Do employers need to make profits before they can pay wages?

Can an employer refuse to pay his employees if he runs at a loss? Is an employer excused from paying his employee’s wages when there is no ‘productivity ‘during the ‘lockdown’? The Answer to all that, is a ‘No’.

[This article is the joint effort of Mr VK Raj and GK Ganesan]

The answer to all that is a ‘No’.

Salaries are Operational Expenses

Staff salaries are generally accounted for as ‘operational expenses’ (OPEX).

The employer has to spend this money as an ‘operational expense’ before he can generate profits.

So a lack of ‘income’ or a ‘lack of profits’ by itself, cannot be an excuse not to pay employee wages during the lockdown.

Problems generated by the Covid-19 virus

True it is that the lack of productivity will directly affect profit.

Small scale employers (or micro-scale ones) need to re-think their business operations.

Their businesses will be the hardest hit.

Emergency measures employers may adopt:

To overcome the lack of productivity during the MCO period, employers may have to adopt some ‘emergency measures’.

Strategies Employers may use:

(1).  cut down working hours.

(2).  negotiate a reduced salary rate with their employees.

Depending on an employer’s respective situation and industry practice, this may or may not result in employee terminations.

(3).  If he has to cull (cut down) his workforce, resulting in terminations, an employer should follow the Code of Conduct for Industrial Harmony – (we will deal with that below).

For example, under the Code of Conduct for Industrial Harmony, an employer can offer re-employment to workers who have to be terminated.

Is the Code of Conduct for Industrial Harmony ‘legal’? Is it ‘law’?

The Code came into operation on February 09, 1975.

At its signing ceremony,  the then Minister of Labour and Manpower, the Datuk Lee San Choon, explained the Code’s aims.

The crucial one was,

‘… to ensure appropriate measures to secure greater compliance of the Code’.1 See the Foreword of the speech of the Minister on 9th February 1975

Does the Code bind Employers?

As a matter of its policy, the Government in 1975 had declared that ‘greater compliance of the Code’ was a clear aim.

The Ministry urged employers,

‘not to offer up as human sacrifice … their employees’ security of tenure at the altar of profit’, or for any ‘ulterior or self-serving motive’.

These are strong words.

It would, therefore, be difficult to argue that the Code is ‘not binding on employers’.

The effect would be to destroy the 1975 Government aim.

How employers now treat the Code

Currently, employers treat the Code as they wish.

Some exercise good Human Resource and Industrial Relations practices.

Others fall terribly short.

There is no uniform or proper procedure before employers dismiss employees.

The Ministry of Human Resources has to address this shortcoming – immediately

This has led to a dichotomy in the Malaysian Industrial Relations landscape.

On the one hand, the Code sets out compliance of agreed procedures for a dismissal to be effected.

On the other, the Government leaves the compliance of the Code entirely at the discretion of the employers.

Industrial Court Awards show two different approaches – and this is troubling

When it comes to compliance with the Code, Malaysian Industrial Courts have taken opposing views.

Some have held that non-compliance of the Code is ‘not fatal’.

They have ruled that it is ‘a mere Code’ and ‘not a law’ in the ‘strict sense’.

Some other Industrial Awards take an opposing stance.

How do we resolve this conflict?

What does the word ‘Code’ mean?

One law dictionary defines a ‘Code’ as:

‘…., a collection or system of laws. The collection of laws and constitutions made by order of the Emperor Justinian is distinguished by the appellation of ‘The Code’ by way of eminence. …’ 2 Jowitt’s Dictionary of English Law, 2nd Edition

Another defines it as:

‘A complete system of positive law, carefully arranged and officially promulgated; a systematic collection or revision of laws, rules or regulations…’ 3 Black’s Law Dictionary: It went on to say that a Code was, ‘Strictly a code is a compilation not just of existing statutes, but also of much of the unwritten law on a subject, which is newly enacted as a complete system of law. – Also termed consolidated laws’

It continues in the following way:

‘A code is not only a collection of the existing statutory law but also of much of the unwritten law on any subject and is composed partly of such materials as might be at hand from all sources… 4 William M. Lile et al., Brief Making and the Use of Law Books 18 – 19 (3d ed. 1914) refer to the sources as ‘…– from statutes, cases, and from customs – supplemented by such amendments, alterations and additions as are deemed by the codifiers necessary to harmonise and perfect the existing system.’

‘In fact, in making a code, new laws may be added and old laws repealed in order to constitute a complete system.’ 5 Ibid

However, some Industrial Courts in Malaysia do not accord the Code its rightful place.

A Code is usually placed in eminence – it is never cast away

However, the argument that the Code is to be highly regarded in the Industrial Law sphere, was accepted by a celebrated Supreme Court case of Said Dharmalingam bin Abdullah.6Said Dharmalingam bin Abdullah v. Malayan Breweries (Malaya) Sdn. Bhd. [1997] 1 MLJ 352

The Supreme Court ruled that Section 30(5A) of the Industrial Relation Act, 1967 authorised the Industrial Court to take into consideration the requirements of the Code.

Could we extend the Said Dharmalingam principle?

By a logical extension of the Said Dharmalingam bin Abdullah case, the Industrial Court should consider whether an employer had – before dismissing an employee  — complied with procedures prescribed under the Code.

If it did not, then it could be argued that if the Code’s ‘pre-set’ and ‘agreed’ procedures are ignored during the dismissal of an employee, that dismissal could be, in law, ‘without just cause or excuse’.

Reorganisation Dismissals and Industrial Subterfuge

Some dismissals of workers result from an employer’s workforce reorganisation exercise.

While the reorganisation of the workforce is a ‘management prerogative’, it should not be a device for industrial exploitation.

Just because Employers dismiss their employees on the basis of ‘management prerogative’, that does not mean these dismissals are immune from a court’s searching eye.

An Employer’s inherent right to ‘management prerogative’ should not give them immunity in court

Whether an exercise of prerogative is genuine and carried out in good faith, requires the anxious scrutiny of courts.

If, at the end of the Covid-19 ‘lockdown’, an employer kicks out 50 employees, the court should examine the dismissals carefully for fairness and equity.

If the answer is No, the Industrial Court should denounce it as dismissal as being ‘without just cause or excuse’.

This is our view.


[The author expresses his gratitude to MR VK Raj, Ms.KN Geetha, Mr. JD Prabhkirat Singh, Mr. GS Saran, Miss KP Kasturi, Ms. Tina Syamsuriatina Ishak, Mr. Andrew Lim, Ms Santhi Latha and Mr. Matthew Thomas Philip for their assistance.]

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