The words “unprecedented” and “novel” are possibly the 2 most used words to describe the global fight against the COVID-19 pandemic. Though the scale of the impact and the resulting challenges brought about by the COVID-19 pandemic coupled with the Movement Control Order is indeed unique, some of the measures taken by employers today are not very different from measures taken by employers in the past when facing economic challenges.

In this article, we look at two Industrial Court decisions where employers have successfully defended the cost-cutting measures taken.


The Japanese Encephalitis epidemic – delay of annual increments

The first is the case of RIH Management Sdn Bhd v National Union of Hotel, Bar & Restaurant Workers, Peninsular Malaysia [2000] 3 MELR 545. This was a complaint of a breach of the collective agreement entered into between RIH Management (who is the owner and operator of the Regency Hotel & Resort, Port Dickson) and the Union.

Here, the Union claimed that RIH breached the collective agreement when it did not pay the unionised workers their annual increment due on 1 January 2000.

It was RIH’s case that its hotel business was severely affected by the Japanese encephalitis (JE) epidemic. It had lost most of its customers during the epidemic and had only recently regained its previous occupancy rate. RIH alleged that this ought to be treated as special circumstances justifying RIH’s non-compliance with the collective agreement, or that they were otherwise entitled to vary the terms of the collective agreement.

The Court accepted that as the cause of the financial loss suffered by RIH Management was due to the outbreak of the JE epidemic, which amounted to special circumstances and is something which the management cannot be blamed for.  The Industrial Court allowed the increment under the collective agreement to be deferred pending renegotiation of the collective agreement:

“The court accepted that the law as it stands today requires parties to a collective agreement to strictly comply with the terms of the agreement. It has not agreed to treat financial losses that a company suffers as special circumstances to allow the court to either exempt the company from complying the agreement or to vary the terms of the agreement. 

However in this case the court is prepared to look at this issue afresh. It feels the court should look into the cause of the financial losses suffered by the company. In this case the outbreak of the JE epidemic was something not within the reasonable foresight of the company. The management of the company is no way to be blamed for losses suffered by the company. The court is also satisfied that the company is not out to totally deprive the employees of their entitlement to the annual increment.”


Salary reduction during company shutdown

The second case is that of Viking Askim Sdn Bhd, Butterworth v National Union of Employees In Companies Manufacturing Rubber Products [1985] 1 MELR 130. The Company, Viking Askim was a rubber boots export manufacturer. In August 1983, the Company lost a million-dollar contract and in order to minimise losses, implemented a shut down wherein only 50% of wages was paid during the shut down period. Although the Union did not challenge the Company’s right to implement a shut down, it contended that the employees ought to be paid in full.

For background, there were 2 prior shut downs in 1981 and 1982 wherein the employees were paid wages at a rate of 50% as agreed between the Company and the Union. The Court found that though there was no agreement for the shut down in 1983, with reference to the previous agreements, the payment of 50% wages for the shut down in 1983 was fair.

The Court referred to the case of Goodyear (M) Berhad v National Union of Employees in Companies Manufacturing Rubber Products [1982] 1 MELR 694, which previously held that the company should compensate its employees during periods of temporary lay-off on occasion of a plant shutdown, and found that a fair rate of compensation was half of basic wages per day of lay-off. In the Goodyear case, the Court held:

“The Company expects him to report back for work after the lay-off and it is only right that the Company should compensate the worker to ensure the availability of labour on call. We do not, however, agree that employees be paid full-wages when they do not do any work. We hold that we have jurisdiction to find an equitable solution to a trade dispute arising from a lacuna in the collective agreement or the law…”


Neither case should be taken as a blanket right to employers to vary and/or breach employment contracts without consent of their employees.

Cases before the Industrial Court in particular are always decided on specific facts of the case and does not necessarily create binding law, since the Industrial Court as a court of equity and good conscience is not bound to follow its earlier decisions.

The two cases highlighted certainly does not create law that employers have a right to unilaterally impose a salary cut, or breach terms of employment contract. However, these cases do demonstrate that the Industrial Courts have taken into account economic realities, similar to the current situation, which may not be the fault of the employers.  Economic challenges cannot be looked at in a vacuum and will be examined holistically by the Industrial Court to decide whether certain measures implemented by the employers were fair and equitable.

As the COVID-19 situation is new and developing, we have yet to see any employment litigation arising from cost-cutting measures taken by employers. Time will tell how the Industrial Court will balance the rights of employees against business realities.


This article was written by Donovan Cheah and Yan Nie Th’ng. Donovan has been named as a recommended lawyer for labour and employment by the Legal 500 Asia Pacific 2017, 2018, 2019 and 2020, and he has also been recognised by Chambers Asia Pacific and Asialaw Profiles for his employment law and industrial relations work.

Donovan & Ho is a law firm in Malaysia. Our practice areas include employment law, dispute resolution, tax advisory and corporate advisory.  Have a question? Please contact us.

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