In our article entitled “Coronavirus (COVID-19) and the Workplace: Preventive Measures for Employers and Employees” dated 16.3.2020, we addressed the following issues:
- Contingency and business continuity plans
- Requiring sick employees to stay home
- Managing employees with sick family members
- Implementation of flexible work arrangements
- Implementation of flexible sick leave policies
- Practicing good hygiene habits
On 16 March 2020, the Government of Malaysia issued a special address entitled “Perutusan Khas YAB Perdana Menteri Mengenai COVID-19” (“Special Address”) which, in a nutshell, states that the Movement Control Order (“MCO”) shall come into effect on 18 to 31 March 2020. During the period of MCO, apart from all the other restrictions listed in the Special Address, companies are compelled to close their premises.
In the event the employer is involved in any of the following services, the employer may continue operations at the office premises as usual:
- Water services
- Electricity services
- Power services
- Communication services
- Postal services
- Transport services by land, water or air
- Drainage and water supply services
- Oil and gas services
- Fire services
- Radio communication and broadcasting services
- Financial and banking services
- Health and pharmaceutical services
- Prison services
- Port, dock, harbour and airport services
- Defence and security of Malaysia
- Hygiene and cleanliness services
- Retail and food services
The worrisome economic situation has undoubtedly caused panic, particularly amongst employers who are concerned about the downfall of the company’s cash flow and financial returns. In this article, we briefly address the employers’ and employees’ rights, particularly on wages and annual leave following the Special Announcement on MCO.
The most common question posed by employers during this challenging time is whether it is lawful to exercise a pay cut or to impose compulsory unpaid leave onto their employees as a measure to reduce costs and to minimize the impact on businesses.
Categories of Employees
In Malaysia, employees are generally divided into two broad categories, namely the employees who are subject to the Employment Act 1955 (“EA”) and employees who are not subject to the EA.
The following categories of employees are subject to the EA:-
- Employees who earn monthly wages of RM2,000 and below;
- Employees who, irrespective of the amount of monthly wages:-
- Engaged in manual labour;
- Engaged in the operation or maintenance of mechanically propelled vehicle;
- Supervise or oversee other employees engaged in manual labour;
- Engaged in any capacity on a vessel registered in Malaysia subject to conditions; and
- Domestic servants.
In other words, the employment terms and benefits of the above-mentioned employees are protected by the EA and provisions under the EA apply exclusively on the above employees.
As for employees who are not subject to EA, their employment terms and benefits are governed by their employment contracts.
Can employers impose a pay cut or deduct wages of the employees?
It is trite law that wages is one of the most, if not the most important terms of the employment contract. Generally, employers are not allowed to deduct employees’ wages or to impose a pay cut, without first obtaining the employees’ consent. However, employers may impose a pay cut or deduct wages of the employees under certain circumstances.
Section 24(1) of the EA provides that no deductions shall be made by an employer from the wages of an employee otherwise than in accordance with the EA. Sections 24(2) to (6) of EA stipulate when and how employers can make lawful deductions of employees’ wages. Under certain circumstances, deductions of wages can only be made if the employees request for such deductions in writing and prior permission from the Director General of Labour is obtained. Section 24(7) 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 EA is silent on whether it is lawful for employers to deduct wages of the employees in the event where companies or businesses have no other options but to shut down the operations of the companies or businesses due to reasons such as the MCO.
The High Court in the case of Viking Askim Sdn Bhd v National Union of Employees in Companies Manufacturing Rubber Products & Anor  2 MLJ 115 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 EA 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 the case of 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.
The Industrial Court in the case of Lim Ban Leong v Gold Bridge Engineering & Construction & Construction Bhd  2 LNS 0370 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 can 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 the case of 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 proactive 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.
Therefore, based on Lim Ban Leong and Penas Realty Sdn Bhd, it is arguable that salary deduction or pay cut may be permissible 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 impose pay cut or deduction of wages on the employees during the enforcement of the MCO from 18 March 2020 to 31 March 2020. Mutual agreement to a pay cut or deduction of wages, if any, should be recorded in writing.
The exercise of pay cut or deduction of wages are viewed as extreme measures and should only be the last resort after exhaustion of all other cost-saving measures. This position is also affirmed by the Code of Conduct for Industrial Harmony (“Code”), an agreement made between the Ministry of Human Resources and the Malaysian Council of Employers’ Organisations. Pursuant to the Code, employers are encouraged to have prior discussions with their employees to explain the financial standing of the companies should they resort to pay cut exercise.
Can employees be forced to take unpaid leave?
Can the employer force the employees to take unpaid leave during the MCO period? The strict answer is that the employer does not have an automatic right to do so.
Section 60E of EA provides that an employee shall be entitled to paid annual leave based on the employee’s continuous years of service with the employer as follows:
- 8 days of annual leave for employees who have less than 2 years of service;
- 12 days of annual leave for employees who have more than 2 years but less than 5 years of service; and
- 16 days of annual leave for employees who have the years of service of 5 years or more.
Section 60E(1A) of EA also provides that the paid annual leave shall be given to the employees in addition to rest days and public holidays. In addition to that, Section 60E(3) further provides that the employee shall be entitled to the ordinary rate of pay for annual leave without abatement to the employee’s annual leave.
Based on the reading of Section 60E of EA, it is clear that the employee’s entitlement of paid annual leave shall be observed by the employer at all times.
As for employees who are not subject to EA, the employer and the employee shall be bound by the four corners of the employment agreement. The terms and conditions stated in the employment agreement must be carefully observed by the employer.
It is vital to always bear in mind the employer’s legal rights and obligations pertaining to any adjustment of the salient terms and conditions stated in the employment agreement. This is particularly so in cases where such adjustment would place the employees in a less beneficial position. As mentioned above, while the employers may explore and consider the option of imposing deduction in wages or unpaid leave, the employers have the duty to provide full and frank disclosure as well as proper justification to the employees.
Please contact us should you require our assistance and further advice on your legal rights and obligations in regards to the employer’s business downturn and financial status, particularly in respect of the employees’ wages.