If an employee owes their employer money, can these just be deducted from wages?
Exclusive to Canadian HR Reporter from Rudner Law.
The employment relationship is a simple concept. An individual provides their labour to an employer, who compensates them. Usually, the flow of money is one way: from employer to employee.
But what happens when an employee owes money to their employer; can they simply withhold or deduct from the employee's wages?
As is often the case, the answer is that ‘it depends’. Employers should proceed with caution before deducting anything from an employee’s wages.
The issue is addressed in employment law statutes. For example, the Ontario’s Employment Standards Act, 2000 (ESA), includes both the process for making deductions and penalties for breaching this process. This issue is taken seriously by oversight bodies like the Ministry of Labour, which can and will levy stiff fines against an employer for improperly withholding funds from an employee's pay.
When can you make a deduction?
Section 13(1) of the ESA prevents an employer from deducting, withholding, or causing an employee to return wages, unless in line with the permissible circumstances where an employer may make deductions from an employee's wages.
A permissible deduction falls into one of two categories:
- Under a statute or court order; or
- Where the employee has explicitly authorized the deduction, in writing.
The first category is simple. Either a statute says that the deduction may be made (such as taxes), or a Court ordered the deduction (such as garnishment for child support).
The second category is complex. An employer may make a deduction from an employee's pay with the employee's written authorization but the authorization must explicitly refer to the amount to be withheld or a formula by which it can be calculated. Also, when the employer makes the deduction, it cannot result in the employee earning less than minimum wage for the time period in question.
Typical reasons for an employer to seek reimbursement, such as addressing an inadvertent overpayment or an outstanding advance are permitted, as long as these rules are followed. An inadvertent overpayment may be deducted from an employee's wages, vacation pay, or termination pay, without written authorization from the employee. As an inadvertent overpayment was not earned by the employee, it is not deemed to be wages, and the employer does not need authorization to take it back. A deliberate overpayment by the employer is deemed to be wages; in this case, the employer must follow the procedure in Section 13 to obtain the return of these funds.
An employer can also include a term in the employment contract requiring an employee to give a minimum amount of notice of resignation , outlining a monetary penalty for failing to do so, and permitting the employer to withhold the amount of the penalty from the employee's final pay.
When can you not make a deduction?
Even though an employer is permitted to deduct funds from an employee's pay by following the process set out in the ESA, this permission is not unlimited, and the employer is blocked from making deductions for certain items.
The ESA forbids an employer from deducting money for the employee's faulty work or where the employer has missing property or money and someone other than the employee had access to the property or money.
This means that the employer cannot withhold funds from the employee when the employee makes a mistake that costs the employer money (like a broken tool or a short till). This does not mean that the employer may not discipline the employee for the error or sue the employee for the loss, just that the employer cannot recoup its losses out of the employee's wages. This applies even if the employee agrees in writing for the employer to make the deduction.
An employer also cannot enforce a blanket authorization that permits it to make a deduction from an employee's wages for any reason; an agreement that reads “the employer may deduct any outstanding advances at any time” is not acceptable; it must refer to the specific amount to be deducted.
Takeaways for HR
Deducting an employee’s wages is not the only way to recover money from an employee; just the easiest. There is nothing stopping an employer from including a requirement for an employee to repay them through a policy or a term of the employment agreement, so long as that term does not contravene employment standards. The employer can also pursue other legal remedies where applicable.
Like many things in employment law, being able to deduct funds from an employee's pay comes down to knowing the rules, working within these, and getting things in writing.
Failing to do that can create liability for the employer, as well as the possibility of a public decision outlining the employer’s wrongdoing, should the matter proceed to a hearing. Getting repayment directly from the source seems like a good idea, and can be, as long as it is done correctly.
Geoffrey Lowe is an associate at Rudner Law in Toronto. He can be reached at (416) 864-8500 or [email protected].
