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Permissible pay deductions in the event of an employee’s sudden resignation

pay deductions

The sudden loss of a key employee can have a significant impact on an employer’s operations. It may result in loss of business, an inability to properly service clients and/or increased costs associated with replacing the lost worker.

Therefore, it is understandable that some Ontario employers may wish to take steps to disincentivize staff from leaving without advance notice. The circumstances in which an Ontario employer may lawfully withhold (or deduct) an employee’s pay, however, are quite limited.

Pay deductions permitted by statute

Section 13 of the Employment Standards Act, 2000 (“ESA”) permits an employer to withhold, or make a deduction from, an employee’s pay where:

  1. It is authorized by statute or a Court Order; or
  2. The employee has authorized the withholding and/or deduction in writing and
    • The authorization refers to a specific amount; or
    • Provides a formula from which a specific amount may be calculated.

As such, it is possible for an employer to institute an agreement in writing with an employee (perhaps in the context of an employment contract) to withhold or deduct payments in prescribed circumstances. That said, the ESA expressly prohibits an employer in Ontario from withholding, deducting or requiring the return of wages: as a result of faulty work; because of a cash shortage: or where property has been stolen or lost (and the employee in question did not have access to the cash or property in question).

Guidance from the Policy and Interpretation Manual

The Ontario Ministry of Labour publishes an ESA Policy and Interpretation Manual (the “Manual”). The Manual offers guidance to employers and employees for complying with the ESA. The Manual considers the pay deduction rights of an employer pursuant to section 13 of the ESA in the event an employee resigns without providing agreed advance notice. The Manual states that:

a written authorization respecting failure to give notice of resignation would be invalid if the amount to be deducted constituted a penalty rather than a genuine attempt to pre-estimate damages.

As such, while an employer is precluded from an imposing a penalty on a departing employee, the Manual leaves open the possibility that an employer could institute a contractual mechanism to dock wages provided it was based upon a genuine (and demonstrable) pre-estimate of actual damages flowing from a resignation without notice.

Lessons from a recent Ontario case

A recent Ontario case (Elemental Data Collection Inc. v. Promesse Bama), however, highlights the difficulties an employer may face in enforcing a contractual provision of this nature.

In this case, the employee agreed that in the event he resigned without providing 2 weeks notice, the employer would withhold $225.00 of his earnings. The resignation provision in question stated:

The Employee may terminate employment at any time by providing to the Employer two (2) weeks notice in writing to that effect. The Employer may decide, in its sole discretion, to waive the Employee’s required notice of termination. The Employee does hereby acknowledge that failure to provide notice as aforesaid and failure to work the required number of weekly shifts (minimum 4/week, which includes at minimum 1 weekend shift per week) during the two weeks’ notice period will result in additional cost and/or loss to the Employer and further acknowledges and agrees that the Employer shall have the right to recover from the Employee and deduct from any monies then owing to the Employee, the sum of Two Hundred and Twenty Five ($225.00) dollars representing the liquidated damages of the Employer due to the Employee’s failure to provide the notice herein agreed upon.

The Ontario Labour Relations Board, however, refused to uphold the legality of this employee pay deduction. Instead, it concluded that the deduction constituted a penalty for failure to provide advance notice of resignation. Moreover (and while the employer relied on the Manual), the Board rejected the assertion that the deduction reflected a genuine pre-estimate of damages.

While the Board conceded that “actual damages may perhaps, in certain circumstances, be lawfully recoverable through a deduction under section 13 of the Act, liquidated damages to cover a risk of damages cannot, because they constitute, in effect, a penalty for failing to give notice to their employer.

Options for Ontario employers

While imposing monetary penalties on a departing employee (whether through an employment agreement or otherwise) is impermissible, there are steps that employers can take to communicate their expectations of staff and protect their business from sudden departures:

  1. Conduct a thorough hiring process. As the old adage goes, an ounce of prevention is worth a pound of cure. As such, employers should look to thoroughly vet all prospective hires to ensure they are likely to engage with the business in a professional and respectful manner (such as by honouring their contractual obligations);
  2. Require in writing (as part of the employment contract) that the employee provide reasonable advance notice of resignation. When selecting the length of this period, employers should consider the importance of the role in question and how long it would likely take to put in place a new incumbent. For example, if an employee works in a critical role (and loss of business would likely flow from a sudden departure), require 60 days advance notice of resignation and further bring this requirement to the express attention of the worker at time of hire (documenting the same);
  3. Draft a carefully worded payment deduction mechanism (which meets the requirements of the ESA and demonstrably compensates the employer for actual damages, rather than functioning as a penalty).
    Employers should seek assistance from an experienced employment lawyer and also consider taking proactive steps to solicit feedback on the likely enforceability of the provision from the Ministry of Labour prior to institution (documenting the same). That said, while helpful, engaging with the Ministry is far from a silver bullet. The employer in the above-referenced case sought guidance from the Ministry of Labour, yet was unsuccessful at the Labour Relations Board.
  4. Sue for Wrongful Resignation. This is an after-the-fact remedy once a harm has been suffered. That said, employers (and departing employees) should be aware that where a sudden resignation (contrary to a contractual obligation) results in economic and/or reputational harm to the employer, the employer may sue the individual to recoup losses. To learn more about this cause of action, see our earlier article on the topic here.
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Vey Willetts LLP

Employment and labour lawyers at Vey Willetts
Vey Willetts LLP is an Ottawa-based workplace law firm, serving individuals and employers across Eastern Ontario. They recognize that operating a business is complex and maintaining an efficient and legally-compliant workplace is a continuous challenge. The firm helps simplify legal workplace obligations so that employers can focus on what matters: their business. Learn more about Vey Willetts LLP by contacting Andrew Vey, or Paul Willetts or by visiting the firm’s website. Read more.
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