Deductions from wages
Employer has no more rights than any other third party when it comes to recovering losses from a worker
Feb 25, 2014
By Stuart Rudner
As gasoline prices soared a few years ago, the issue of when employers can make deductions from an employee's paycheque took on added significance.
Specifically, there were many reported instances of gas station owners purporting to shift the losses from "gas and dash" incidents to their employees. In some cases, the amounts the employer sought to deduct actually exceeded the amount of pay owing. Many employers were surprised to learn they do not have the right to take such action. Unfortunately, many employees were unaware of their rights, and did not seek legal advice in order to protect them. As a result, they had their wages cut and did nothing to fight back.
The very essence of the employment contract is that an employee will provide labour and the employer will pay them for it. There is nothing in that contract, by default, that would allow an employer to reduce the amount of wages it pays in order to penalize the employee or recover losses that it has incurred, even if those losses are purportedly the result of the employee's acts or omissions.
Employment standards legislation in Canada is very specific in protecting wages and providing that, in most cases, employers will not have the right to apply deductions, other than those required by law such as withholding of taxes and payment of employment insurance (EI) premiums.
It is, of course, always open to an employer to seek compensation from an employee if the employer legitimately suffered losses as a result of the employee's acts or omissions. However, the employer does not have any more rights than a typical party in that regard. If the average person is wronged by someone else and suffers a corresponding loss, they may be entitled to launch legal action in order to recover their losses. The same would apply for an employer. However, in most cases, it cannot unilaterally impose a penalty by taking money off the employee's paycheque.
Aside from the gas-and-dash scenario, one issue I am often consulted about relates to commissioned salespersons whose draws exceed commissions earned. The typical scenario in which I am consulted involves an employee, paid partly or entirely by commission, who receives regular draws against those commission payments. When the employment relationship ends, for whatever reason, the employer discovers the salesperson has received draws significantly greater than their entitlement to commissions, and seeks to recover those payments. However, as I have advised both employees and employers in such situations, it is not so simple.
The employer cannot simply declare they are now going to "reconcile" the employee's pay and either reduce their paycheque or, in some cases, require the employee repay them for the overpayments. This issue is a matter of contract — in order to understand the parties’ rights and obligations, it will have to look at the terms of the contract, and specifically those relating to the payment of draws and commissions.
When I work with employers in order to prepare employment contracts for commissioned salespersons, we will typically include a clause that explicitly refers to any draw payments as repayable, and clearly states the employer will have the right to recover excess draws over commissions earned, both on a regular basis and at the termination of the employment relationship.
However, I am often consulted by employees that have contracts which do not contain such provisions. The wording of the contracts suggest the draws are, essentially, a "floor" for their compensation, and that commissions might increase the amount of their take-home pay but that they will not have to repay any of the draws if their earned commissions are less.
For employers, it is advisable to include clear terms in the contract of employment that specify when you will be entitled to deduct amounts from the employee's paycheque. Particularly in the case of commissioned salespersons, it is critical that the commission structure, formula and process be clearly defined. Unfortunately, I have seen many contracts which contain very brief wording along the lines of "commissions on sales of 15 per cent — $2,000 monthly draw". This does not provide any insight into which sales are to be included, what the employee's role in the sale must be in order to be entitled to commissioned payment, or whether the draws are to be repayable or simply set as a minimum monthly payment.
For employees, it is crucial that you make sure you understand your legal rights and obligations when it comes to commissions and other wages, both at the time of contract and if your employer purports to deduct amounts from your paycheque. While you may have a verbal discussion with the employer in which it provides various promises or guarantees, if it is not in the written contract, you should assume it is not part of your agreement. For example, if the employer says, during the hiring process, you will never have to repay your draws, this should be explicitly stated in the contract.
Like most areas of law, many disputes can be avoided when there is a clear contract in place so that both parties understand their rights and obligations. While some hiring processes can be quite informal and friendly, and the parties often are in a "honeymoon stage," they should not forget that they are creating a legal relationship. The time and money spent up front to clearly delineate the terms of that relationship will be far less than the potential costs when you have to retain counsel to resolve or litigate a dispute.
Stuart Rudner is a founding partner of Rudner MacDonald LLP in Toronto. Follow him on Twitter @CanadianHRLaw
. He can be reached at email@example.com