I have, on a number of recent occasions, had employers contact me to determine what options are available to them when they have mistakenly overpaid an employee. Most employers wish to simply reverse the overpayment on a following pay thereby deducting the overpayment from wages owing.

Section 11(1) of the Employment Standards Act, 2000 of Ontario (“ESA”) stipulates that: “an employer shall establish a recurring pay period and a recurring payday and shall pay all wages earned during each pay period, other than accruing vacation pay, no later than the payday for that period.”

Section 13 (1) of the ESA  states that: “an employer shall not withhold wages payable to an employee, make a deduction from an employee’s wages or cause the employee to return his or her wages to the employer unless authorized to do so under this section.”

Section 13 (2) provides that an employer may make a deduction “if a statute of Ontario or Canada or a court order authorizes it” and Section 13 (3) states that an employer may do so “with the employee’s written authorization.”

The Employment Standards Act 2000 Policy and Interpretation Manual (Carswell 2015) states:

In addition, referees under the former Act have held that the employer may deduct wages paid in error in the past from an employee’s paycheque. As the referee pointed out in Re All-Way Transportation Services Ltd.[1] when an employee is overpaid, he or she was never entitled to the amount that the employer seeks to deduct, so it cannot be regarded as wages payable in the first place.

In some cases, an overpayment may have arisen from a failure to make an authorized deduction. For example, an employee may have provided the employer with a written authorization to deduct a specific sum from each paycheque in respect of a company benefit plan. Where the employer inadvertently fails to make the deduction, resulting in an overpayment to the employee, the employer may recover the monies paid out in error without obtaining any additional authorization to do so.

In cases where the employer has made an “overpayment”, it can recover those monies from the employee’s wages, whether they are regular wages, vacation pay, or termination pay.

Contrast the above with the case of Humber River Regional Hospital v Ontario Nurses’ Association Re: Offsetting Wages Grievances, 2014 CanLII 37563 (ON LA) where an Ontario arbitrator decided in favour of six nurses and their union when they filed six individual grievances in a policy grievance over their hospital’s decision to recover inadvertent overpayments through unilateral wage deduction. The arbitrator held that after discovering that a coding error in payroll had resulted in significant overpayments to nurses providing after hours telephone support to patients, the hospital was prohibited from recovering the monies by deducting the outstanding amounts from the employees’ paychecks without their consent pursuant to the provisions set out section 13 of the ESA.  Arbitrator Brian Sheehan emphasized that section 13 of the Act expressly sets out an absolute prohibition on an employer deducting monies from wages payable to an employee, save for the limited express exceptions. The arbitrator nonetheless noted that there was some jurisprudential support for the hospital’s position. He observed that this view was based on what he characterized as the “attractiveness of the reasoning that suggests that if an employee was never entitled to the monies in question, an adjustment made to recover such monies does not constitute an impingement on the wages payable to the employee.”

However Sheehan held that this reasoning failed to capture the underlying fundamental rationale for the prohibition set out in section 13 of the Act. The arbitrator specifically stated that, at its core, the provision is designed to prevent an employer from using its power as the paymaster of the employee to act as the sole arbitrator to decide and enforce any dispute regarding the amount of any purported overpayment and then subsequently to dictate the terms of repayment all owing.

Therefore, employers should take heed that despite the Ontario Ministry of Labour’s policy interpretation of section 13, a strict reading of that section (as supported by arbitrator Sheehan’s decision referenced above) would indicate that an employer must either get consent to deduct from future wages for an overpayment erroneously made (since an erroneous overpayment is not a statutory deduction), or in the absence of such consent, proceed to enforce repayment through litigation.