Can Employer not Pay Employees for Overtime?

Due to the recent amendment of the Employment Act 1955 (“the Act”), there is an increasing concern among the employers regarding the payment of overtime. The employers are piled with the pressure to pay employees earning RM 4,000 or less with overtime allowance as this would undoubtedly raise the operational costs involved in business.

Many employers lack the general understanding about overtime and had narrowly focused on the salary threshold to determine the payment of overtime. In this article, we share with the readers on the important aspects of overtime before deciding if the payment of overtime can be avoided.

What is Overtime?

Overtime is the time when an employee works outside their normal working hours in a day. For example, if an employee normally works from 8am to 5pm, the working time between 7am to 8am will be considered as overtime work.

Employer should be Paying Overtime to which Employee?

In order to determine which employee should be paid overtime allowance, the employer must look into:-

1. The Employment Act. The employer shall check the relevant provisions in the Act. If the particular employee falls under one of the categories below, then the employer must pay the employee overtime allowance for the overtime works that he or she has performed.

2. The Employment Contract and Policies. Next, if the employee does not fall under one of the above categories, the employer should look into the terms in the employment contract and policies. If the employment contract or policies state that the company will be paying overtime, then the employer must pay the particular employee the overtime allowance.

What are the Common Mistakes made by Employers?

When it comes to payment of overtime, employers have often made the following mistakes:-

1. Neglected the usefulness of overtime policy or clauses which assist the company to set up clear precedent, guidelines and conditions for overtime payment and, entitlements;
2. Assuming that “wages” only include “basic salary”, and failed to consider “wages” also include other cash payable to the employee;
3. Thinking that by getting the employee’s consent, they can be excused from paying overtime;
4. Did not fully understand the definition of “overtime”, and decide what is overtime according to their likings; and
5. Not knowing the calculation of overtime, in particularly the employers confused the definition and calculation between “ordinary rate of pay” and “hourly rate of pay”.

What is the Definition of Wages when Calculating Overtime Payment?

According to Section 2 of the Act, “wages” means basic wages and all other payments in cash payable to an employee for work done in respect of his contract of service. This would even include the commission for work done and certain allowance payable to the employee.

Wages under the Act will specifically exclude:-

• The value of any house accommodation or the supply of any food, fuel, light or water;
• Any contribution paid by the employer on his own account to any pension fund, provident fund, retrenchment, termination, lay-off or retirement scheme or any benefits of the employee;
• Travelling allowance;
• Special expenses;
• Gratuity payable on discharge or retirement; or
• Annual bonus or any part of any annual bonus.

What is the Rate of Pay for Overtime?

Ordinary rate of pay = monthly rate of pay ÷ 26

Hourly rate of pay = ordinary rate of pay ÷ normal working hours (usually 8 hours)

Within normal working hours

Beyond normal working hours

What are the Consequences of Not Paying Overtime?

Pursuant to Section 100(2) of the Act, the employer who fails to pay the overtime payment to any of his employees is committing an offence and he shall pay the employee the amount of overtime payment due as ordered by the court.

When the matter is referred to court, the employer will be having a very tough time to look for documents and proof to show the exact calculation. Thus, employer will always on the losing end when it comes to disputing (i) whether the employee is entitled for the overtime; and (ii) how much is the fair and accurate amount of overtime payment that the employer needs to compensate.

What must the Employer do Now?

Regardless of the employer’s ability to pay overtime allowance, it is important for the employer to avoid the common mistakes highlighted in the article. In order to avoid the mistakes made, the employer must:-

1. review and revisit the employment contract and policies, in particular the clauses pertinent to overtime; and
2. devise a suitable overtime policy for the employees, ensuring the operation is managed prudently and in a disciplined manner.

If you have any questions or require any additional information, please contact our lawyer that you usually deal with.

This article is written by 

Andrew Yoon
Partner, Low & Partners

Nicole Lim Jia Ying
Legal Associate, Low & Partners