UPDATE: The law on deducting from an employee’s pay changed from 1 April 2016. See this blog post for more details.

Normally, employers pay employees. That’s the way the money is supposed to flow.
Nevertheless, there can be times when the money needs to flow in reverse, because your employee owes you.

In that situation, the simplest approach would be to offset any amount they owe you from their next pay, wouldn’t it?

There’s just one small problem – it’s unlawful to do that.

At least, it’s unlawful unless you have your employee’s consent. The problem is that it’s human nature to object when someone wants to take money off you, which you believe you have earned fair and square.

As I suggest below, it’s best avoiding this situation altogether if you can.

WHY WOULD YOUR EMPLOYEE OWE YOU MONEY?

There are all sorts of reasons why your employee might end up owing you money:

• You loaned them money;
• You accidentally overpaid them;
• They damaged property owned by your business;
• They left their role and didn’t return some property;
• You let them take annual holidays in advance, and they leave their job with a negative holidays balance; or
• They don’t turn up to work for a day they have already been paid.

It is worth noting that some of these debts can be avoided completely if you, as the employer, choose not to allow them to occur.

For example, you could choose not to:

• loan your staff money;
• allow staff to take annual holidays in advance; or
• pay your employees in advance, but rather always pay in arrears.

That, of course, doesn’t help you if you’re left in the position where your employee owes you something. You can take action to prevent it happening in the future, but what about dealing with the funds you’re owed right now?

If you’re going to be paying that employee some pay in the near future, it is tempting to simply dock their pay by the amount they owe you. Problem solved.

Or is it?

DOES THE EMPLOYEE CONSENT?

You’ll need your employee’s consent before you reduce their wages as a means of getting back money that you’re owed.

If you don’t have your employee’s consent before you make a deduction, you can be liable to a penalty of up to $20,000 when acting on behalf of a company.

HOW TO GET THEIR CONSENT

The form of consent must be in writing, and can be obtained either before or after the debt becomes due.

Before the debt is due

The best option is to have a clause in your employment agreement that covers any future possible need to dock their pay. That way, when the employee signs up as your employee, they give their written consent at the outset – even though the deduction may occur years later.

Here is an example clause you could include in your employment agreements to cover this:

The Employer may deduct from the Employee’s pay any amount that the Employee owes the Employer, including the value of any overpayment, or unreturned or damaged property.

After the debt is due

Even if you don’t have consent in writing beforehand, you can ask for that written consent once the debt is due.

It can be much more difficult to get that concession from an employee for the reasons I have already mentioned – none of us like parting with our hard-earned cash.

Therefore, the employee may need to be gently reminded that if they do not consent, you will need to take other debt collection measures that can take up their time, and cost them further money in terms of court fees and legal costs.

In order to ensure the employee has no surprises, and to get their consent recorded in writing, you could send them an email with a draft payslip showing how the pay will be worked out, taking into account the deduction. Make sure you do this before the payment is finalised, and ask them to reply by email confirming their agreement. That can then be used as your written record of the employee’s consent.

EXCEPTION FOR ACCIDENTAL OVERPAYMENTS

There is an exception to the usual requirement for consent prior to a deduction where you make an accidental overpayment to your employee.

In those cases, you do not need the employee’s consent, provided that:

• the overpayment could not have been reasonably avoided;
• you give notice to your employee that you intend to recover it within a specified timeframe (see the Act to check what timeframe applies); and
• you actually recover that overpayment within two months after it was made.

CONCLUSION

It is not lawful for employers to reduce an employee’s pay just because they believe the employee owes them some money.

A well-considered deductions clause in the employee’s employment agreement from the outset will help to avoid the awkward situation where your employee owes you money and refuses to consent to the agreement, or worse, sues you for making an unlawful deduction.