South East Asia Journal of Contemporary Business, Economics and Law, Vol.

2, Issue 3 (June)
ISSN 2289-1560 2013

MISCONDUCT OR NEGLIGENCE OF EMPLOYEE AND LOSSES TO EMPLOYER:

RECOVERING LOSSES THROUGH SALARY DEDUCTION
Dr. Ashgar Ali Ali Mohamed
Ahmad Ibrahim Kulliyyah of Laws (AIKOL)
International Islamic University Malaysia (IIUM), Kuala Lumpur, Malaysia
ashgar@iium.edu.my, Tel: 603 61964382

ABSTRACT

Majority of the workers are employed to earn a living. Undoubtedly, the wages or salary earned would be used to provide the
employed and his family the basic necessities of life such as food, clothing, education, housing, leisure activities and eventually,
saving for retirement. Considering that wages earned are the main source of income for most households, the following issues
arises and are discussed in this article namely, (i) whether an employer could recover damages or losses from an employee
where the latter has been negligent in the performance of his duties or committed misconduct thereby causing the employer to
suffer damage or losses, for example, an employee accidentally dropped a tray of dishes or have a customer walkout without
paying for the items, among others; and (ii) whether such claim is recoverable from the employee through salary deduction
without the employee’s prior consent, given the fact that an employee might be earning a small sum or minimum wages.

Keywords: Negligence of Employee; Losses to employer; Recovery of losses to employer; Salary deduction

INTRODUCTION

A person normally seeks employment for various personal reasons. However, the majority of them work for monetary
consideration. Undoubtedly, the wages or salary earned would be used to provide the employed and his family the basic
necessities of life such as food, clothing, education, housing, leisure activities and eventually, saving for retirement. The
Universal Declaration of Human Rights 1948 provides that the wages payable must be adequate to meet the basic needs of the
worker and his or her family.1 However, in practice, the level of wages or salary is generally set either by the market force
(supply and demand) or by a collective agreement. In fact, many workers are paid substandard wages. Realising this, the
International Labour Conference had, in its 54th session on 22 June 1970, adopted the Minimum Wage Fixing Convention, 1970
(No. 131) and the Minimum Wage Fixing Recommendation 1970 (No. 135), which requires the ratifying states to establish a
minimum wage fixing machinery which is capable of determining and periodically reviewing and adjusting minimum wage
rates. Its primary purpose is to aid the underpaid group of the nation’s working population and those who lacked sufficient
bargaining power to secure for themselves a minimum subsistence wage.

Although Malaysia did not ratify the above Convention, nevertheless it had in 2010 requested for the assistance of the
International Labour Organisation (‘ILO’) in the reformation of its national labour laws and policies, especially those relating to
minimum wages and social security schemes (actuarial review and unemployment insurance). 2 More recently, the Minister of
Human Resources and Manpower had enacted the Minimum Wages Order 20123 (‘the Order’) which came into force in January
2013. The said Order was made pursuant to the power conferred on the Minister by the National Wages Consultative Council
Act 2011.4 These steps were taken due to the realisation that minimum wages had to be given to employees as it would constitute
a decent living for the worker and his dependents. Having said the above, the following issues are considered in this article
namely, (i) whether an employer could recover damages or losses from an employee where the latter has been negligent in the
performance of his duties or committed misconduct thereby causing the employer to suffer damage or losses, for example, an
employee accidentally dropped a tray of dishes or have a customer walkout without paying for the items, among others; and (ii)
whether such claim is recoverable from the employee through salary deduction without the employee’s prior consent, given the
fact that an employee might be earning a small sum or minimum wages.

NEGLIGENT IN PERFORMANCE OF DUTIES OR MISCONDUCT BY EMPLOYEE: RECOVERY OF DAMAGE

OR LOSSES

The issue arises whether an employee is bound to reimburse the employer for losses incurred by the employer due to the
employee’s negligence in the performance of his duties, for example financial losses due to the non-compliance of the procedure
set by the employer. Further, whether such losses could be recovered through a salary deduction? It is noteworthy that at
common law, an employee in the discharge of his duties is required to exercise certain care. This includes duty to render faithful
and loyal service towards the employer; duty to obey lawful instruction; duty to exert reasonable degree of competence and skill;
duty to protect employer’s property; and in exercising trust placed on him by the employer. It also includes duty not to
dishonestly secure benefits at the employer’s expense; not to accept commission without the employer’s permission or

1
The Universal Declaration of Human Rights 1948, art 23(3) provides: ‘everyone who works has the right to just and favourable remuneration,
ensuring for himself and his family an existence worthy of human dignity, and supplemented, if necessary by other means of social protection.’
2
http://www.ilo.org/asia/countries/malaysia/lang--en/index.htm
3
PU (A) 214/2012.
4
The Wages Consultative Council Act 2011 (Act 732), s 23(1) provides: ‘Where the Government agrees with the recommendation of the Council
under paragraph 22(2)(a) or 22(4)(a) or determines the matters under paragraph 22(4)(b), the Minister shall, by notification in the Gazette,
make a minimum wages order on the matters specified in paragraphs 22(1)(a) to (e) as agreed to or determined by the Government.’

64
 South East Asia Journal of Contemporary Business, Economics and Law, Vol. 2, Issue 3 (June)
ISSN 2289-1560 2013

knowledge, bribe and not to work in the spare time with a competitor of the original employer. The employee is also under a
duty not to disclose confidential information acquired during the cause of employment.5

What is emphasized here is that an employee performing his services is required to work with care and diligence, to act with
good faith and fidelity and to maintain mutual trust and confidence of his employer. 6 In other words, an employee should do his
job faithfully and entirely for his employer's benefit and should not further his own interests or those of any third party contrary
to his employer's interests or undermine the business of his employer.7 In Soo Jim Weng v Guinness Anchor Marketing Sdn Bhd,8
a case dealing with alleged irregularities with regards to the approval of distributor's claims, the Industrial Court held inter alia,
that the claimant, by his conduct had shown a dereliction of duty, was negligent and failed to work with care and diligence.9

It is a fact that an employee can be dismissed from employment after due inquiry when he was negligent in respect of duties for
which the employee was engaged.10 In Rank Xerox Ltd v Chong Siw Sing @ Hong Lian Hwa,11 the Industrial Court held that “A
single act of negligence by an employee may justify dismissal only if it so gross or the consequence of further error is so serious
and predictably forthcoming that it would be unreasonable to expect the employer to give the workman a second chance.”
Incompetence is also a valid ground to dismiss a worker. In Shamsudin Mat Husin v Austral Enterprise Bhd,12 the Industrial
Court stated: “Incompetence also is a ground for dismissal, indeed ineptitude resulting in failure to perform the duties of the
service destroys the whole reality of the contract from the point of view of the employer. It must be remembered that the vast
majority of the employees make their employers the judges of their efficiency and as long as the employer acts bona fide ie, if he
is genuinely discontented with an employee, he is quite entitled to give notice of termination".

Also noted is the case of Palmco Oil Mill Sdn Bhd v Ooi Ching Lang,13 where the Industrial Court stated: “The claimant had
effectually been playing around with the company's assets. Not only was he misleading management but in effect he was also
misleading himself and this made it impossible for him to continue to carry out his duties and responsibilities. He had already
caused considerable losses to the company which was entitled to also think of its own well-being and that of its shareholders.
The dismissal had been effected with a heavy heart after the company had taken all relevant factors into consideration before
making its decision. The court therefore does not see any justifiable reason to disagree with the company's decision to dismiss
the claimant. The claimant himself, when asked what lesser punishment he would have been prepared to accept, frankly replied
that he could not say.”

Apart from subjecting the employee to appropriate disciplinary action up to and including dismissal from employment, an
employer may also bring a civil suit against its employee or former employee to recover the amount of money that the employer
lost or was misappropriated as a result of the employee’s negligence, dishonesty or carelessness. Likewise, the employer could
demand the former employee to return the salary he was paid, or reimburse the company for profits it lost as a result of a breach
of contract. The employer can also demand the careless employee to pay losses incurred by them due to the breach of implied
duty to exercise proper care and skill in carrying out his duties.14 In other words, an employee who acted in bad faith or has
engaged in an improper conduct where it was reasonably foreseeable that their conduct would cause loss to the employer could
be sued to reimburse the employer for such losses. This includes fo example when the employee fails to follow proper
procedures for engaging contractors, misuse of funds, abuse of delegated authority, fraud, failing to disclose a conflict of interest,
and an inference of dishonesty, among others.

In ANZ National Bank Ltd v Hussain,15 a New Zealand case, the investigation carried out by the plaintiff revealed that the
defendant, a mobile mortgage manager, had breached Bank procedures for processing mortgage applications. In the above case,
the defendant was found to have repeatedly breached the bank’s credit risk policy in respect of 18 transactions by recommending
unconditional approval of mortgage applications to borrowers without exercising proper diligence. In each of the transactions,
the borrowers defaulted on the loans. The Employment Relations Authority of New Zealand held that the defendant had breached
the implied duty to exercise proper care and skill in carrying out his duties. The defendant was therefore held liable for all losses
incurred by the bank in relation to these specific transactions. The Employment Relations Authority ordered the employee to pay
the employer damages, a sum of NZ$1.3 million, for losses caused by his conduct.

Again, in Auckland Regional Council v Tilialo,16 another New Zealand case, the plaintiff succeeded in their claim for damages
against the defendant, a manager in the plaintiff’s company, for dishonestly authorising payment on false invoices. In the above
case, the defendant had engaged his girlfriend to provide services to the plaintiff, which she had no qualifications to perform. The
defendant then authorised payment of two invoices in respect of the services of $4,500 each. The Bank account records showed

5 See Chitty, (2010). Chitty on Contract, Specific Contracts (vol.2), 31st ed.,: Sweet & Maxwell Ltd.
6 See Zulkifli Abdul Latif v Sistem Penerbangan Malaysia Bhd, [2006] 3 ILR 1923
7 See Ward Evans Financial Services Ltd. v Iain Fox and Alan Philips [2002] IRLR 120.
8 [2011] 2 LNS 0548
9 See also Patrick Chin Beng Chew v Time Dotcom Berhad [2009] 2 LNS 0698.
10 See Ghaiye, B.R. (1988) Misconduct in Employment, 2nd at p. 32.
11 [1989] 1 ILR 594.
12 Award No. 47 of 1994.
13 [2005] 1 ILR 587
14 See ANZ National Bank Ltd v Hussain Reference No AA 34/10; Member Arthur; 29/1/10 (28 January 2010).
15 See http://www.laneneave.co.nz/documents/Briefs%20November%202010.pdf
16 Reference No AA 368/09 5138995 (15 October 2009). See also
http://media.nzherald.co.nz/webcontent/document/pdf/cainblogPDFNovember.pdf

65
 South East Asia Journal of Contemporary Business, Economics and Law, Vol. 2, Issue 3 (June)
ISSN 2289-1560 2013

that the girlfriend had withdrawn the money to pay for their overseas trip. The Employment Relations Authority held that the
defendant had breached the implied duties of fidelity and trust and confidence, and the obligation to use proper care and skill.
Further, the defendant had also breached certain express terms of his employment agreement relating to fraud, dishonesty, use of
plaintiff’s funds and failure to disclosure material conflicts of interest. Accordingly, the defendant was ordered to pay the
plaintiff the following as damages: (1) the value of the false invoices, a sum of $9,000; (2) a sum of $5,408.90 in respect of the
forensic IT investigation; (3) a sum of $22,408 as legal fees; (4) a sum of $3,000 as general damages; and (5) a penalty of
$2,000.

Similarly, in Masonry Design Solutions Limited v Bettany,17 the Employment Court of New Zealand allowed the employer’s
claim for damages for losses arising from an employee’s poor workmanship. The Court found that the defendant, a qualified and
experienced draughtsperson, was careless about the quality of his work and in breach of the express terms in his employment
agreement. His poor quality of work was such that the employer had to rectify at a significant cost. Accordingly, the defendant
was ordered to pay the employer a sum of $12,000 as special damages for the cost of engaging a senior draughtsperson to rectify
his mistakes. As from the above, an employer is able to recover losses arising from the employee’s carelessness in performing
their duties which had caused foreseeable loss to the employer.

Meanwhile, in the Malaysian case of Eric Chan Thiam Soon v Sarawak Securities Sdn Bhd,18 the plaintiff claimed against the
defendant a sum of RM78,873.50 being the alleged sums they had compensated one, William Wong, their client. The plaintiff
alleged that the defendant, whilst in its employment, had unlawfully withdrawn or converted shares from the account of the
plaintiff’s client. The plaintiff compensated the client for the wrongful conversion of his shares. Thereafter, the plaintiff filed a
suit against the defendant to recover the money it had paid out to the client as compensation. The above claim was allowed by
the court.

It may be added that the carelessness of the employee if discovered earlier by the employer, it would still be open for the
employer to take appropriate disciplinary action against the errant employee up to and including dismissal from employment
even if the company did not incur any financial loss. For example, in Tian San (S) Sdn Bhd v Lin Kim Ping,19 the company
dismissed the claimant, manager, due to his unprofessional conduct in preparing invoices for the company’s sub-contractors. He
failed to perform his duties in accordance with the requisite care, skill, fidelity and diligence expected of him. The respondent
maintained that claimant’s conduct was such that the respondent had lost confidence and trust in the claimant and was no longer
safe nor in the best interest of the business to allow the claimant to continue in employment. This arose as a result of two very
suspicious cases discovered involving the claimant, where he had failed to follow the procedures in the operations of the
company’s business, which if not detected earlier, would have caused the company to lose nearly RM100,000. It was held inter
alia, that ‘the question of actual loss to the company is [not] relevant when the issue revolves around the performance of an
employee and of the employee’s conduct which had undermined the trust and confidence of his employer. Actual loss would
aggravate a case of poor performance or lack of diligence. The fact that the company did not suffer loss might in some
circumstances mitigate the claimant’s lack of diligence but does not exonerate the same, if proven.’

SALARY DEDUCTION TO REIMBURSE EMPLOYER FOR DAMAGE OR LOSSES SUFFERED DUE TO

EMPLOYEE’S WILFUL MISCONDUCT OR NEGLIGENCE

Deduction Of Salary

The issue here is whether an employer would be able to recover losses from an employee through salary deduction for the
financial losses incurred by the employer for example, compensation for damages to the employer's property, compensation due
to the illegal use of the employer’s properties, compensation for financial losses due to clients/customers not paying bills, and
compensation for theft of the employer's property by the employee, among others. 20 It is an implied term of any contract of
employment that payment of salary is a fundamental term of the contract. It is the employer’s obligation to pay the agreed wages
promptly. Any unilateral decision to reduce or deduct an employee’s salary, in the absence of a statutory authority or a
contractual right would be deemed unlawful as it constitutes a variation of an essential term of the employment. By doing so, the
employer would have acted in a manner calculated, or likely to destroy or seriously damage the relationship of confidence and
trust between the employer and employee. Such a breach is considered fundamental going to the root of the contract and it may
be deemed repudiated.21 It may thus, entitle the employee to treat his contract as terminated and himself as dismissed.

In Ling Ka Hong v Crystal Establishment Bhd,22 the Industrial Court stated:

[U]nilaterally reducing the Claimant’s salary without her consent, or proper consultation with her, the Company had breached
the terms of the contract of employment. The Company had evinced an intention not to be bound any longer by the contract.
Further, the said breach was a fundamental one, going to the root of the employment contract. It is trite that salaries are one of

17
(2009) 6 NZLR 834. See also http://www.justice.govt.nz/courts/employment-
court/documents/Masonry%20Design%20Solutions%20Ltd%20v%20Bettanypdf.pdf/view
18
[2000] 4 MLJ 399, [2000] 4 CLJ 464.
19
[1997] 3 ILR 483.
20
See Lister v Romford Ice & Cold Storage Co Ltd [1957] AC 555, [1957] 1 All ER 125, HL.
21
See China Airlines v Lim Lee Chang & Anor [2011] 1 LNS 103; Lim Lee Chang v China Airlines [2009] 4 ILR 461; Sri Sutra Travel Sdn Bhd
v Um Nusmayah bte Mohd Yussof [1997] 3 ILR 756; Kumpulan Perunding Daya Sdn Bhd v Lim Seng Chong [2009] 2 LNS 1318.
22
[2010] 2 LNS 0411. See also Kejuruteraan Samudra Timur Sdn Bhd v Seli Mandoh [1998] 3 ILR 1120.

66
 South East Asia Journal of Contemporary Business, Economics and Law, Vol. 2, Issue 3 (June)
ISSN 2289-1560 2013

the most, if not the most important terms of the employment contract. Change this, and the employer-employee relationship is
destroyed. The employer was wrong in reducing her salary in the way it did here. A change of salary augurs a new relationship,
which the employee may accept or reject freely.

Again, Simon Deakin dan Gillian S Morris stated: ‘At common law, once the employee has shown that he or she has performed
the contractual obligation which triggers the employer’s obligation of payment, any deduction from or retention of wages or
salary must be justified by contractual authority of some kind, such as an express or implied term or an implied right of set-off
for breach of contract.’23

The above is also provided in the International Labour Organisation’s Protection of Wages Convention 1949 (‘the Convention’),
which provides that deductions from wages shall be permitted only under conditions and to the extent prescribed by national
laws or regulations or fixed by collective agreement or arbitration award. 24 The Convention further provides that where
deductions are made, the affected workers shall be informed, in the manner deemed most appropriate by the competent
authority.25 In short, deduction of salary can only be done with the knowledge or consent of the employee. If the deduction was
done without their knowledge (or consent) it may amount to a breach of the contract of employment which is fundamental in
nature.

Having said the above, an employee’s wages or salary can be deducted in the following manner: (1) deduction made pursuant to
statutory provision for example, the Employment Act 195526 and the Income Tax Act 196727 which authorise deductions for
absence from work, for the recovery of any advanced or over-paid wages to the employee, deductions of the value of food and
accommodation the employer supplies to the employee, deductions in respect of contributions to be paid by the employee
through the employer for any medical scheme or retirement scheme, deductions for the recovery of any loan made by the
employer to the employee and income taxes deductions, among others; (2) deduction made pursuant to a court order directing an
employer to make a deduction from an employee’s wages and send the money to a third party for example, pursuant to an
attachment of income order; and (3) deduction of money from an employee’s wages if the employee has signed a written
statement authorizing such deduction.

Salary Deduction To Reimburse Employer For Losses Suffered Due To Employee’s Wilful Misconduct Or Negligence

Having discussed the above, the question arises whether these losses can be recovered through salary deduction. Whether such
salary deductions would be deemed lawful even though the same was not provided in the contract of employment? As noted
earlier, salary deduction is allowed when the statute requires the deductions to be made, where the contract of employment
makes specific provision for a deduction, and where the parties have agreed in writing to the deduction before the situation
arises. In Martin John Donohoe v Asiatic Lumber Industries Sdn Bhd,28 the claimant was required to pay the employer a sum of
RM11,250 by way of salary deduction for his unauthorised use of the company’s helicopter for his personal advantage. It was
held that the company was justified in recovering from the claimant the said sum by making the necessary salary deduction. This
did not amount to a fundamental breach of the claimant’s contract of employment.
In Kejuruteraan Samudra Timur Sdn Bhd v Seli a/k Mandoh & Anor,29 it was stated that the deduction of an employee’s salary or
wages to recover losses or damage arising from the negligent act of the employee would be deemed lawful provided that the
recovery of the such losses was expressly authorised in the contract of employment or the collective agreement to which the
employee was a party. In particular, Raus Sharif J, stated:

[T]he learned Chairman had addressed the correct question of law when she considered that there was no provision in the
claimant’s contract of employment which allowed the reduction of his salary when the applicant incurs losses in his business.
This issue is relevant and centred to the first respondent’s case of constructive dismissal. The first respondent pleaded that the
unilateral reduction of his salary amounted to a repudiation of his contract of employment. Thus the question for the Industrial
Court to determine was whether the contract itself provided for such a reduction. The Industrial Court made a finding of fact that
there was no such provision in the contract and the first respondent did not consent to the massive reduction of 30% of his salary.
To me, the learned Chairman was right to conclude the unilateral reduction of an employees pay constitutes a fundamental and
repudiatory breach of the contract of employment.

In Goh Khoon Seng v Seacera Tiles Berhad,30 the company found the claimant guilty of his irresponsible action namely, leaving
the nine (9) pallets of tiles outside store for a substantial period of time without appropriate action. The packaging and quality of
tiles were found badly damaged and stained (engobe mark and rusted). The claimant was punished with a demotion by way of a
salary cut of RM1,000.00. However, no attempts were made to recover the losses suffered as a result of the negligence of the
claimant. The Industrial Court held that the unilateral decision to punish the claimant to a demotion with a salary deduction was
clearly a fundamental breach going to the root of the employment contract. The Industrial Court arrived at the above decision for
the following reasons; (1) the Domestic Inquiry held by the company was defective namely, the inquiry had proceeded ex parte

23 Simon Deakin and Gillian S Morris., (2009) Labour Law, 5th ed., p 256.
24 Ie the International Labour Organisation’s Protection of Wages Convention 1949 art 8(1).
25 Ie the International Labour Organisation’s Protection of Wages Convention 1949 art 8(2).
26 Act 265.
27 Act 53.
28 [2010] 2 LNS 0450.
29 [2004] 5 MLJ 179, [2004] 1 CLJ 393.
30 [2009] 2 LNS 0846.

67
 South East Asia Journal of Contemporary Business, Economics and Law, Vol. 2, Issue 3 (June)
ISSN 2289-1560 2013

in the absence of the claimant; (2) the company failed to prove that the claimant was given sufficient notice of the postponed
inquiry; and (3) the company failed to prove that the said Notice was duly served on the claimant personally.

In short, while deduction of an employee’s salary or wages to recover losses or damage arising from the negligent act of the
employee would be deemed lawful so long as the recovery of such losses was expressly authorised in the contract of employment
or the collective agreement, the employer can legally withhold only a reasonable amount and/or percentage on a monthly basis.
The amount so withheld should not overburdening the employee given the fact that a vast majority of these workers would have
other financial commitments and further, the excessive withdrawal of an employee's monthly salary would reduce his salary
below the minimum wage.

CONCLUSION

As from the foregoing discussion, where an employee through its negligence or willful misconduct causes loss or damage to
company property, the employer can take the following actions. (i) Disciplinary action: If an employee causes damage or loss
because of poor performance, the employee should be subject to disciplinary action in the same manner as an employee who had
projected unsatisfactory or poor performance; (ii) Dismissal from employment: If upon due inquiry, the employee was found
guilty for the willful misconduct or negligence, the affected employee can generally be terminated or dismissed from
employment. Generally, the employers would have or should include a provision in their discipline policies reserving the right to
impose discipline, up to and including dismissal, in any situation they deem appropriate. Willful or intentional misuse of
company property resulting in significant loss could be grounds for immediate dismissal; and (iii) File a civil suit: Employers can
file a civil suit to recoup the money owed for the loss or damage. Thus, an employer who incurs losses or damages due to its
employee’s negligence or wilful misconduct may recover such losses directly from the employee.

However, in so far as salary deduction is concerned, there are restrictions. A salary deduction to recover such losses would be
allowed if the same has been expressly incorporated in the collective agreement or was authorised by the employee in writing
before the losses occurred. The agreement between the parties must clearly state the manner in which the amount to be deducted
will be computed. Further, the salary deductions shall not be made unless the employee has been given an opportunity to explain
the cause of the damage or loss and his reasons why the deductions should not be made. This is so because it is important to
determine whether the loss was due to dishonesty, willfulness, or a grossly negligent act of the employee. If an employer makes
such a deduction and it is later determined that the employee was not guilty of a dishonest or willful act and neither grossly
negligent, the employee would be entitled to recover the amount of the wages withheld.

However, any unilateral decision to reduce or deduct an employee’s salary, in the absence of a statutory authority or a
contractual right would be deemed unlawful as it constitutes a variation of an essential term of an employment. Additionally, if
the employee no longer works for the employer who made the deduction and it's decided that the deduction was wrongful, the
employee may apart from recovering the amount sue the employer for other tortious action such as defamation.

REFERENCES

Chitty, (2010). Chitty on Contract, Specific Contracts (vol.2), 31st ed.,: Sweet & Maxwell Ltd.
Ghaiye, B.R. (1988). Misconduct in Employment, 2nd at p. 32.
Simon Deakin and Gillian S Morris., (2009). Labour Law, 5th ed., p 256.
Ashgar A., (2007). Dismissal from Employment and the Remedies: LexisNexis (M) Sdn Bhd.
Ashgar A. and Farheen B. (2009). Procedure for Unfair Dismissal Claims in Malaysia: LexisNexis (M) Sdn Bhd.
Ashgar A. and Farheen B. (2012). Retrenchment: The Law and Practice in Malaysia: Sweet and Maxwell (M).

68