To deduct or not to deduct; that is the question

20 September 2017

Angela MacKenzieI have had a few queries of late regarding wage deductions and given there has been amendments to the Wages Protection Act 1983 it is probably timely that an update on this area is provided and how these amendments affect deductions.

In accordance with the Wages Protection Act 1983, an employer may make deductions from wages payable to an employee for any lawful purpose with the employee’s written consent and it has long been thought that if there is a deductions clause in an employment agreement then that gave employers the ability to make deductions from employees’ wages. The amendments to the Act do confirm this, however provide that it is a requirement to consult with employees about specific deductions (even if there is a deductions clause in the employment agreement). The amendments also prohibit employers from making ‘unreasonable’ deductions from employees’ wages. Though the amendments do not define what is unreasonable, it is suggested that deductions from an employee’s wage as a consequence of customer theft or the actions of any other third party will be considered unreasonable.

Amendment #1: Consultation

The amendment requires employers to consult before making a deduction by adding that “an employer must not make a specific deduction in accordance with a general deductions clause in a worker’s employment agreement without first consulting the worker”.

This amendment is consistent with the good faith obligations of section 4 of the Employment Relations Act 2000. So, while the good faith requirements of the Employment Relations Act already required the employer to consult before making deductions, this Amendment adds an express statutory requirement to consult in accordance with the Wages Protection Act.

The requirement to consult arises where an employer seeks to rely on a general deductions clause to make a specific deduction. In order to comply with good faith obligations employers should in writing:

  • explain the nature of the proposed deduction and reasons for it;
  • give the employee a genuine opportunity to provide feedback;
  • consider any feedback.

Only after this process has been followed should the decision be made about making a particular deduction. Be aware that if an employee withdraws their consent in writing to the general deductions clause when the employer initiates consultation on a specific deduction, the employer will not be able to make a deduction.

Amendment #2: Reasonableness

The amendments specify that the deduction must not be unreasonable. These changes were inserted to prevent examples where unfair wage deductions had been made for losses to the employer over which the employee had no control.

However, the Act does not define what is considered as “Reasonable” so this remains to be interpreted by the Courts although it has been indicated that it is intended to cover situations beyond the control of the employee and employers will be unable to deduct money from employees’ pay for losses which the employee had no control over and no contribution to through negligence. For example, an employer will not be able to make deductions from an employee for theft by customers. If the employee is responsible for the loss, particularly due to some fault on his or her part, any deduction for that loss would likely be considered reasonable.

A common question around deductions is the ability to deduct for an unworked notice period. Ideally, the employer and employee would consider the importance of giving notice at the time the employment agreement is signed. If notice is particularly important for any reason, this would be the time to make an estimate of how much it might cost if the employee didn’t give the correct notice and the question is whether the employer will suffer any loss as a result of the breach. Perhaps a middle-ground would be that employers seeking to rely on such a clause when an employee resigns should consider whether any financial loss has actually been suffered, and deduct only that amount to be able to survive the reasonableness test.

How does this impact employers?

It remains to be seen how the Authority and the Courts will approach these amendments, particularly around the effect of an employee withdrawing consent during a consultation over the making of a specific deduction, and the reasonableness of a deduction. However, it is likely that a strict approach to interpretation and one that favours the rights of the employee under the Wages Protection Act is likely to be taken. So, where it is clear the employee does not consent to a specific deduction and has expressed that view in writing, an employer should be wary of going ahead with the deduction.

The best approach will be to try to reach agreement through discussion around the reason for the deduction and negotiation around the level of deduction from wages. Employers should also check their deductions clauses to include that deductions will be made following consultation with the employee. For existing employment agreements, these don’t necessarily need to be updated to reflect these Amendments, however Employers should just make sure deductions aren’t made without first consulting with the employee about it.

Points to consider:

  • If relying on a general consent to deductions clause in an employment agreement the employer needs to consult with an employee before making any deductions from his or her wages, including final pay and holiday pay.
  • If the period of notice is critically important to the employer, consider making a realistic assessment of likely damage at the time you enter into the employment agreement and record it in the agreement.
  • For a ‘middle ground’ approach – an employer should only make a deduction for unworked notice if it has actually suffered financial loss. For example, if the employer makes a deduction equivalent to the increased cost of hiring a temp, due to the employee’s failure to give notice. However, if there is no demonstrable financial loss, the employer runs the risk that the deduction will not be lawful.

If you have any questions about deductions or want to run a particular scenario by us please contact a member of our legal team.

 

Angela MacKenzie | Solicitor


 

Legal Team

 

Diana Hudson | Managing Solicitor | 03 456 1804 | 021 816 469 | diana@osea.org.nz

David Browne | Solicitor | 03 456 1812 | 021 225 6938 | david@osea.org.nz

Angela MacKenzie | Solicitor | 03 218 7962 | 021 756 809 | angela@osea.org.nz

Grant Walker | Advocate | 03 455 5165 | grant@osea.org.nz

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