What If An Employer Really Can’t Pay During The MCO Period?

Given that the MCO period (18th – 31st March 2020) has been extended for another two weeks, I think that the Covid-19 issues faced by the employment sector remains a public concern.

I read quite a few articles out there relating to this topic, many of which tend to be employee- oriented or overly cautious around the issue.

Meanwhile, the workplace guideline and FAQ released by the Ministry of Human Resources (“MOHR“) appears to be blanket advice – it informs employers of their obligations (i.e. to pay their staff full salary), without addressing the flip side of the coin.

I think for employers especially, the elephant in the room is “What if I can’t afford to comply?”.

Background

(Please skip this section if you have no time for grandmother stories)

On 16th March 2020, when the Prime Minster of Malaysia first announced the MCO, employees like myself worried if we would be put out of jobs or suffer pay cuts like the Malindo Air employees.

(It is reported that due to the Covid-19 disease, Malindo Air ordered its staff to take 2 weeks of unpaid leave and a 50% salary cut)

(Malaysia Airlines similarly offered its employees a voluntary scheme – the option of taking 1-3 months of unpaid leave or 5 days unpaid leave per month for at least three months, beginning April)

Subsequently on 19th March 2020, the MOHR issued a statement containing FAQ’s for employers and employees during the MCO. The FAQ’s clearly states that employers are to pay their employees full salary during the MCO period and they are not to make employees take unpaid leave in lieu of. Failing to do so, employees can make complaints through the Department of Labour (JTK).

Further, employers of employees subject to the Employment Act 1955 (“EA“) may be liable to an offence of contravening the EA which is punishable with a fine not exceeding RM10,000.

Needless to say, employers were troubled by the “biasness” of the guidelines which seem to heavily favour workers.

I should mention that during this time, I cheekily posted a Facebook post about lawful deductions under the Employment Act 1955. It triggered some text messages from friends and family alike asking me if it was true – whether they could avoid paying their staff and whether retrenchment was an option during this MCO period. My mum included sent me a news article on force majeure clauses and how contracts must be upheld.

(A force majeure clause in a contract is a provision that excuses a party for not performing its contractual obligations on the grounds that it had become impossible or impracticable due to an unforeseeable event. That means that if present in an employment contract, it may be that an employer can avoid all payment obligations to its employee because of the MCO).

I realised that a blanket piece of FAQ advice about when and when not a pay cut is lawful because of the MCO did not help public confusion and I give no legal advice as I say this:

There are situations where pay cuts can be lawful. For employees governed by the EA i.e. those earning below RM2000 per month, Section 24 of the Employment Act 1955 allows salary deductions if i.e. the employee was overpaid; left without providing sufficient notice; for SOCSO and Income Tax contributions; or for loan repayments. However, I do not think that Covid-19 by itself warrants such circumstances.

Since this blog is about hypothetical conflicts, I am exploring the possibility of an employer not paying or pay-cutting their employee in a Covid-19 situation.

What If An Employer Can’t Pay?

1. First thing to note is that if you don’t pay your employees, it doesn’t mean that you’ll automatically be fined or forced to pay your employees. There is still a complaint process that employees need to go through i.e. through Labour office – suggesting that some investigation into the reasons for the pay cut or non-payment is expected before the MOHR takes legal action. (see point #3 below about investigation)
2. In addition to the above, an employee is expected to take the initiative to file a complaint before there are consequences to the employers who do not pay their employees. Practically speaking, if your employee isn’t going to make a complaint i.e. because they had a run-in with the law in the past, then there is no harm in not paying them (although that may be unethical). Indeed you can ask your employee to agree in writing that they are willing to receive a pay cut or unpaid leave.
3. Secondly, pay cuts per se are not illegal. As mentioned above, there are circumstances where salary deductions are lawful. Further in the case of dismissal or retrenchment, the fact that an employer acted in good faith is a consideration. However, there is still a legal risk involved – the employment tribunal may not share the same view as you.

(For employees governed by the EA, it is unclear whether there can be any force majeure clause in the contract and whether it can be used to the employer’s favour. The reason I am doubtful is because the EA is considered to be a “beneficient social legislation, that safeguards the rights of employees”. This means that the employment contract cannot be interpreted less favourable than what the Act protects employees for)

6. Lastly (and arguably), beginning tomorrow – 1 April 2020, there will be a wage subsidy programme introduced by the government whereby employers can claim RM600 per worker x 3 months if they can show that their business has lost 50% profit. This wage subsidy will be credited directly into the employer’s account within 7 days of application approval. However, it is not clear what happens if you are still unable to pay your employee full salary despite the RM600 wage subsidy. (i.e. Will this affect your position in salary deduction complaints?)

Highlights

1. Employers do not have an automatic right to deduct employee salaries or terminate their services by reason of the MCO. This doesn’t mean that it is impossible, you have to prove that there is business decline, due to the MCO, and that the pay cut or termination was justified.
2. Retrenchment is only a measure of last resort. Technically, it means that employers who cannot afford to keep their employees should first take the salary deduction route (lawfully i.e. by getting employee approval in writing) before exercising retrenchment.
3. The statements and guidelines by MOHR is not legally binding per se – Just because it says “employers must pay full salary”, doesn’t mean you have to go bankrupt to comply. However, the MOHR guidelines are likely to be very persuasive in courts. The Industrial and Employment Law Committee (IELC) for instance, is of the view that the government’s directive requiring employers to pay full salary reflects “the correct position in law”.
4. Finally, force majeure clauses can only be relied upon if it was already included in the contract. Even then, it does not give employers an automatic right to release themselves from their payment obligations, you will still have to prove that the force majeure clause applies in your situation.

I hope that this throws some positive light to desperate employers out there, especially SMEs, my favourite local coffee stalls and certain chicken rice uncle, hang on there! Apologies to employees who find this post rather convincing.

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