Last week I explained the difference between penalty provisions and liquidated damages clauses. A liquidated damages clause can usually be enforced by an employer against an employee who does not abide their contractual agreement to give a certain amount of notice.
Very often that question gets conflated with another question, which is whether the money owing can be deducted from an employee’s final pay, or holiday pay entitlements. They are in fact two different questions. The ability to ‘set off’ two sums (ie deduct a debt owing by the employee from wages owing by the employer), is convenient and useful, but not always allowed by law.
The starting point is the Wages Protection Act. It provides that an employee’s wages must be paid in “money”, without deduction (did you know you need written consent to pay an employee by direct credit to their bank account?!). The clear intent of the Wages Protection Act is that the payment of wages is of paramount importance, and not to be lightly messed with.
However, the Wages Protection Act allows an employee and employer to agree to certain deductions in writing. So, the parties to an employment relationship frequently agree that an employer will deduct certain amounts from an employee’s pay – for example union fees, or a contribution to a superannuation fund.
Many employment agreements contain various other agreed deductions – a common one is for “loss caused by the employee’s default”, or sometimes an express agreement to deduct where an employee’s notice of termination is deficient.
Consistent with the paramount importance of paying wages, the Act allows the parties to agree to deductions from wages, but requires two things: one, that the deduction is agreed to in writing, and two that the amount of the deduction is agreed to in advance. Even if there is written authority to make deductions, that authority can not be relied on until the employee is aware of the amount of the deduction and agrees to it.
Last week, I suggested a liquidated damages provision in the following terms:
The parties agree that if the employee leaves without giving the notice required in this agreement, the employer will be required to hire a temporary replacement at short notice. The parties acknowledge that such a consequence will incur agency fees of approximately $100 per day in addition to ordinary employment costs. Therefore, where the employee gives less notice than that required by this agreement, the employee will pay to the employer the sum of $100 for every working day by which the notice is short.
That provision agrees the amount of an employer’s loss. It could be supported by a provision such as:
The employee consents to the employer deducting from any final pay owing (including holiday pay), $100 per day for every working day by which notice given by the employee is less than the agreed notice period.
An employer could rely on this provision without any further agreement with the employee. However, if your employment agreement simply provides that the employer may make a deduction for any loss caused by the employee’s default, or any debt owing to the employer, this is more likely to require the employee’s agreement to the specific deduction proposed.
Without an effective agreed deduction clause, or the employee’s consent to the specific deduction at the time it is made, the employer must make an application to the Employment Relations Authority for an order that the relevant sum be paid. To make a deduction without such an order is to risk a penalty for breach of the Act.
Finally, two weeks later, we get to the end of an answer to what seems like a simple question. Feel free to give me a call if you are grappling with this, or any other “simple” employment issue!
