Things to consider before taking a pay cut

By Chee Jo-Ey

TO avoid succumbing to the financial pressures caused by the Covid-19 pandemic, many companies are trying to reduce costs by implementing pay cuts, temporary lay-offs, downsizing and so forth.

According to SME Association of Malaysia president Datuk Michael Kang, around 60% of its members are considering pay cuts in order to survive the crisis with the scale of the cut ranging from 30% to 50%.

In a situation where the job market is in bad shape, employees might be left with no choice but to accept pay cuts offered by employers.

Dispute resolution lawyer Yee Jun Hong at JH Yee & Co says that in general, employees should be mindful that a pay cut or salary reduction is essentially a variation of the employment contract and the contractual terms can only be varied if both parties mutually agree to it.

As such, employees’ consent must first be obtained before implementing the pay cut and failure to do so would form a ground for constructive dismissal.

Both employers and employees must ensure that there is mutual agreement in writing that the pay cut is accepted by employees voluntarily. Both parties will also need to ensure that the terms varied are fair and reasonable, especially the duration of the pay cut and whether it is temporary or permanent.

In the worst-case scenario, an employee might have to accept the offer notwithstanding that the terms are disadvantageous. The employee may then negotiate to shorten work hours, create a flexible work scheme, narrow down job scopes and liberty to take up a part-time gig so long the side job has no direct competition or conflict of interest with the current company.

An employment is a contractual relationship between the company and employee. The terms of such a contract will have to be negotiated mutually in a fair and reasonable manner. Written consent by both parties will also have to be in place.

As for a temporary lay-off, there is no such law that justifies such a measure unless there is a force majeure clause, subject to the full terms and effect of the contract, in the existing contract. Should a company resort to this avenue it would also have to be done by way of mutual agreement.

Meanwhile, according to myLegal Response, although it is not at employers’ liberty to reduce employee salary at their whim and fancy, it does not do the employee any good as well should the employer be forced out of business.

Ultimately, both parties need to be clear about what to expect so that they can make financial preparations. What employees can explore include taking a salary cut for a fixed period of time or to have “deferred or staggered” payment of salary.

This means that employees would take a reduced salary for a fixed period and be paid back the difference in amount or an agreed fixed sum later on.

Employees can take a salary cut and work out a contractual bonus scheme that requires employers to give out a bonus sum should they achieve certain targets. – May 5, 2020

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