay-cut exercise. If there is mutual agreement to a deduction of salary achieved between the Employer and the employees, it should be recorded in writing.

Q5. Can the employee take a legal action against the Employer because of the salary reduction?

Answer: 

Yes. An employee can file a claim of constructive dismissal against the Employer in the Industrial Court if he believes his pay was cut not due to economic crisis or because of something he had done. In other words, if the pay-cut was not done in a good faith or for no valid reason.

Section 43 of the National Salary Consultative Council Act 2011 also provides that an Employer who does not pay its employees without a good reason is actually committing an offence.

In North Malaysia Distributors Sdn Bhd v. Ang Cheng Poh , the Court allowed the employee’s claim for constructive dismissal and held that the Employer’s unilateral deduction of an employee’s salary constituted a significant breach of going to the root of the employment contract. In this case, the Employer reduced its staffs’ salaries due to the economic downturn and the Employer promised to increase the salary back once the economy recovered. Despite its assurance, the employee’s salary was never reinstated to its original salary. The employee refused to sign a consent letter for a further pay-cut on the basis that the Employer never upheld its promise on the first reduction.

However, if the unilateral pay-cut for a financially distressed company were not done in a bad faith, it will not justify a claim of constructive dismissal as in the case of Penas Realty Sdn Bhd v. Chee Yew Kong where the Industrial Court took cognizance of the economic situation at the material time and found that the company had to adopt a pro-active stand to create a win-win situation for the company and the employees.

Q6. When is it illegal for the Employer to cut the employee’s salary?

Answer: 

The following situations may constitute an illegal pay-cut:-

• When there is no prior notification about the pay-cut

• When the pay cut is discriminatory

• When the pay cut below the minimum wage

Q7. Can the Employer cut the employee’s salary without notice?

Answer: 

Generally, cannot. However, there is a case where the Court has given green light to the Employer to cut the employee’s salary without notice.

This can be seen in the Industrial Court case of Norhayati Hussein v. JV Marriot Hotel Kuala Lumpur (Start Hill Hotel Sdn Bhd)15 where the employee had been on prolonged medical leave for 19 months. The hotel had assigned her a different position (lower position) with a reduced salary when she returned to work. She claimed constructive dismissal but the Court held that her Employer had acted fairly and reasonably since they had waited for 19 months for her to come back to work and had even made arrangements for her to perform duties suitable to her condition.

Q8. Is there any penalty for imposing unilateral pay-cut?

Answer: 

The liability for imposing unilateral pay-cut may be a breach of Section 24 (1) of the Employment Act 195516. If breached pursuant to Section 99A of the Employment Act 1955, the Employer can be fined up to RM10,000.00.

Q9. Section 24 of the Employment Act 1955 apply to employees that earn RM2,000.00 and below or to those doing manual labour irrespective of wages. How about the employees that fall outside the scope of the Employment Act 195515(“non-EA employee”)?

Answer: 

Although Section 24 of the Employment Act 1966 does not apply to the non-EA employee, this would not imply that the Employer is allowed to impose unilateral pay-cut to the non-EA employee.

In the High Court case of Supportive Technology Sdn Bhd v. Chong See Wan17, the High Court upheld the Labour Office decision pursuant to Section 69B of the Employment Act 1955 in awarding payment of wages that were not paid during a period of shutdown.

Section 69B of the Employment Act 1955 provides the same remedy for those salary between RM2,000.00 to RM5,000.00. An Order for payment can be ordered and if fail to be complied, it can be registered in Court and executed as a debt and/or statutory offence of which shall be liable to a fine not exceeding RM10,000.00 upon conviction.

FOOTNOTES 

[1] Section 24(2)(a) of the Employment Act 1955

[2] Section 24(2)(b) of the Employment Act 1955

[3] Section 24(2)(c) of the Employment Act 1955

[4] Section 24(2)(d) of the Employment Act 1955

[5] Section 24(3)(a) of the Employment Act 1955

[6] Section 24(3)(b) of the Employment Act 1955

[7] Section 24(4)(a) of the Employment Act 1955

[8] Section 24(4)(b) of the Employment Act 1955

[9] Section 24(4)(c) of the Employment Act 1955

[10] Section 24(4)(d) of the Employment Act 1955

[11] Section 24(4)(e) of the Employment Act 1955

[12] An employer who fails to pay the basic wages as specified in the minimum wages order to his employees commits an offence and shall, on conviction, be liable to a fine of not more than ten thousand ringgit for each employee.

[13] [2001] 3 ILR 387

[14] [2002] 3 ILR 13 – “Regardin g the pay reduction, the company had proved that they were in fact financially distressed and that the option of reducing staff wages instead of its staff was a way of reducing its overhead costs. The claimant was the only staff in his department to refuse the said reduction. There was no evidence of mala fide on the company’s part”

[15] [2017] 4 ILR 108

[16] General Penalty – Any person who commits any offence under, or contravenes any provision of, this Act, or any regulations, order, or other subsidiary legislation whatsoever made thereunder, in respect of which no penalty is provided, shall be liable, on conviction, to a fine not exceeding ten thousand ringgit.

[17] [2015] 1 LNS 1291

[18] Additional powers of Director General to inquire into complaints – (1) Notwithstanding the provisions of this Act, the powers of the Director General under paragraph 69(1)(a) shall extend to employees whose wages per month exceed two thousand ringgit but does not exceed five thousand ringgit.

THIS FAQS ARE PREPARED AND PUBLISHED BY MESSRS GAN & ZUL, ADVOCATES & SOLICITORS, KUALA LUMPUR.-GENERAL DISPUTE RESOLUTION AND APPELLATE DIVISION-