Deducting cost of employee errors from commissions

Is it legal to deduct amounts from a sales representative’s commission when they make a costly error?

Question: Is it legal to deduct amounts from a sales representative’s commission when they order the wrong product? If so, do we need to take extra precautions in training employees to help protect against this type of error?

Answer: Provincial legislation, such as Ontario’s Employment Standards Act, 2000, Nova Scotia’s Labour Standards Code, and Alberta’s Employment Standards Code, typically limits the kinds of deductions employers may make from employees’ wages (sales commissions are considered to be wages). Deductions are generally limited to three types: statutory deductions such as income taxes, employment insurance premiums and Canada Pension Plan contributions; court orders or garnishments; an deductions for which an employee has provided written authorization that specifies or provides a method of calculating the amount to be deducted. Employers may usually also recover pay advances and payroll errors.

Depending on the particular provincial legislation, employers are usually restricted from making deductions for vehicle, equipment and tool repair or loss; breakage or other damages; faulty work or poor quality work; inventory shortages; customer theft; or business supplies. Ordering the wrong product may fall into the category of faulty work or be considered as one of the costs of doing business and therefore not deductible from the sales representative’s commission.

However, in some jurisdictions, such as Nova Scotia, employers may make deductions from employees’ pay for losses, shortages, or damage. These kinds of deductions must not take the employee’s gross pay below minimum wage.

If a deduction is for losses incurred while the employee is working, it must be supported by a written authorization dated and signed by the employee and specify the kind and amount of deductions. The authorization should be made in advance, ideally when the employee is hired. Authorizations made after the loss occurs can be open to challenge. In addition, the employer must be able to show the loss is the fault of the employee. It would be helpful to an employer to demonstrate the employee was trained in avoiding the type of error for which she has authorized can be deducted from her commission.

It must be emphasized, however, that you should review the employment standards legislation in your particular jurisdiction to ensure what deductions are permitted and in what manner. It is also advisable to seek legal advice if you are left in any doubt.

Brian Kenny is a partner with MacPherson Leslie and Tyerman LLP in Regina. He can be reached at (306) 347-8421 or [email protected]

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