Understanding Demotion and Salary Reduction: A Guide for HR Managers

Demotion together with salary reduction is a form of punishment which an employer may impose on employee who is found guilty of serious misconduct. Section 14(1) of the Employment Act 1955 states that an employer may downgrade an employee. The law does not go on to say anything about the salary. Due to that, many HR managers are unsure of it and therefore not quite comfortable with executing the punishment. Some HR managers are worried that to demote and reduce salary at the same time constitutes double punishing the employee because the employee suffers humiliation along with the loss of certain benefits already. The salary reduction is like punishing him a second time.

Salary Paid for a Job

Among other things, the salary that is paid to a person is based on both his rank and the size of responsibility that goes with the rank. It is normal to expect that as a person goes up in rank, the responsibility that goes with the job becomes higher. Therefore, the salary for the job would be increased with the rank. When a person is promoted, he can usually expect an immediate upward adjustment in salary representing the increase of responsibility he now has to carry. Conversely, when an employee is demoted, his lower rank would mean that he now carries a lower weight in responsibility. For that reason, it is only to be expected that his salary should accordingly go down with the lower rank. It would be ridiculous to punish a person by giving him the same salary for carrying lower responsibility; it would be a motivation and reward for him rather than punishing him. We can safely say that reducing the salary upon demotion is a consequential effect.

Is Demotion and Salary Deduction breach of contract and therefore ground for claiming constructive dismissal?

No, it is not. In Mohd Khairul Nizam Othman V. Safeguards G4S Sdn Bhd [2021] the Industrial Court ruled that that penalties of even demotion and salary deductions, would not justify a claim of constructive dismissal.

“The court going by equity and good conscience finds that the punishments of demotion and salary reduction imposed by the company for the misconduct committed by the claimant are fair and reasonable in the circumstances, taking into account the severity of the misconduct committed by the claimant. As such, the company did not commit any breach of the claimant's contract of employment and was justified in imposing the aforesaid punishments on the contract.

An employer is always entitled to discipline the employee by imposing appropriate and fair punishment on the employee who have committed wrongdoing. Such action taken by the employer cannot and should not be viewed as breach of contract of employment unless the punishment meted out against the employee is excessive and grossly disproportionate to the wrongdoing committed by the employee”.

How far down can a person be demoted?

There appears to be no limit set. The decision is up to the employer to exercise in his best judgement. We have industrial court cases where the employer won their cases even though the employee was demoted by several ranks. Read further down.

By what amount can the salary be reduced?

In Ng Yin Fun Vs Crystalball Advisory Services Sdn. Bhd, Award No. 1030 Of 2024, the claimant was demoted from General Manager down several rung to the post Senior Accounts Executive. Her salary was reduced by 50% from RM7000 down to RM3500, which was even lower than her starting salary of RM48000. She lost the case in court.

In another case, Abdul Rasyid Bin Abu Bakar Vs Ixora Hotel Sdn. Bhd. Award No.: 131 / 2024. The claimant was a Duty Manager with salary of RM2500. He was punished with demotion to Senior Guest Service Assistant and salary reduced to RM1500. He lost the case in court too.

Conclusion

The employer has been given clear authority to punish the employee. The punishment should be proportionate to the severity of the misconduct. If a misconduct is serious or the employee does not respond to lesser punishment to correct himself but continues to repeat minor misconduct, then demotion would not be inappropriate or disproportionate. If the misconduct is severe or gross such that the employee clearly deserves to be dismissed, the punishment of demotion would be seen by the court as being lenient, and probably because of this, the court would stand with the employer even if the employee is demoted down by many rungs and the reduction is salary is 50% or more; if the employer dismisses him, the offending employee would stand to lose everything.

Chan Wang Tak

Pakar Industry Negara, HR Consultant

Author of 400 Q&A on the Practice of Labour Laws in Malaysia