It is universally acknowledged and trite law that wages or salaries is one of the most important terms of the employment contract. Consequently, employers generally are not permitted to deduct employees’ wages or to impose pay cuts, without first obtaining the employees’ consent. Nevertheless, under the law, employers may be permitted to impose a pay cut or deduct wages of the employees under certain special circumstances. This will be discussed in this article.
In Malaysia, Section 24 (1) of the Employment Act 1955 (the Act) states that no deductions shall be made by an employer from the wages of an employee otherwise than in accordance with the Act. Sections 24 (2) to (6) of the Act further stipulate when and how employers may be permitted to make lawful deductions on employees’ wages or salaries.
Under certain circumstances, deduction of wages can only be made if the employees request for such deductions in writing and/or prior permission from the Director General of Labour is obtained. Section 24 (7) of the Act states that the Director General of Labour may permit deduction of wages for a specified purpose or a specified class or classes of employees subject to such conditions as he may deem fit to impose.
However, it is pertinent to note that Section 24 of the Act is silent on whether it is lawful for employers to deduct wages or salaries of the employees in the event where companies or businesses have no other option but to shut down the operations of the companies or businesses due to reasons such as the Covid-19 outbreak and Movement Control Order (MCO).
In North Malaysia Distributors Sdn Bhd v Ang Cheng Poh  ILJU 43, the Industrial Court held that the company’s pay-cut was a unilateral decision of the company without regard to the claimant’s objection. The Industrial Court found that the company went on with the pay-cut even though the claimant did not sign the consent to a pay-cut. The Court is of the view that there was a clear willful breach of the employment contract on the part of the Company and the salary of an employee being the fundamental factor in a contract of employment has been breached.
In Viking Askim Sdn Bhd v National Union of Employees in Companies Manufacturing Rubber Products & Anor  2 MLJ 115, the High Court addressed the issue on whether there was a legal basis for the Industrial Court to have awarded full wages for Sundays and public holidays during a period of shut down caused by a fall of orders following the loss by the applicant company of a million-dollar contract. The applicant company, in its application for certiorari to quash the Industrial Court award, argued that there was no legal basis. In dismissing the application for certiorari, the High Court held that the Employment Act has no provision authorizing an employer to make any deduction from wages for periods of shut down. Any such deduction would, therefore, be illegal. The High Court further held that under industrial law, employees were entitled to keep their wages in full during periods of cut back in production when no work is done at all, if there is no provision in the collective agreement for part payment of salary or salary deduction during periods of temporary lay-off. There is no difference between deduction of wages and non-payment of wages.
In Lim Ban Leong v Gold Bridge Engineering & Construction & Construction Bhd 2 LNS 0370, the Industrial Court held that, traditionally, any salary cut to an employee’s pay can be used as a ground by the employee to plead constructive dismissal. However, if the company is facing losses and is trying to fight off closure of its business or retrenchment of its employees, the company may appeal to the employees to ride through the rough times with it and take a salary cut which can then be reinstated and increased when the business picks up again. The Industrial Court further notes that there should have been much more engagement by the company with its employees in order to maintain industrial harmony.
Further, the Industrial Court in Penas Realty Sdn Bhd v Chee Yew Kong  3 ILR 13 took cognisance 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. The Court finds that the reduction of salary of the claimant and the other relevant employees is bona fide and justified in view of the financial situation of the respondent company and the predicament it is in and that it was intended to be a win-win for both the employees and the respondent instead of retrenching the employees or dismissing them.
It would appear that based on the principles in Lim Ban Leong and Penas Realty Sdn Bhd (supra), it is arguable that salary deduction or pay cut may be permissible under the law under certain circumstances, especially when it is the only option to prevent termination or retrenchment of employees. While it is good practice for employers to obtain consent from the employees before imposing pay cut or deduction of wages, it is arguable that employers may implement pay cuts or deduction of wages on employees during the outbreak of Covid-19 and the enforcement of the MCO. What is important is that the pay cut should be discussed and agreed upon beforehand and the mutual agreement to a pay cut or deduction of wages between the parties should be recorded in writing.
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