Law on Deduction of Wages
According to Section 24(1) from the Employment Act 1955:
“No deductions shall be made by an employer from the wages of an employee otherwise than in accordance with this Act.”
Primarily, employers are not permitted to deduct employees’ wages or to impose a pay cut, without first obtaining the employees’ consent. If the Employment Act 1955 (“EA 1955”) does not provide the purpose and manner of deduction from wages, deduction from wages automatically becomes unlawful.
However, employers may set a pay cut or deduct employees’ salaries under certain circumstances. One of those circumstances include what is typically known as an employee share option scheme (ESOS). An ESOS is a way for employees to purchase shares in their employer’s business (sometimes at a discounted price) through the deduction of wages.
Nonetheless, it is pertinent to note that in any instance the total of any amount deducted from the wages of an employee in respect of any one (1) month shall not exceed 50% of the wages earned by that employee in that month as per Section 24(8) of the EA 1955.
Amendments to Employment Act 1955
Prior to the recent amendments, the EA 1955 only applied to workers whose monthly pay was less than RM2,000 or who performed manual labour. Given this restricted scope, the EA 1955 did not apply to participants in global employee share plans; therefore no DGL approval was necessary for salary deductions associated with global employee share plans.
After wide extensive amendments to the EA 1955, which came into effect on 1 January 2023, the scope has been expanded to include all private sector employees who engage into a contract of service with an employer. As a result, the EA 1955 now applies to employees in global share plans who would have previously been exempted from the salary deduction restrictions.
Purchasing Shares in Your Employer’s Business
Scenario: David works in MEME Sdn Bhd. His employer offers to sell shares of MEME Sdn Bhd at a discounted price of the market value.
Provision (Lawful Deductions): Section 24(3)(b) of the EA 1955
Definition: “Deductions in respect of payments for any shares of the employer’s business offered for sale by the employer and purchased by the employee.”
Analysis: This scenario is rather straightforward as it is a lawful deduction of the employee’s wages in accordance with Section 24(3)(b) of the EA 1955 and the fulfilment of the conditions listed below.
Conditions:
- There must be a contract of service between both parties (employer and employee).
- This type of salary deduction shall only be made at the employee’s request in writing.
- The shares must be of the employer’s business.
Purchasing Shares in Your Employer’s Parent’s Company
Scenario: Legoland is managed by a UK company named Merlin Entertainments plc. (“Merlin”). The local entity is LL Malaysia Taman Tema Sdn Bhd. (“LL Malaysia”). Rachel has been an employee of LL Malaysia for 3 years and was recently offered shares in Merlin for sale at a discounted price of the market rate.
Provision (Lawful Deductions): Section 24(4)(c) of the EA 1955
Definition: “Deductions in respect of payments to a third party on behalf of the employee.”
Analysis: In this circumstance, however, since the shares offered for sale are of the employer’s holding/parent company, then Section 24(3)(b) of the EA 1955 would not be applicable as the holding company would not be an “employer” to the employee. Following Section 2 of the EA 1955, an employer would mean any person who has entered into a contract of service to employ any other person as an employee.
Conditions:
- There must be a contract of service between the employer (subsidiary company) and employee.
- The shares must be of the employer’s holding/parent company’s business.
- Salary deduction can be made by request in writing of the employee and with the prior permission in writing of the Director General.
- Borang C Form and Lampiran C(iv) must be completed and submitted to Jabatan Tenaga Kerja Semenanjung Malaysia (JTKSM) for approval.
