Deductions and the minimum wage: can employers deduct below minimum?

A recent full bench decision of the Employment Court clarifies the boundaries of lawful wage deductions, setting out when employers can, and cannot, deduct from an employee’s pay if it results in take-home earnings falling below the minimum wage.

The facts

The plaintiffs were employed by Pick Hawke’s Bay under the Recognised Seasonal Employer (RSE) scheme, which allows accredited employers to employ workers from specified Pacific Island nations for seasonal horticulture/viticulture work.

Accreditation under the scheme requires compliance with immigration and employment laws, financial stability, and a commitment to worker welfare.

The claims

The plaintiffs claimed that Pick Hawke’s Bay made unlawful deductions from their wages in breach of the Wages Protection Act 1983 and the Minimum Wage Act 1983.

The deductions in question included weekly deductions made by Pick Hawke’s Bay, to recover costs for accommodation, health/travel insurance, and transport. Pick Hawkes Bay would also recover costs through a ‘reducing balance deduction’ for half the plaintiffs return airfare, the RSE visa, domestic travel, and wage advances.

Pick Hawke’s Bay denied the claims, and counterclaimed, seeking restitution or to off-set the amount of the deductions.

Employment Court

The Court found that many deductions were made without proper written consent or approval from INZ under the ATR (Agreement to Recruit) process.

Pick Hawke’s Bay was criticised for not making it clear to INZ or the plaintiffs how repayment of debts would operate in practice. For example, Pick Hawke’s Bay had disclosed the existence of the reducing balance debt, however the resulting effect that workers often had their entire weekly pay deducted except for $100, was not disclosed to INZ.

Pick Hawke’s Bay was also criticised for making deductions in a way other than expressly consented to by the workers. For example, costs which were incurred prior to the plaintiff’s starting work were recovered through deferred deductions, and the deductions consent forms did not allow for this.

Although the plaintiff’s hourly rate met the minimum wage, deductions reduced their take-home pay below that threshold. The plaintiff’s claimed that the Minimum Wage Act required that they receive payment in the hand at not less than the applicable minimum rate, subject only to the exceptions in section 7 to 9 of the Minimum Wage Act.

The Court rejected the submission that where deductions are made under the Wages Protection Act, they constitute part of an employee’s wages for the purposes of “receiving” the minimum wage.

The Court concluded that it was a breach of the Minimum Wage Act for Pick Hawke’s Bay to make deductions from the plaintiff’s pay that reduced their wages below the minimum wage, insofar as the deductions were not permitted by section 7.

The Court said this was consistent with the earlier decision of Faitala where the Court of Appeal held that the right to receive the minimum wage is “subject to statutory or other legal deductions”.

Section 7 Minimum Wage Act prevents deductions for board or lodging from exceeding such amount as will reduce the worker’s wage calculated at the appropriate minimum rate by more than the cash value as fixed by or under any Act, determination, or agreement relating to the worker’s employment. Alternatively, if it is not fixed, the deduction shall not exceed such amount as will reduce the worker’s wages by more than 15% for board or by more than 5% for lodging.

The plaintiff’s claim was that the accommodation deductions exceeded the 5% allowed by section 7 for lodging, and that there was no Act, determination, or agreement within the meaning of the section that fixed the cash value of that lodging.

The Court concluded that the value of board or lodging can be fixed by an individual employment agreement, but that did not happen under the ATR process.

The Court accepted in principle that an agreement in some situations can fix the cash value for accommodation through a deductions clause, but that will not always be the case. The text of section 7 suggests that the amount able to be deducted for accommodation is dependent on whether the cash value was fixed as a separate step. If the cash value can be fixed by needing only to state an amount to be deducted, the limits provided for in section 7 would be deprived of effective meaning.

The employment agreements stated the amount to be deducted from the plaintiffs’ wages for accommodation per week as a dollar amount, but they did not fix the cash value of the accommodation. The deductions for accommodation therefore did not comply with section 7 where the amounts taken exceeded 5% of the plaintiffs’ minimum rate of pay.

The Court said for completeness, even if the cash value was found to be fixed, the amounts deducted were not reasonable and would have been unlawful under the Wages Protection Act, s 5A. They did not reflect actual costs because the calculation included costs incurred by Pick Hawke’s Bay during off-season periods.

Counterclaim

Pick Hawke’s Bay succeeded only in recovering wage advances made under a mistaken belief they could be deducted. Other counterclaims failed.

Outcome

The Court held that Pick Hawke’s Bay breached section 4 of the Wages Protection Act and sections 6, 7 and 11B of the Minimum Wage Act. The plaintiffs were awarded recovery of monies owing, interest on those amounts, and the matter was referred to Immigration New Zealand.

While this decision arose in the context of the RSE scheme, its interpretation of the Minimum Wage Act and Wages Protection Act applies broadly to all employers.

The key takeaways for all employers are:

• Accommodation deductions must be fixed (i.e in an employment agreement) at a reasonable amount to be lawful.
• If they are not fixed, they cannot exceed such amount as will reduce the worker’s wages by more than 15% for board or 5% for lodging.
• Other contractual deductions cannot reduce an employee’s wages below minimum wage, even if the employee consents to them.

Want to know more?

If you have any questions about wage deductions, or compliance with minimum wage obligations, please contact our specialist Employment team.

View the PDF here.