Financial Advice – Can I Make Employee Pay Deductions?

Employee Pay Deductions

Many employers encounter situations in which they feel they have the right to “dock” an employee’s pay. For instance, employee pay deductions come to mind when an employee is:

• Routinely late or regularly leaves early;
• Causing damage to the employer’s property;
• Appearing to be “lazy”; or
• In an extreme case, commits theft.

However, contrary to what many people assume, employers in Ontario have a very limited ability to make deductions to an employee’s pay. I will explain.

1. General Prohibition

The Ontario Employment Standards Act, 2000 (the “ESA” or the “Act”) contains a general prohibition against employers making deductions to an employee’s pay. The Act sets out two narrow exemptions to this general rule:

• Deductions authorized by legislation or a court order; and
• Deductions authorized by an employee in writing.

2. Deductions Authorized by Law or Court Order

This exemption is self-explanatory: it is permissible for the employer to deduct employee pay in accordance with the terms of the applicable court order or legislation. Specifically, this means:

• If any court or tribunal (such as the Ontario Superior Court of Justice or the Human Rights Tribunal of Ontario) orders that an employer may deduct certain amounts from an employee’s wages; or
• If any provincial or federal act entitles an employer to withhold wages (such as the ESA).

3. An Employee’s Written Authorization

An employer may also make deductions to an employee’s pay if the employee provides written authorization and:

• The authorization refers to a specific amount to be deducted; or
• The authorization contains a specific formula for determining the amount to be deducted.

In other words, the ESA does not give employers carte blanche to make discretionary deductions from an employee’s pay. This includes such things as for “faulty work” or “poor work performance”. These sorts of deductions are viewed as punitive and open to abuse and are therefore prohibited by the Act. To be enforceable, authorization in writing must not only explain in clear terms how the deduction(s) will be calculated, but the need for the deduction must also be connected to a legitimate business purpose. For example, recovering employee training costs (which employers view as an investment of sorts).

Handle Employee Pay Deductions with Care

While it is often a tempting option for employers, making unauthorized deductions from an employee’s pay can result in significant financial penalties. Particularly, this includes fines issued by the Ministry of Labour and employee claims for compensation.