Can Employer Reduce Employee's Salary?

In this climate of the Covid-19 virus, employers across different fields may face economic challenges and financial difficulties to keep their businesses afloat. Understandably, it is foreseeable that employers may carry out a salary reduction exercise in efforts to sail through these difficult times. The question is, is it legal for your employer to take a pay-cut in this circumstance?

The only provision authorizing an employer to make a deduction from the wages of employees earning RM2,000 and below is s24 of the Employment Act 1955, in which 4 grounds have been laid down in s24(2) as circumstances where employers are authorized to make lawful deductions:-

(2) It shall be lawful for an employer to make the following deductions—

(a) deductions to the extent of any overpayment 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 mistake;

(b) deductions for the indemnity due to the employer by the employee under subsection 13(1);

(c) deductions for the recovery of advances of wages made under section 22 provided no interest is charged on the advances; and

(d) deductions authorized by any other written law.

There is no statutory provision to regulate deduction of salary for employees earning RM2,000 or more, but that does not mean that employers may make salary deduction unnecessarily. A salary reduction is essentially a variation of an employee’s contract. As such, the law generally requires a salary reduction to be with the employee’s consent. Failure to obtain consent before a reduction may amount to a breach of contract by the employer. This may allow the employee to initiate a claim against his/her employer for constructive dismissal, which the employee may be ordered to pay back wages and compensation instead of reinstatement.

It is pertinent to note that if the salary cut is not made across the board but on a selective basis which only affected a few staffs at the company level, the employer would most likely fail to show to that the cost cutting exercise is done in good faith nor it is justifiable. In this case, the employer may be found liable for constructive dismissal without just cause or excuse.

There are several ways for employers to curb the difficulties in paying employees salaries, especially programs that have been implemented by the government such as putting employees on unpaid leave and claiming for wages subsidy, which are part of the Employee Retention Program.

Written by: Sutha Rajoo and Alicia Ang Edited by: Dato Fion Wong