Can an Employer Reduce the Salary of a Downgraded Employee?

Under S.14(1) of the Employment Act 1955 an employee can be subject to downgrading (demotion) if found guilty after due inquiry.

The question that often lingers in the minds of employers and HR practitioners alike is, can the salary of the downgraded employee be reduced too?

Unilateral reduction of salary is allowed only where it is reasonable and justifiable to do so. A downgraded employee earning twice the basic salary of his peers of the same level would surely cause dissatisfaction amongst the rest of the staff. To preserve equilibrium and fairness the employer may impose a paycut, however, care needs to be given when deciding on the quantum of the paycut.

For instance, a Supervisor who has served the company for 5 years prior to being demoted to a Line Leader position, should not have his pay reduced so much that he only earns as much as an entry-level Line Leader. The company may consider reducing his salary to that within the range of his peers of similar years of service. There is no hard and fast rule or law as to the quantum of downward adjustment but it should not put the employee in a position of extreme hardship and suffering.

Salary reduction due to unique circumstances

What about employees whose salaries have to be reduced due to unique circumstances (not via the inquiry process)?

Firstly, these unique circumstances are rare and few and employers need to be very judicious when deciding to impose a paycut for special reasons other than misconduct.

In Norhayati Hussein v JW Marriott Hotel Kuala Lumpur (Star Hill Hotel Sdn Bhd) [2017] 4 ILR 108 the employee had been on prolonged MC. When she returned to work the hotel had assigned her a different position with a reduced salary. She claimed constructive dismissal but the court held that her employer had acted fairly and reasonably since they had waited for 19 months for her to come back to work and had even made arrangements for her to perform duties suitable to her condition.

In general, the element of bona fide is very important in any business decision to unilaterally demote an employee or reduce their salaries.

About the Author

Tahirah Manesah Abu Bakar is a Human Resources expert with 22 years of experience in Human Resources and corporate legal work. She also holds a MSc in Management (by Research) specialising in constructive dismissal.

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