When you resign from your job, your employer may say you owe them money, which they plan to deduct from your final pay. This article explains your rights under the law, and discusses some common examples. Find out what is legal and what deductions may be illegal…
Wages Protection Act
The Wages Protection Act makes deductions from an employee’s wages unlawful, unless the employee agrees in writing. An agreement can be recorded in an employment agreement, but it must be specific and the deductions must be reasonable.
An employee can also vary or withdraw their agreement to a deduction by giving the employer notice in writing. The employer must implement the change as soon as practicable, and within two weeks (if practicable) of receiving the written notice.
If an employment agreement only has a general deduction clause the employer must first get the employees agreement in writing.
There are a few exceptions where deductions are either required or permitted, even if an employee does not agree:
- Deduction required by law (for instance tax, child support, student loan repayments).
- Deductions ordered by a court (for instance court fines, attachment orders to repay a judgment creditor).
Leave in advance:
Often an employer will allow an employee to take leave before they are entitled to it (for instance if a new employee gets sick before their sick leave kicks in, an employee wants to take a holiday before their annual leave kicks in, or where an employee has used up their annual leave and wants to use their next entitlement in advance).
An employer may allow an employee to take leave in advance, on the understanding they will pay it back from their future allocation of leave. If the employee leaves before their next entitlement, they may be asked to pay back leave taken in advance (in cash or as a deduction from their wages).
Most employment agreements contains a specific clause that allows the employer to made a deduction for leave paid in advance. If not, the employer must first get the written consent from the employee.
An employer can ask the Employment Relations Authority to direct the employee to make a payment or to allow deduction, if the employee does not agree.
Failure to give notice:
Most employment agreements require an employee to give notice before they resign. An employee is usually entitled work out their notice period, but an employment agreement may also give the employer the power to pay the employee out in lieu of working out their notice (which means the employee does not have to work, but they will still get paid). If an employer does not have the power to pay an employee out in lieu of working, an employer and employee can none the less agree to reduce, waive or pay out the notice period.
The situation is different if an employee is dismissed for serious misconduct. In that case, an employer can terminate the employee’s employment without notice (or payment in lieu of notice).
If an employee does not want to work out their notice period for any reason, they should ask their employer to waive, or reduce the notice period, as a first step. The employer may agree, but they do not have to. If the employee breaches their obligation to provide notice, they could face disciplinary action from the employer (which could lead to a finding of misconduct being recorded on their employment file). This could be damaging to the employee’s reputation (for instance if the employer is asked to provide a reference to a future prospective employer).
If an employee fails to provide notice, an employer cannot generally deduct money for this unless the employee agrees to this in writing. If, however, the lack of notice has caused a financial loss (for instance increased costs to the employer) an employer could seek compensation equal to the loss they have suffered. An employer can ask the Employment Relations Authority to make an order (allowing them to make a deduction, or to seek a cash payment as compensation).
Overpayments:
If an employee has been overpaid by mistake, the law is the same. An employer cannot make a deduction from the employee’s pay, unless the employee agrees and the deduction is reasonable.
If an employee refuses, the employer could commence a disciplinary process against the employee for failing to engage in good faith. The employer can get assistance from the Employment Relations Authority, if the employee does not agree to repay money owed.
Losses caused by employee:
If an employee has caused financial loss to their employer (for instance by acting negligently), the employee may be liable in some circumstances. Besides facing potential disciplinary action, an employee could be asked to compensate the employer for the loss they caused.
Most employers have insurance to cover financial losses, and they may not require an employee to pay. If the loss is significant, the employer (or their insurer) may want to recover losses from an employee. An employer may also decide to seek compensation if they don’t have insurance.
The best approach is to discuss the problem directly, and to try and reach an agreement. Where the employee denies they are liable, or refuses to pay, an employer should seek legal advice before making a potentially illegal deduction.
If an employee agrees in writing to pay for losses caused by them, the amounts deducted should be reasonable (for instance spread out to allow the employee to meet their living costs). If the employee is no longer employed, the employer will need to consider other avenues to recover the loss they suffered (for instance an order in the Employment Relations Authority).
Short-fall in sales:
Where there is a short-fall, for instance after cashing up, deductions cannot be generally be made without the employee’s written agreement.
If the short-fall is a result of theft by an employee, or due to not following instructions or policies, the employee could face disciplinary action.
Tip for employees:
If you are concerned about a deduction clause in your employment agreement, or if your employer has made a deduction without your agreement, talk to your employer about it and try to resolve the issue in good faith.
If you cannot resolve the issue through direct discussion with your employer it is a good idea to seek advice from an experienced employment lawyer about you options, including to raise a personal grievance, to attend mediation, the ask for assistance from the Labour Inspector or the Employment Relations Authority.
Tips for employers:
Always check the relevant employment agreement before making a deduction. If you are unsure, seek legal advice.
Discuss any issues with employees and try to reach an agreement. Record any agreement around deductions in writing.
At Empower Law we can advise employees and employers on when deductions are legal. We advocate for parties to help them resolve issues quickly and cost effectively. Contact us if you need to discuss your options.
Contact us: https://empowerlaw.co.nz/contact-us/
