Salary deduction refers to the amount withheld by an employer from an employee's earnings. A salary deduction usually includes tax, social security contributions, national insurance scheme, and may also include pension fund contributions.
The Law on Salary Deduction
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."
If the Employment Act 1955 does not provide the purpose and manner of deduction from wages, deduction from wages automatically becomes unlawful.
Primarily, employers are not permitted to deduct employees' wages or to impose a pay cut, without first obtaining the employees' consent. However, employers may set a pay cut or deduct employee' salaries employees under certain circumstances.
Salary deduction refers to the amount withheld by an employer from an employee's earnings.
According to the Employment Act's Section 24(1), no deductions shall be made by an employer from the wages of an employee unless stated. Sections 24(2) to (6) state when and how employers can make lawful deductions of employees' wages.
Under certain circumstances, deductions of wages can only be made if the employee's request for such deductions in writing and prior permission from the Director-General of Labour is obtained.
Section 24(7) states that the Director-General of Labour may permit the deduction of wages for a specified purpose or a specified class or classes of employees subject to such conditions as he may deem fit to impose.
The Need for Salary Deduction
Arguably, salary deduction may be permitted under certain circumstances, especially when it is the only option to prevent termination or retrenchment of employees.
While it is good practice for companies to obtain consent from the employees before imposing pay cut or deduction of wages, it is arguable that employers may set pay cut or deduction of wages on the employees during the MCO that started from 18 March until 31st March 2020. Mutual agreement to a deduction of salary, if any, should be recorded in writing.
The exercise of pay cut or deduction of wages are viewed as extreme measures and should only be the last option after exhaustion of all other cost-saving methods. The Code of Conduct also asserts this position for Industrial Harmony ("Code"), an agreement made between the Ministry of Human Resources and the Malaysian Council of Employers' Organisations.
According to the Code, employers are encouraged to have prior discussions with their employees to explain the companies' financial standing if they resort to pay cut exercise.
Some salary deductions require the employee's written request.
Types of Salary Deduction
1. Salary deduction that does not need the employee's & Director General's approval in writing
Section 24(2) of the Employment Act 1955 makes it lawful for an employer to make the following deductions (without needing to obtain the employee's prior request in writing, nor the Director-General of Labour's prior approval in writing):
Deductions of any over-payment of wages made during the immediately preceding three months from the month in which deductions are to be made, by the employer to the employee by the employer's mistake;
deductions for the indemnity due to the employer by the employee under subsection 13(1);
deductions for the recovery of advances of wages made under section 22 provided no interest is charged on the advances; and
deductions authorised by any other written law.
2. Salary deduction that requires employee's request
Meanwhile, the following deductions shall only be made at the request in writing of the employee:
Deductions in respect of the payments to a registered trade union or co-operative thrift and loan society of any sum of money due to the trade union or society by the employee on account of entrance fees, subscriptions, instalments and interest on loans, or other dues; and
deductions in respect of payments for any shares of the employer's business offered for sale by the employer and purchased by the employee.
3. Salary deduction that requires employee's request and Director-General's approval
These deductions shall not be made, except at the employee's and the Director-General's consent via writing:
Deductions in respect of payments into any superannuation scheme, provident fund, employer's welfare scheme/insurance scheme established for the benefit of the employee;
deductions in respect of repayments of wage advances made to an employee under section 22 where interest is levied on the advances and deductions in respect of the payments of the interest so levied;
deductions in respect of payments to a third party on behalf of the employee;
deductions in respect of payments for the purchase by the employee of any goods of the employer's business offered for sale by the employer; and
deductions in respect of the rental for accommodation and the cost of services, food and meals provided by the employer to the employee at the employee's request or under the terms of the employee's contract of service.
Employers should be attentive of their legal obligations before forcing salary deductions. While salary deductions are permissible in some situations, they should only be imposed where necessary and with sufficient justification.
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Source: Business Dictionary, Pesara Online
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