Can an employer make deductions from an employee’s final pay if the employee fails to give the required notice?

Employment

Most employment agreements require an employee to give a certain amount of notice if they resign from the role. What happens if they fail to do so? The employer can't always rely on a clause in the original employment agreement to deduct money from the employee's pay.

Most employment agreements require an employee to give a certain amount of notice if they resign from the role. What happens if they fail to do so? For example, an employee may be required to give four weeks notice when they resign, but he/she walks off the job instead, giving no notice and leaving the employer having to scramble to find a replacement.

In this scenario there are two things to consider:

  • What, if anything, is an employer entitled to recover from the employee for the inconvenience arising from a breach of contract; and,

  • If an employer is entitled to recover money from the employee, can this be taken by way of deduction from final pay and holiday pay?

The general rule is that an employer may not make unauthorised deductions from an employee’s wages. The Wages Protection Act 1983 allows deductions to be made only if the employee requests them or consents to them, and has not given written notice of withdrawal of consent.

While many employment agreements have a standard clause which purports to give this consent, developing case law suggests that general consent to deduction from wages will not necessarily be enough to allow deduction for a failure to give the required notice upon leaving a role.

Where an employer wants to deduct wages for lack of notice, the clause in the employment agreement must be clear and specific as to what the deduction is for and where the deduction will be made from.

In Smith v EZ Step Ltd t/a Pet Stop [2014] NZERA Auckland 442, the Employment Relations Authority held that a clause that provided “four weeks pay shall be paid or forfeited by the party not giving the requisite notice” was not written consent to a deduction in terms of the Wages Protection Act because it did not specifically make provision for deduction from the employee’s wages or final pay.

In addition, the deductions clause must be a genuine pre-estimate of the loss that would be caused by the breach. Whether a clause meets this requirement will be assessed at the time the parties entered into the employment agreement, not at the time of the alleged breach.

In Paengkam v GL Freeman Holdings Ltd [2013] NZERA Christchurch 235, the Employment Relations Authority held that a clause purporting to allow deduction from the employee’s wages and/or holiday pay and final pay where the six weeks required notice was not given, was a penalty provision rather than a genuine pre-estimate of loss, and was not required or reasonable.

We suggest any employer should seek legal advice when wishing to rely on a clause that purports to allow deductions from final pay where an employee does not give the required amount of notice upon leaving a role.

Our specialist Employment team are experts in this area and can provide advice on this as well as any other employment related issues. Please contact them by calling +64 3 379 9940 and asking to speak to a member of our Employment Team or you can contact the Employment Team leader Ashley-Jayne Lodge directly on +64 3 339 5627 or ashley-jayne.lodge@cavell.co.nz.

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