When Can Your Employer Deduct Your Salary?

With the ambit of the Employment Act 1955 (“EA”) being widened effective 1 January 2023, the provisions in the EA about salary deductions now apply to all employees.

Under section 24 of the EA, employers cannot deduct employee’s salaries unless it is authorised under the EA.

What can be deducted? 

There are several categories of permissible deductions.

Category 1:  Employer can deduct without employee’s consent

For this category, the employer can unilaterally deduct the employee’s salary without needing the employees’ consent, approval or permission:

1. Recovery of overpayment of wages made during the immediately preceding 3 months from the month in which deductions are to be made; 
2. Deductions for payment in lieu of notice owed by employee to employer;
3. Deductions of advance of wages made under section 22 of the EA 1955 (provided no interest is charged on the advances); or
4. Deductions authorized by any other written law (eg: EPF / SOCSO deductions) 

Category 2: Employer can deduct at the employee’s request

Thee amounts can be deducted from the employee’s salary, if the employee requested in writing for such deductions to be made:

1. Deductions in respect of payments to a registered trade union or co-operative thrift and loan society of any sum due to it; or
2. Deductions in respect of payments for any sale of shares of the employer’s business to the employee. 

Category 3: Employer can only deduct if the employee requests it in writing and permission is obtained from the Director General of Labour

For this category, the employer can only make the deduction if there is a request in writing by the employee, and prior permission is obtained from the Director General of Labour:

1. Deductions in respect of rental for accommodation, cost of services, foods and meals provided by the employer to the employee at the employee’s request or under the terms of the employment contract;
2. Deductions in respect of payments into any superannuation scheme, provident fund, employer’s welfare scheme or insurance scheme established to benefit the employee;
3. Deductions in respect of payments to a third party on behalf of the employee;
4. Deductions in respect of repayments of advances of wages made to an employee under section 22 of the EA 1955 (where interest is chargeable); or
5. Deductions in respect of purchase of goods from the employer’s business. 

Category 4: Employer can deduct with the employee’s request in writing, and agreement of the manager of the co-operative shop

Employers can deduct from an employee’s salary for the purchase of food stuff, provisions, or other goods on credit from a cooperative business (as registered under the Cooperative Societies Act 1993) provided the employee has requested so in writing and there is agreement from the manager of the co-operative shop. The amount deducted cannot exceed the credit given, and the amounts deducted must be paid to the manager of the co-operative shop to satisfy the employee’s debt.

How much can be deducted?

Employers cannot deduct more than 50% of an employee’s wages in any one month. However, this limitation does not apply in these circumstances: – 

1. Deductions for indemnity in lieu of notice payable by an employer to an employee;
2. Deductions from the final payment of wages of an employee for any amount due to the employer on the termination of the employment contract, or
3. Repayment of housing loan. However, this is subject to the prior permission of the Director General and employer are only allowed to exceed by an additional amount of 25%.

The consequences of not complying with the limits of deductions can be dire, especially if such over deductions cause the employee to commit misconduct to sustain themselves.  In Airport Limo (M) Sdn Bhd v Syed Jamal A Nasir Syed Mustafa [2007] 3 ILR 350, the claimant (a limousine driver) faced substantial salary deductions and he was only left with RM 2 after deductions. 

Due to his financial problems from the salary reduction, the claimant was forced to sell his tickets instead of performing the trips (as he did not even have the capital to work).  The Claimant was dismissed for misconduct due to the wrongful selling of his tickets.

Although the Industrial Court noted that it is a serious misconduct for a driver to be selling his tickets, the claimant was forced to do so by his employer’s actions of breaching section 24 of the EA 1955 (by deducting over 50% of his salary). 

The Industrial Court held that the employer had substantially contributed to the claimant’s misconduct. Therefore, it was unfair and inequitable to punish the claimant for it. Ultimately, the Industrial Court held that the claimant was unfairly dismissed. 

Key Takeaways 

Some practical tips for employers:

• Check your current practices on deduction of salary, and ensure that you are only making authorised deductions.
• Ensure that the limit of deductions is complied with.
• Seek the permission of the Director General wherever necessary. 

If amounts owing by the employee to the employer do not fall within the authorised deductions under section 24 of the EA 1955 to deduct, the employer can seek to recover those sums separately by way of legal action (if the employee refuses or fails pay those amounts).

***

This article was written by Leow Ho Eng (Associate) from Donovan & Ho’s employment law practice. 

Donovan & Ho is a law firm in Malaysia, and our employment practice group has built a reputation for providing strategic employment advice to local and global organisations.  Our team of employment lawyers provide advice on employment law and industrial relations including review of employment contracts, policies and handbooks, advising on workforce reductions, and managing dismissals of employees for poor performance or misconduct. We also represent clients in unfair dismissal claims and employment-related litigation. Have a question? Please contact us.