In contract law, offset is the right to balance one debt against another. For example, if Frank owes Harry $10, and Harry in turn owes Frank $3, Frank can fully repay his debt to Harry by giving him $7. Employers rely on this right of offset when they wish to withhold monies owing from subsequent payments to employees.
There are many circumstances under which employees might end up owing money to employers. An employer may have provided a car allowance, on the understanding employees would reimburse any excess over that owing for the actual business kilometres travelled. An employer may have covered an employee’s portion of group benefit costs during a maternity or parental leave, before the employee’s return to work. An employer may allow employees to take paid vacations before the right to that time has been earned. An employer may not have taken CPP or EI source deductions from an employee. Payroll may have inadvertently overpaid an employee, not knowing the person had left the company.
Unlike our friend Frank above, as a general rule employers may not unilaterally exercise the right of offset. With few exceptions, employee written authorization is required for employers to use source deduction as a technique to recover money from employees.
Some of these exceptions deal with situations where employers provide employees with goods or services, such as food, lodging, footwear or uniforms, etc. Other exceptions deal with cash shortages from customer payments. This article doesn’t deal with these. Here we are talking about the recovery of employee debts related to cash payments of the kind described in this article’s 2nd paragraph.
The remainder of these exceptions are described below.
In the federal jurisdiction, under the Canada Labour Code, employers have the right, without employee consent, to recover overpayments at source, where both the overpayment and the subsequent pay are ‘wages’. For example employee housing loans are not wages. If an employer tried to deduct the remaining amount of a housing loan from an employee’s final pay, this is not permitted in the federal jurisdiction, without employee consent, on two grounds: one, the loan itself is not wages, and two, the loan was not an overpayment.
There are also two limitations on the right of employers to recover CPP or EI deductions that should have previously been taken. One, no deduction may occur later than 12 months after the initial failure. Two, multiple failures to deduct may not be grouped together and recovered at the same time. Only one failure to deduct CPP/EI may be recovered from a single subsequent payment, although CPP and EI recoveries can both be made from a single payment.
In Manitoba, there are two specific types of debts that employers may recover at source: payroll errors and cash advances. If this recovery is with employee consent, the full amount may be deducted at source. Without employee consent, the amount that employers may deduct at source is governed by the provisions for garnishment in Manitoba. Under those provisions, employers can deduct up to 30% of gross pay, net of statutory source deductions. However, at a minimum, net pay after this calculation must be at least $250 per month for single employees and $350 per month for employees with dependents.
Similarly, in Prince Edward Island, employers do not require employee permission to recover pay advances through source deduction. Note, in both Manitoba and PEI, the term advance is not defined, but presumably would include the payment of vacation pay, before the related time has been earned. However, a payroll error is not an advance, so in PEI employers do not have the right to recover payroll errors, by source deduction, without employee authorization in writing.
In Newfoundland and Labrador, employers can recover the overpayment of wages or travel advances from employees without employee written permission. Here the term overpayment of wages includes payroll errors, such as paying at the wrong hourly rate or earnings employees were not entitled to.
In all other jurisdictions, the general rule stands. In some cases, such as in Ontario, this is spelt out explicitly. Ontario employers may not make a deduction from employee wages without specific written consent. In other jurisdictions, such as New Brunswick and Nova Scotia, there is no such explicit ban. However, in those jurisdictions, employers must pay all wages owing to employees, each pay day. Making a deduction without employee consent means all wages owing have not been paid and so would be an offence under the employment standards in those jurisdictions.
What should employers do to ensure employees don’t end up owing money the employer can’t later collect?
The best practice is to ensure employees provide written authorization for the employer to recover, by source deduction, any of the debts described in this article. For example, if the employer policy is to let employees take paid vacation time before the right to this time has been earned, the terms and conditions of employment should include authorization for the employer to deduct at source any overpayment that might result. This is the best practice, even where such recoveries are allowed by the applicable employment standards.
Alan McEwen is a Vancouver Island-based HRIS/Payroll consultant and freelance writer with over 20 years’ experience in all aspects of the industry. He can be reached at email@example.com, (250) 228-5280 or visit www.alanrmcewen.com for more information. This article was first posted to Canadian HR Reporter on November 19, 2013.