Can you deduct from an employee’s wage? It’s not as easy as you may think.

Home / Insights & Opinion / Employment / Can you deduct from an employee’s wage? It’s not as easy as you may think.

It is a fundamental rule that employers must pay the entire amount of an employee’s wage without any deduction. But what about PAYE, an overpayment made to the employee or if the employee owes you money? There are some exceptions to the rule and this article will help you navigate them and the Wages Protection Act 1983.

The Rule

The starting point is the Wages Protection Act 1983 (WPA) which prohibits any deductions from an employee’s wages.

This begs the question, what is an employee’s wage? Wages are defined to include any part of an employee’s salary, wage, time and piece wages, overtime, bonus or other special payments agreed to be paid to an employee for the performance of service or work. In short, wages include all of an employee’s earnings in respect of employment.

Exceptions to the Rule

The exceptions to the rule are as follows:

• The employer may deduct from an employee’s wage if it is required to do so by law, for example for income tax or child support payments.
• If a court directs a deduction to be made.
• An employer may deduct from an employee’s wage, for a lawful purpose, if requested or authorised by the employee in writing. Also note that an employee may vary or withdraw a consent given, or request made, by giving written notice.
• An employer may recover overpayments of wages directly from the employee’s wages, but only where the employee has been absent from work without the employer’s authority, been on strike, locked out or suspended. This can only occur after specified notice has been given to the worker and the employer must show that it was not reasonably practicable for the employer to avoid making the overpayment. There is no automatic right to deduct an overpayment that has just been a mistake.

Deductions clause in an employment agreement

Most employment agreements contain a deductions clause or at least mention when the employer can deduct from an employee’s wage. For example, a provision stating that if the employee does not give the required notice period then the employer can deduct the unworked portion from the employee’s final pay.

The employment agreement is in writing and if the employee signs it then the employer has written consent from the employee to deduct from his or her wages, right? Not quite!

Many employment cases have stated that explicit informed consent by the employee is required and have held that consent by default in a signed employment agreement is not adequate to allow an employer to deduct from an employee’s wage.

What is an employer to do?

We recommend that employers do the following:

• Have a deductions clause in your employment agreements and make it as specific as possible.
• If you wish to deduct from an employee’s wage, make sure it is for a lawful and reasonable purpose.
• Give the employee a consent form that repeats or refers to the employment agreement clause, specifies the amount you wish to deduct, when you propose to deduct it and the reason for the deduction.
• Get the employee’s written consent by requesting the employee sign the consent form.

Must pay wages in notes and coins

As a side note, an employee’s wages must be paid in money only, meaning any New Zealand coin or banknote, or combination of both. However, most employers nowadays pay by direct credit into an employee’s nominated bank account. To avoid breaching the WPA, you will need the employee’s written consent or written request for a direct credit.