June 2019

There are many situations in which an employee may come to owe their employer money. A common example is where an employer overpays their employee’s wages. Some other examples include where an employer covers an employee’s expense or where an employee is liable for damage to an employer’s property. In most commercial situations, when two people owe each other money, one debt can be ‘offset’ against the other so that only the difference needs to be paid. This saves the wasted time and expense of handing over money only for it to be handed back. However, special rules apply to employer – employee relationships and special care must be taken before making any deduction from an employee’s wages.

The rule against deductions

Special protections on employees’ wages are set out in the Wages Protection Act 1983. The general rule in the Act is that employers cannot deduct any amount from their employee’s wages without the employee’s written consent. This includes any deduction to recover money that the employee may owe to the employer. This written consent may be withdrawn at any time by the employee, and even if the employer has written consent, the deduction must not be unreasonable.

It is common for employment agreements to contain a general clause which allows the employer to deduct wages for various purposes (e.g. travel costs or social club membership fees). However, even if such a clause exists in the employment agreement, an employer must still consult with an employee before making a deduction and the employer is bound not to make unreasonable deductions.

These rules stem from earlier industrial years where an employee could find themselves with no wages if an employer claimed that the employee had caused some damage or was otherwise liable to the employer. The, often destitute, employee could find themselves in no position to challenge the claim of the employer which led to many unjust results. As a result of this history, the rules now tend to be enforced strictly in favour of employees.

In general, if an employer wishes to recover a debt from an employee, he or she must first pay the employee all the wages that the employee is entitled to. The employer can then make a claim to recover the money owed using processes such as the Disputes Tribunal.

Overpaid wages

There is one important exception to the rule. An employer may recover overpaid wages by deducting from subsequent wages; however, this right is limited. Certain criteria must be met:

• the overpayment must be for a suspension, absence without authority, strike or lockout;
• the overpayment must not have been reasonably practicable to avoid; and
• the employer must give the employee notice of the intention to deduct within a strict time frame.

Consent to the deduction for overpaid wages may otherwise be given in the employment agreement. However, the employer will be subject to the requirements to consult with the employee and to make sure the deductions are reasonable. Otherwise, the employer must make a claim for repayment of the wages with the Employment Relations Authority.

Many special rules apply to deductions from employee wages and the individual circumstances matter. If you are planning on making deductions from your employees’ wages you should speak to an employment law specialist first.