Deducting Overpayments – Balancing the Ledger or Aggressive Self-Help?

Mistakes happen. You try to ensure every payment is precisely correct, but sometimes an employee gets paid too much because of an accounting error or an incorrect assumption. It could be an under-deduction for employee contributions or taxes, or an overpayment of wages or vacation pay. What can an employer do to rectify the situation and balance the ledger?

While it may be tempting to offset future amounts owed to an employee, in many Canadian jurisdictions an employer is not permitted to deduct wages without the consent of the employee or a court order.[1] In British Columbia, unilateral deductions are prohibited under section 21 of the BC Employment Standards Act (the “ESA”), which says an employer “must not, directly or indirectly, withhold, deduct or require payment of all or part of an employee’s wages for any purpose”. “Wages” is broadly defined to include any payments made to an employee including salary, benefits, vacation pay, commissions or cash incentives, but does not include tips, discretionary bonuses, allowances or expenses.

Section 21 of the ESA is primarily designed to prevent employers from ‘offloading’ businesses costs onto employees.[2] Judicial interpretation of the provision has resulted in a prohibition on unilaterally deducting amounts owed by employees, no matter how clear the entitlement is.

British Columbia

BC Courts have characterized unilateral deductions of wages as a form of “aggressive self-help” that abuses an employer’s position of power.[3]

Section 21 of the ESA was interpreted by the BC Court of Appeal in Health Employers Assn. of British Columbia v. B.C.N.U.[4] The Health Employers Association had advised the B.C. Nurses’ Union that it could make unilateral deductions from employees’ wages to recover overpayments made through inadvertence or error. The Nurses filed a grievance, which ended up at the BC Court of Appeal.

The Court of Appeal held that an employer cannot withhold wages unilaterally without express authorization under an employment contract, collective agreement, or the employee’s consent. An employer may have a right to claim repayment, but must do so by making a claim in an appropriate court, if the employee will not consent.

The Court explained that the phrase “for any purpose” in the ESA “includes the purpose of reimbursing the employer for the overpayment, regardless of the reason for the overpayment”. No matter how blatant the overpayment, the employer was required to follow the grievance procedure before deducting wages.

Ontario

Ontario also prohibits employers from engaging in self-help. Section 13.1 of the Ontario Employment Standards Act is similar to the BC ESA and has been interpreted as preventing employers from unilaterally deducting wages.

An illustrative case is Altman v. Steve’s Music Store Inc.[5] Ms. Altman was a long-term manager of Steve’s Music Store. She developed lung cancer and underwent treatment. The store initially allowed her to continue working with reduced hours, but subsequently she was unable to meet those minimum hours. Steve’s claimed that Ms. Altman arrived late, left early, and was absent more than was appropriate. Eventually she was terminated and Steve’s made deductions from her final wages and vacation. Steve’s took the position that the deductions were direct compensation for hours paid but not worked.

The Court found that the employer’s ESA violations amounted to an independent actionable wrong above and beyond the failure to provide reasonable notice of termination. Thus, the Court ordered additional damages of $20,000.

The Court noted that even if the employer had a right to be repaid, that entitlement must be established by court order before making unilateral deductions. [6]

Unjust enrichment

In a unionized context, the recourse is to claim repayment through a grievance. If an employment contract has an arbitration clause, the employer may be able to settle the matter through arbitration. For other employment relationships, a court action is the only recourse; the Employment Standards Tribunal has no jurisdiction to award an employer’s claim. The Court action will likely be on the basis that the employee was “unjustly enriched”.

In addition to the Court’s power to enforce legislation, it has an equitable power to remedy unfair situations. Proving an unjust enrichment claim has three requirements:

1) detriment to the employer;

2) benefit to the employee; and

3) no legal reason for the benefit and detriment.[7]

The burden of proof is on the employer, but if there is a payment the employee is not entitled to, there should be little to contest. The vast majority of these cases settle early, often before litigation begins.

Practical Considerations

Employment standards legislation runs parallel to employment common law. The Court has firmly established the principle that rights created by the ESA are not enforceable in provincial courts.[8] Thus, in BC, an employee would typically be required to bring a complaint about a unilateral deduction to the Employment Standards Branch. This imposes a six month limitation period from the time of the deduction, rather than the time of the overpayment.

The Court has left open an exception to the prohibition against self-help: deductions can be made with the employee’s consent. If you can get the employee to agree, take care to ensure the consent is valid and enforceable. Reasons that consent could be invalidated are:

  • incorrect underlying assumptions;
  • the employer is not in fact entitled to the deduction;
  • the consent is made under duress; or
  • the consent is not clearly made.

The Court does not give guidance on what an employee’s consent should look like, except that it must in writing. The Ontario ESA requires that the exact amount, or a formula for calculating it, be expressly set out. Prepare a written statement, describing the overpayment and proposed repayment plan in specific detail. Your written statement must be free of implied threats. You should provide an opportunity to consult a financial or legal advisor before signing.

You can’t count on employee’s consent, and the amounts may not be worth a court battle, so double check employees’ slips, or the slip may be on you.

 

Kieran Moore is an employment lawyer who advises and represents employers and employees in Richmond and Vancouver British Columbia. Thanks to articling student Louise Lam for her valuable contribution.

[1] Each province is differently regulated in accordance with local labour or employment standards legislation. Federally regulated unionized workers are also treated differently, with some permitted deductions.

[2] Kirby v. Amalgamated Income Ltd. Partnership, 2009 BCSC 1044 at 364-367.

[3] Health Labour Relations Association of British Columbia (Prince George Regional Hospital) v. Prins, (1982), 140 D.L.R. (3d) 744 (B.C.S.C.) at 17.

[4] Health Employers Assn. of British Columbia v. B.C.N.U., 2005 BCCA 343.

[5] Altman v. Steve’s Music Store Inc., 2011 ONSC 1480.

[6] Grapple Markeing Inc. v. Harrison, [2010] O.L.R.B. Rep. 272, at para 10.

[7] Garland v. Consumers’ Gas Co., 2004 SCC 25.

[8] Macaraeg v. E Care Contact Centers Ltd., 2008 BCCA 182, leave refused, 2008 CanLII 53790 (SCC).

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