Salary Reduction and Implications in the Workplace

Overview

This update addresses the following questions:

1. Where a company unilaterally imposes a salary reduction (due to it suffering from financial difficulties), does such action amount to constructive dismissal?, and
2.  In claiming constructive dismissal, how soon (after the salary reduction) is the employee required under the law to walk out and leave his/her employment?

In our feature case, the claimant commenced employment with the company as its Chief Executive Officer (CEO) on 1 April 2015 via a letter of appointment dated 31 March 2015. He was paid a basic monthly salary of RM30,000 but this salary was later increased to RM50,000.00 vide the company's letter dated 1 April 2016.

In or around June 2018, the claimant averred that the other director of the company (J Abd Jalil) had proposed that the senior management personnel of the company including the claimant, take a temporary 50% cut in their salary. The claimant alleged that this was with the understanding that the 50% would be reimbursed to the claimant in the future. The claimant subsequently received a letter from the company on 11 June 2019 and it was dated 21 May 2019. The claimant alleged that vide the said letter, the company unilaterally reduced his salary to RM10,000.00 and other benefits which were stated in the 1 April 2016 letter were withdrawn.

The claimant contended that he never agreed to such a unilateral reduction of salary and withdrawal of benefits nor was such matter discussed with him. Subsequently, the claimant sent a letter to the company on 16 July 2019 stating that he was not agreeable to the terms and conditions of the 21 May 2019 letter. The claimant took the view that such a unilateral decision in revising his salary and benefits tantamount to a breach of his contract of employment. When the company did not respond to the claimant's letter, he considered himself constructively dismissed.

What the Industrial Court Held

The Industrial Court held in favour of the company and dismissed the claimant’s claim for constructive dismissal. In coming to its decision, the court first addressed the issue of whether the company’s actions of unilaterally reducing the claimant’s salary amounted to a constructive dismissal wherein it said the following:

Quotation/Citation One

“It is evident from the documentary evidence adduced that the Company had effected a reduction in the Claimant's salary and this fact is not disputed by the Company. In the High Court decision in the case of Kejuruteraan Samudra Timur Sdn. Bhd. v. Seli Mandoh & Anor [2004] 1CLJ 393, the High Court held that a unilateral reduction of the claimant's salary amounted to a repudiation of his contract of employment and was thus a fundamental breach. In this case, the Company had committed a breach of a fundamental term of the Claimant's contract by reducing his salary.”

Having affirmed that a unilateral reduction of an employee’s salary amounts to a breach of the employment contract, the court went on to address the issue of whether the claimant had acted soon enough to leave his employment after the salary reduction wherein it said:   
Quotation/Citation Two

“The pivotal issue left to be decided in this case hinges on whether the Claimant had left at an appropriate time soon after the breach complained of; that is, that he did not stay on in such circumstances as to amount to an affirmation of the unilateral variation of the term of his contract of employment.”

Quotation/Citation Three

“The Claimant did not do anything despite receiving the signed letter left on his desk on 11 June 2019 until 2 July 2019 when the reduction of his salary was confirmed when he saw the lesser amount credited into his account. The Claimant then sought legal advice and it was only two weeks later on 16 July 2019 that he sent his written protest letter to the Company (page 86 of CLB1). The period from the day he was first notified of the Company's intention to reduce his salary on 20 May 2019 to 16 July 2019 was almost two months. The Claimant walked out of the Company on 26 July 2019 and that exceeded two months from the day the Company conveyed its intention to reduce the Claimant's salary. The court agrees with the Company's submission that the Claimant could consider himself constructively dismissed on 21 May 2019 when he was first informed of the salary reduction but he had continued working in the whole month of June till 26 July 2019.

It is hard to believe that the Claimant could still think that the Company was still reconsidering his proposal. After all, it was not the first time in the Claimant's experience in the Company that the Company had gone on a salary reduction. Having heard and considered the Claimant's evidence which were not much in dispute, the court finds that there was an inordinate delay on the part of the Claimant for walking out of his employment. He could have raised his objections on 21 May 2019 itself but he had asked the Company for the quantum of reduction to be decreased. Subsequently, he did not do anything to show his objection until 16 July 2019. Clearly by then, the Claimant had lost his right to treat himself constructively dismissed. The Claimant's failure to make up his mind soon after the alleged breach of the fundamental term of his contract, as he had continued working for another two months without leaving the Company, had lost him the right to treat himself as dismissed.”

How Your Organisation Can Benefit From This Case

When Seeking to Reduce an Employee’s Salary, It Is Best to Try and First Obtain the Employee’s Consent

A number of companies today are implementing salary reduction initiatives in an effort to curb their cost base. It is important to note that while an organisation may justify its actions on the basis of its financial challenges, any changes to an employee’s salary is under the law still deemed a variation of the employment contract and henceforth requires the employee’s prior consent. Otherwise, the law considers any unilateral reduction of an employee’s salary as a fundamental breach of the employment contract, which justifies a claim for constructive dismissal.

Employee Must Walk Out Immediately In Response to the Unilateral Salary Reduction in Order to Successfully Claim Constructive Dismissal

While the court in this featured case did find that the company’s actions (of reducing the claimant’s salary) amounted to a fundamental breach of the employment contract, it nevertheless found that the claimant had failed the test for proving constructive dismissal as he waited almost two months from the date of his salary reduction before claiming constructive dismissal.
It is important to note that under the law, an employee must reject any salary reduction imposed by the company by immediately walking out from his/her employment (within the next/immediate salary payment cycle). And if he/she does not leave his employment, the law considers that he/she has waived the company’s breach of his employment contract.

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