I Overpaid My Employee: What Now?

What Employers Can and Can’t Deduct from Employee Wages in Ontario

Accurate payroll management is essential for employers in Ontario. A common question is: What can we legally deduct from an employee’s wages? The short answer—very little, unless the employee has agreed, or the law requires it.

Ontario’s Employment Standards Act, 2000 (ESA) sets strict rules on wage deductions. However, some recent Ontario Labour Relations Board (OLRB) decisions have conflicting interpretations regarding whether employers can deduct overpaid vacation pay. Because OLRB decisions are not binding on courts, the law on this issue remains unsettled.

Here’s what you need to know. 

Employers can only deduct wages in three scenarios:

1. Statutory Deductions
   Employers must deduct and remit:
   • Income tax
   • Canada Pension Plan (CPP) contributions
   • Employment Insurance (EI) premiums
2. Court Orders or Wage Garnishments
   If an employee has a court-ordered garnishment (e.g., child support), the employer must comply. However, you cannot deduct more than the legal limit, which varies based on income and circumstances.
3. Employee-Authorized Deductions
   An employer can deduct wages for other reasons only if the employee gives written consent. This includes:
   • Health or dental benefits
   • Retirement savings plans
   • Charitable donations

The consent must be clear, specific, and voluntary—a general clause in an employment contract is not enough.

Even with employee consent, some deductions are prohibited under the ESA. Common mistakes include:

1. Cost of Damage or Loss
   Employers cannot deduct wages for:
   • Cash shortages (e.g., a register is short)
   • Lost, stolen, or broken company property
   • Accidental damage caused by the employee

Even if the employee agrees in writing, these deductions are illegal.

1. Uniforms and Tools
   Employers cannot make employees pay for mandatory uniforms or tools unless the deduction is voluntary and for a personalized item (e.g., a custom name tag the employee keeps).
2. Training Costs
   Employers can’t deduct training costs unless:
   • The training is optional (not required for the job)
   • The employee agreed in writing after fully understanding the costs

Even then, the deduction can’t bring the employee’s wages below minimum wage.

1. Administrative or Processing Fees
   Employers can’t charge employees for processing payroll, direct deposit fees, or other admin costs.

Can Employers Deduct Overpaid Vacation Pay?

There have been conflicting decisions from the Ontario Labour Relations Board (OLRB) on whether an employer can deduct vacation pay that was paid in advance but not yet earned. One key factor that may explain the different outcomes is whether the employee quit or was terminated.

Case #1: Deduction Allowed – MenuPalace.com (2008) (Employee Quit)

In MenuPalace.com v. Saladino, 2008 CanLII 26628 (ON LRB), the employee resigned after taking vacation time he had not yet accrued. The Board ruled that the employer could deduct the overpayment from his final wages because it was simply correcting an advance on wages, not making an unlawful deduction under ESA section 13.

Case #2: Deduction NOT Allowed – MT Dynamics (2020) (Employee Terminated)

In Christopher Stuart v. MT Dynamics, 2020 CanLII 68306 (ON LRB), the employee was terminated after using more vacation time than he had accrued. The Board did not allow the employer to deduct the overpayment, reasoning that the employer’s policy of advancing vacation was not a mistaken overpayment and therefore subject to ESA section 13 restrictions.

What This Means for Employers

• If an employee quits, an employer may have a stronger argument for deducting overpaid vacation pay.
• If an employee is terminated, deductions are more likely to be viewed as unlawful under section 13.
• Since these decisions are from the OLRB (and not binding on courts), the law remains unsettled, and the safest approach is to obtain written authorization before advancing vacation pay.
• If the vacation overpayment was a mistake, a deduction may be allowed.
• If the employer intentionally advanced vacation pay, a deduction likely violates section 13, unless the employee previously agreed in writing.

Best practice: Get written authorization before advancing vacation pay and track accruals carefully.

How to Stay Compliant

1. Get Written Consent for Any Non-Statutory Deductions
   Keep detailed records of what the employee has agreed to, ensuring it’s specific and voluntary.
2. Review Payroll Practices Regularly
   Ensure payroll deductions align with the ESA and update policies if needed.
3. Avoid Common Pitfalls
   If an employee breaks something or there’s a cash shortage, you cannot deduct wages—even if it was their fault.
4. Double-Check Vacation Pay Calculations
   Since the law is unclear, the best approach is to avoid overpaying in the first place. Ensure payroll systems track vacation entitlements accurately.

Bottom Line

Ontario employers have very limited rights to deduct wages. If it’s not required by law, ordered by a court, or voluntarily agreed to in writing, you likely can’t deduct it—except in cases of recent vacation pay overpayments, and even then, the law is unclear.

Missteps can lead to ESA claims and fines, so when in doubt, consult an employment lawyer before making a deduction.

Need guidance on payroll compliance? Contact us for advice.