In Light of the New MCO, Can Employers Enforce Salary Reduction?

The recent announcement made by the Government to enforce Movement Control Order (MCO 3.0) nationwide until 7th of June 2021 in the country has left many employers dumbfounded. Employers who are still struggling to cope with the aftermath of MCO 1.0 and 2.0 (and with the economic turmoil, of course) are now considering to ‘jump the gun’ on making salary cuts to ensure business sustainability.

This is not a surprise because one of the main costs for most businesses is employee overhead expenses. Essentially, salary reduction varies an employee’s contract of employment. Companies facing extreme financial difficulty may choose to reduce the salary of employees as a last resort after considering other alternatives. It is this drastic measure that is usually chosen as an alternative to retrenchment.

The law requires a salary reduction to be done only after consultation and with the consent of the employees. Consent is absolutely vital as failure to obtain as such may amount to a breach of contract by the employer.

Since consent is important, an employer’s unilateral reduction of employees’ salaries would constitute a significant breach of going to the root of the contract of employment, and may potentially be held liable for the following:

Affected employees may claim for constructive dismissal against the employer.
Affected employees can file complaints with the Labour Department whereby they will be able to claim for the unpaid salary sum.

Employers may be liable to a fine not exceeding RM10,000 if convicted for implementing salary reductions for employees subject to the Employment Act 1955.

It is absolutely imperative for employers to communicate with their employees, on the companies’ financial standing during these tough times. Employers have to be transparent and provide legitimate business reasons for implementing salary reduction.

What are the important considerations?

Firstly, the Company has to decide if salary reduction is for all employees or a certain class of employees. The employer should start working on a communication plan with its employees given the current situation and show that there is no intention to victimise the employee.

Secondly, a prior notice on the reduction of the employees’ salaries before implementing the actual reduction is necessary. Companies could hold a meeting or townhall session to communicate its financial worries and inform its employees of the decision to reduce their salaries. In doing so, companies are giving employees a reasonable time frame to either consent to or act on the said variation of their employment agreements.

The importance of employee engagement is highlighted in the case of Lim Ban Leong v. Gold Bridge Engineering & Construction Bhd [2017] 2 LNS 0370, where the court noted that “there should have been much more engagement by the Respondent (Company) with its employees in order to maintain industrial harmony.”

Ultimately, if there is no consent, companies would have to pay their employees in full.
Managing employees’ expectation and perception is key in implementing drastic changes. In light of the ongoing pandemic, it is inevitable to explore unfavourable business initiatives to ensure business sustainability. Do get in touch with our consultants at MECA South to learn more about available strategies to implement salary cuts within your company.