Considering Employee Wage Deductions

Considering Employee Wage Deductions
Wednesday November 2, 2016

Typically, it is sufficient for an employer to obtain the employee’s consent to deductions (including future deductions) by the insertion of a clause in the employee’s individual employment agreement (provided those deductions fall within the scope of what is agreed).  However, there are two legal points which an employer must consider. 

First, Jonas v Menefy Trucking Limited [2013] provides that prior consent does not waive the requirement for an employer to act in good faith pursuant to the Employment Relations Act 2000 (“ERA”).  In particular, the employer must remain active, constructive, responsive and communicative, which includes consulting with an employee prior to deductions being made.  An employer may therefore, despite its compliance with the WPA, be in breach of the ERA for failure to comply with its good faith obligations in relation to the deduction.

Second, there has also been a recent amendment to the WPA in which section 5A requires any deduction to be reasonable.  Again, this is regardless of consent already being given.  The scope of section 5A has not yet been tested by the Courts, and so it is difficult, at this time, to determine what would be considered reasonable. 

In this regard, deductions which arise from clauses contained in an employment agreement are typically those which come about because the employee has caused loss to the employer by way of damage to a third party.  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.  However, in circumstances where an employment agreement contains a deduction clause which in effect operates as a penalty, (for example, failure to work out a notice period), and for which the employer cannot point to having suffered any actual loss, such clauses may not survive the reasonableness test. 

When deductions are made to an employee’s wage, employers, and indeed the employee, should consider firstly, whether a deduction clause made pursuant to an employment agreement will comply with section 5A, and secondly whether, in making the deduction, good faith obligations are met.