The thought of having one’s salary reduced by an employer is often a difficult pill to swallow. In the business landscape, salary reductions are often attributed to either a demotion or the declining financial performance of the company. However, are employee salary reductions by employers legal to begin with?
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 prior to a reduction may amount to a breach of contract by the employer, allowing an employee to claim for constructive dismissal. In North Malaysia Distributors Sdn Bhd v Ang Cheng Poh  3 ILR 387, the court held that the employer’s unilateral reduction of an employee’s salary constituted a significant breach of going to the root of the contract of employment. Such breach shows that the employer no longer wants to be bound by one of the essential terms of the contract.
That being said, there are certain situations in which a unilateral salary reduction may be permissible. For example, where the employee is (legitimately) demoted, the demotion will usually come with a salary reduction to reflect the employee’s lower job ranking/band. Some companies may also choose to impose salary cuts as an alternative to retrenchment. In such situations, in the event of a dispute, the Industrial Court will examine all circumstances as a whole to determine whether the salary cut was an unfair labour practice.
What can an employee do?
In the even the employee feels that the salary cut is not made in good faith, s/he can consider filing a claim of constructive dismissal on the basis that the salary reduction is a fundamental breach of contract.
In the North Malaysia Distributors Sdn Bhd case mentioned above, the employer reduced staff salary due to the economic downturn with promise of it being reversed 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 reduction on the basis that the employer never upheld its promise on the first reduction. The Court allowed the employee’s claim for constructive dismissal.
In the recent case of Norhayati Hussein v JW Marriott Hotel Kuala Lumpur  3 MELR 112, the employee in question was on long medical leave (October 2008 to May 2010). On her return from medical leave, she was transferred to a new position with a lower salary. The Industrial Court dismissed her claim for constructive dismissal, and found that the employer had acted fairly and reasonably since they had allowed her to receive the appropriate medical treatment and waited for 19 months until the employee herself informed the company she was able to start working. The Industrial Court also found that the company had taken all necessary steps to accommodate the employee to find her an appropriate role.
Employers should be mindful of their legal obligations before imposing salary reductions. While salary reductions are permissible in some cases, they should only be imposed where necessary and with sufficient justification.