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latest news in employment law

Deductions For An Overpayment

Published 01 Jan 2011

You may have noticed a subtle change to our EAL's standard agreement clause on overpayment. There is a good reason for this change as explained below.

The Wages Protection Act 1983 (WPA) does not prohibit an employer placing a clause in an employment agreement that allows for deductions from entitlements for a future overpayment made in error. Sections 5 and 6 of the WPA, respectively allow deductions by consent, and limit overpayments without consent to a narrow time slot immediately after a mistake is made. (Other requirements exist in making a non-consensual deduction).

The Wages Protection Act also provides that an employee can withdraw any consent in writing at any time and the employer should then stop the deductions within two weeks if practicable or ASAP.

Even if you have a contractual right to make a deduction for a future overpayment, the amount, how you go about making the deduction, and whether or not you have acted in good faith, as a fair and reasonable employer does, may come under the judicial spotlight.

A disadvantage claim can flow if an employee is unnecessarily humiliated or hurt by an employer's actions. A simple example would be a $500 deduction from a $600 net payment due to an employee, which could trigger default in a rent payment due, mortgages etc.

Whether a proposed deduction amount would be reasonable, and could be taken, may well be the focus of an avoidable grievance complaint. $3,000 may be a modest settlement.

So... it is recommended that the following practicable steps are taken.
  1. Always seek written consent first for the amount of an overpayment deduction.
  2. Agree to any reasonable arrangement for time payment, and seek authorisation to deduct any balance from final pay.
  3. If you can not get agreement then consider whether you have a legal right to deduct anyway under section 6 of the Wages Protection Act – this is limited, so call us to discuss fully.
  4. Remember an overpayment has to be repaid legally, so cashing in one week's annual holiday entitlement under the new laws, after April 1, 2011 is an option.
  5. If you can not reach agreement there are other options, including paying $70 (approximately) to Baycorp or a similar debt collection firm to recover what is owed. Mediation is another option.