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Can’t Claw Back Employee Earnings For Materials Ordered in Error

In its recent decision in Building Works Ltd. o/a Building Works Remediation & Restoration v. Nagy, 2024 ABESAB 20, the Alberta Employment Standards Appeal Body upheld a decision of an Employment Standards Officer finding that the Appellant employer was not entitled to deduct the cost of materials ordered in error from the Respondent employee’s final pay and rejected the Appellant’s further grounds of argument as to why it should be entitled to otherwise deduct / claw back the Respondent’s earnings.
This case is important because it demonstrates the uphill battle employers face in attempting to deduct and/or claw back an employee’s earnings. In particular, in certain situations, such deductions/claw backs are inadmissible even when the employee agrees to same.
Facts
The Respondent, Mr. Ryan Nagy (the Employee) worked for the Appellant, Building Works Ltd., o/a Building Works Remediation & Restoration (the Employer) from September 1, 2020, until his employment was terminated on June 20, 2023. At the time of his termination, the Employee was employed as a Project Manager.
The Employer is a building restoration company. In his position as Project Manager, the Employee was responsible for assessing potential client properties, determining what work needed to be done, and overseeing the remediation efforts.
Prior to his termination, the Employee had purchased certain building materials, at a cost of $4,981.69, in error. The Employer deducted this amount from the Employee’s total final pay (the Deduction).
Upon his termination, the Employee signed an agreement confirming that he had received his final pay (less the Deduction), and the Employer had “no further obligations or payments due” to him.
The Employee later filed an Employment Standards Complaint (the Complaint). An Employment Standards Officer upheld the Complaint, finding that the Deduction was not permitted under section 12 of the Employment Standards Code (the Code). The Employer appealed that finding.
Analysis / Conclusion
On appeal, the Employer argued that it was entitled to deduct the cost of the materials purchased in error, as the Employee had agreed to the Deduction. In the alternative, the Employer argued that it overpaid the Employee’s vacation pay in error, and that it ought to be able to deduct that overpayment from any money it owes the Employee. In the further alternative, the Employer argued that it is entitled to claw back a portion of the commissions and bonuses previously paid to the Employee in accordance with the terms of its Project Manager’s Bonus Program (the Bonus Program). The Employer argued that, if the Appeal Body finds that the Deduction was unauthorized, the vacation pay deduction and the bonus and commissions claw back should be offset against the repayment of the Deduction.
The Appeal was heard by Vice-Chair Scott, sitting alone as the Appeal Body. The Appeal Body found that the three issues to be addressed on the appeal were as follows:
- Was the Deduction permitted by the Code?
- Did the Employer overpay the Employee’s vacation pay? If so, is the Employer entitled to deduct the vacation pay from the amounts owing to the Employee?
- Is the Employer entitled to claw back the Employee’s commissions and bonus payments?
In dismissing the appeal, the Appeal Body made the following findings:
- The Deduction was not permitted by the Code;
- While the Employer provided the Employee with more vacation pay than required by the Code, the Employer is not permitted to deduct the payments in excess of the minimum Code requirements, as the overpayment was not a true payroll error; and
- The Employer is not entitled to claw back the Employee’s commissions and bonus payments.
Was the Deduction Permitted by the Code?
In determining whether the Deduction was permitted, the Appeal Body considered section 12 of the Code, which addresses employer deductions from employee’s earnings. In particular, the Appeal Body cited section 12(3), which addresses situations where an employer may not apply a deduction, even if the employee had agreed to same:
12(3) Despite an authorization in a collective agreement or a written authorization by an employee, an employer must not deduct from earnings a sum for
(a) faulty work, as defined in the regulations, of the employee or damage caused by the employee,
(b) cash shortages or loss of property if an individual other than the employee had access to the cash or property,
(c) cash shortages resulting from a failure to collect all or any part of the purchase price from a purchaser, or
(d) any other circumstance specified by the regulations.
In holding that the Employee’s error in ordering the materials constituted “faulty work” and thus could not be subject to a deduction (notwithstanding the Employee’s agreement to same), the Appeal Body held the following:
[14] The Employer asserts that the Deduction was permissible because, in accordance with section 12(2)(c) of the Code, the Employee authorized it. However, this does not end the matter. Section 12(3)(a) of the Code clearly prohibits a deduction – even where authorized in writing by the employee – arising out of faulty work or damage caused by the employee. Section 11.1 of the Employment Standard Regulation, Alberta Regulation 14/1997 (the “Regulation”) defines “faulty work” as “any act or omission of an employee that results in a loss to the employee’s employer.” Here, the Employer and the Employee agree that the Employee ordered the wrong materials causing the $4,981.69 loss to the Employer. While the Employer is understandably unhappy about this error, the Code clearly prohibits a deduction from the Employee’s earnings in this circumstance, notwithstanding the Employee’s agreement to the Deduction.
Was the Employer Entitled to Deduct Vacation Pay?
The Employer’s Office Manager testified that in January of 2023, she noticed that several Project Managers (including the Employee) appeared to be accruing excessive vacation pay. Upon investigation, the Employer learned that these employees had been receiving 9.6% of their wages (including commission and bonuses) as vacation pay, as well as paid time off in accordance with the Code.
The Office Manager later spoke with Employment Standards and learned that the Employer was not required to pay these Employees both 9.6% vacation pay and paid time off for vacation.
Ultimately, the Employer advised these employees that they would no longer receive 9.6% vacation pay, and those employees who had banked vacation pay would be allowed to use it up or have it paid out.
The Employer argued that it was permitted to deduct the Employee’s banked vacation pay pursuant to section 12(2) of the Code, as the overpayment was a payroll calculation error:
(2) An employer may deduct from the earnings of an employee a sum of money that is
(a) permitted or required to be deducted by an Act or regulation, including a regulation under this Act, or a judgment or order of a court,
(a.1) a recovery of an overpayment of earnings paid to the employee resulting from a payroll calculation error, [emphasis added]
(a.2) a recovery of vacation pay paid to the employee in advance of the employee being entitled to it,
(b) authorized to be deducted by a collective agreement that is binding on the employee, or
(c) personally authorized in writing by the employee to be deducted.
The Appeal Body rejected this argument, holding that the overpayment was not a “payroll calculation error” as it was not an error of a mathematical or clerical nature – rather, the Employer misunderstood its obligations under the Code:
[20] However, neither Code section is applicable in this case. Although the Employer appears to have unintentionally paid the Employee vacation pay in accordance with sections 46 and 48 of the Regulation in addition to his entitlements under section 34 of the Code, this error is not the kind of “payroll calculation error” contemplated by section 12(2)(a.1) of the Code. The word “calculation” operates as a qualifier on the word “payroll” indicating that the legislature intended the section to apply to arithmetical or clerical errors regarding the “calculation” of the employee’s entitlement…
[22] There was no evidence before the Appeal Body in this case that the 9.6% in additional vacation pay provided to the Employee arose due to a “calculation” error. Rather, the Employer simply appears to have misunderstood its obligations under the Regulations and the Code. Notably, this practice carried on for some time. While this resulted in the Employee receiving more than his minimum entitlement under the Code, such a mistake is not a payroll calculation error. It is the result of the Employer making an uninformed but deliberate decision. The fact that the Employee received more than his minimum entitlements is not, by itself, sufficient to turn the Employer’s mistaken approach to vacation pay into a “payroll error” or to disentitle the Employee to the vacation pay. Section 3(1)(b)(i) of the Code expressly saves the greater benefit where an employer provides the employee with a benefit that exceeds the minimum required.
The Appeal Body also held that, even if the payment were a true payroll calculation error, section 12(2.1) of the Code prohibits a deduction when more than six months has passed from the date the error occurred. In this case, the Employer sought the deduction long after this 6-month window had closed.
Was the Employer Entitled to Claw Back the Employee’s Commissions and Bonus Payments?
At all material times, the Employer had in place a Bonus Program for Project Managers whereby the managers were paid a certain percentage commission on projects they oversaw. The percentage paid to the Project Managers depended on whether the project achieved its target profit.
In January of 2023, the Employer introduced a revised policy (the New Policy) which permitted it to claw back commissions on future bonus payments, if the projects the Manager oversaw did not achieve its target profit. The Employee acknowledged the enforceability of the New Policy generally, but argued that it did not apply to the case at hand.
The Employer claimed that certain projects oversaw by the Employee were not profitable, entitling it to apply deductions to the Employee’s final earnings.
The Appeal Body held that it was not necessary to consider whether these projects were profitable or not, as the Employer’s arguments could be rejected on three grounds:
- Sections 12(3)(a) and (c) of the Code prohibit deductions from an employee’s earnings in respect of “faulty work, as defined in the regulations, of the employee or damage caused by the employee” and “cash shortages resulting from a failure to collect or any part of the purchase price from a purchaser”. This applies even in situations where the employee consents to the deduction;
- The Bonus Program and New Policy contemplate that the reduction of past bonuses and commissions will be effected via a reduction of bonuses and commissions payable in the As such, any reconciliation of the payments on the allegedly unprofitable projects had to have been applied by way of reducing the Employee’s future commissions and bonuses, not those already paid to him; and
- The Employer had effectively asked the Appeal Body to apply some kind of set-off in relation to a claim it had under the New Policy, or on some equitable basis. However, s.107(2) of the Code prohibits the Appeal Body from taking into account claims, counter-claims, or rights of set-off.
My Take
The outcome in this case is not surprising to me. In particular, I am not surprised that the Appeal Body found that the Deduction was impermissible, given the clear prohibitions on deductions relating to faulty work in the Code, and given the broad definition of faulty work in the Regulation.
It is also not surprising that the Appeal Body rejected the Employer’s claim that its misunderstanding of its obligations regarding vacation entitlements under the Code constituted a “payroll error”. Employers have an obligation to understand their duties and responsibilities under the Code, and it would have been shocking if the Appeal Body accepted the Employer’s misunderstanding of these duties and responsibilities as grounds for deducting an employee’s earnings.
This case serves as a good example of the skepticism with which Employment Standards bodies will assess efforts by employers to deduct and/or claw back employee’s earnings. While such deductions/claw backs may be permitted, either under the Code or under the employer’s internal policies, the circumstances in which they are acceptable will often be read narrowly, given the serious impact such deductions/claw backs can have on employees.
If anything, this case serves as a lesson to Employers that they need to understand both the Code and their own policies, and cannot use a lack of understanding of same as an excuse to try to deduct and/or claw back an Employee’s earnings.
Bow River Law provides these regular legal blog articles for the purposes of legal news, education and research for the public and the legal profession. These articles should be considered general information and not legal advice. If you have a legal problem, you should speak to a lawyer directly.
Bow River Law is a team of knowledgeable, skilled and experienced employment lawyers handling employment law, human rights (discrimination) and labour law matters. Bow River Law is based in Calgary but we are Alberta’s Workforce Lawyers.
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