Recovering costs from employees

Nick Stanley
By Nick Stanley

There are times, as an employer, when you may feel justified in reclaiming money from an employee. The person may have lost company property, broken or damaged your equipment, or they may have resigned and headed for the hills, never to be seen again.

But before you make any move to recover money from someone, you should take a step back. Deductions need to be handled carefully or you could end up in a legal wrangle.

The bottom line is that any deduction you make from an employee’s pay must be lawful and reasonable, but what does that mean in practice?

This blog post takes a look at recovering costs from employees, when you can and can’t make deductions from people’s wages or pay, and the process you should follow in all instances.

Wages Protection Act

The general rule, under the Wages Protection Act, is that deductions from wages are unlawful, unless the employee concerned has specifically agreed to the deduction, in writing.

There are a few exceptions:

  • The deduction is required by law - e.g. tax, KiwiSaver, student loan repayments, or child support payments. In these cases, the employer is paying something on the employee’s behalf, so the employee doesn’t have to agree and can’t ask you to stop.
  • A court directs that a deduction be made, e.g. court fines.
  • Deductions the employee has agreed to for their benefit, e.g. medical insurance, the company social club, or accommodation.

Adding a deductions clause to employment agreements

While you and your employee can agree to include a general deductions clause in their employment agreement, it’s not something we recommend. Even with a general deductions clause, you still have no right to make any deduction without a separate written agreement.

A specific deductions clause, however, is something you can rely on. A common example is a company uniform clause, which outlines that loss or damage by the employee will result in deductions for the cost of a new uniform. 

It’s important to recognise that employees can withdraw their written consent to any deduction, or change the details, by giving notice in writing at any time. You must act on that notice within 2 weeks or otherwise as soon as possible.

Make sure your employees are aware of this.

When an employee leaves without working out notice

If an employee leaves your company and doesn’t give the notice set out in their employment agreement, you still can’t legally make deductions or withhold wages or holiday pay unless the employee has given their written consent.

Although frustrating and difficult to manage, it’s illegal to make an arbitrary deduction from an employee’s pay for an early departure from the business. Making a deduction from wages for time unworked is called a “penalty clause”, and the Employment Relations Authority (ERA) has ruled several times that they are a breach of the law.

You can, however, propose deductions from an employee’s pay (or final pay), if their early departure from the business resulted in extra costs, over and above what you would otherwise have incurred if the employee worked their full notice period.

Here’s an example: a busy bakery has a qualified baker working 45 hours a week, earning $30/hour, and the baker resigns and leaves without working out their full 4 weeks’ notice.

To keep up with demand and ensure the team isn’t short-staffed, the baker hires another qualified baker through a temp agency, paying $40/hour for the temp while they look for a permanent replacement.

This means the business ends up spending $1,800 more on wages for the temp baker than it would have if the departing baker had stayed and worked their notice period.

The bakery can propose deducting $1,800 from the baker’s final pay, but the employee has to agree to this deduction.

If the employee doesn’t agree to the proposed deduction, then the business has no legal option to recover costs, and must lodge an application with the ERA to try and recover them.

A word about final pay

If an employee does not receive all of the components of their final pay which are owing, they may have a claim for unpaid wages or holiday pay or other breach of their employment agreement.

Deductions for losses, damages, or shortfalls

Deductions for loss or damage caused by employees can be problematic, because what one person considers reasonable another might not.

As mentioned, if you have clauses that specifically cover how loss or damage to company property will be handled, e.g. a vehicle clause, you can rely on these. But again, it's important to note that employees can revoke their consent at any time.

It is also important to be fair as well as reasonable. If the deduction amount is significant, we would recommend discussing a deduction schedule with the employee, so the money is recovered over several pay periods to ensure the person can still meet their living costs.

You cannot deduct money from an employee's pay to cover a shortfall, e.g. if the day's takings in the till are short. These costs need to be met by the employer.

Overpayment

In the case there is a payroll error and the business has overpaid wages, it may make sense to deduct the overpayment from the employee’s next pay. However, this is not lawful.

While it was a genuine mistake, you cannot make this deduction without the employee’s consent.

If you do find you’ve overpaid an employee, we would recommend requesting that employee pay back the money, or propose deducting it from their next pay (or over a series of pay periods).

If an employee refuses, you may have an option to explore disciplinary procedures for failing to engage in good faith. You should get expert advice before you take any action.

In all cases: Consult, consult, consult.

As in any employment matter, be sure you consult with the employee before taking any money from their pay, even if there is a clause (or clauses) covering deductions in their employment agreement.

You should inform them in writing of the prospective deduction you want to make, the reason for it - e.g. for lost tools or damages to company property - how much and how it was calculated, and when it will be taken from the employee’s pay. You must then seek their feedback and genuinely consider their response in making your final decision.

As we’ve said, the employee has to agree to the deduction in writing.

A few don’ts

Here are a couple of things that you shouldn’t ever do, even if it seems tempting:

  1. Don’t use pay deduction as a punishment for poor performance or mistakes. It must be for a real or genuinely estimated cost or loss. There are much better ways to handle poor performance or behaviour.
  2. Don’t deduct (charge) money to allow a person to get a job or to retain one. Aside from being morally bankrupt, it’s totally illegal!