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 [2001] 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 [2017]
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.
Conclusion
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.
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