Salary debt and deductions – things to think about

Salary debt and deductions – things to think about

We sometimes receive questions from employers about what to do if they’ve paid an employee the incorrect salary and what they need to think about when making salary deductions. Making salary deductions incorrectly can have major consequences and put employers at risk of having to pay compensation, which is why it’s important to know the rules. Here are some things to bear in mind.

There are several reasons why a salary deduction may be needed, such as due to paying the incorrect salary. Employers often have time to pick up on mistakes before the final salary has gone to the bank for payment. However, more often than not, when employers discover that an incorrect payment has been made, they want this amount to be deducted from the next salary.

The rule of thumb is that an incorrectly paid salary must be paid back. However, salary deductions are regulated in the “deductions law”. An employer cannot simply just choose to withhold part of the next salary payment when it considers itself entitled to deduct a previous incorrect payment. Employers have an obligation to pay their employees the salary that has been agreed for the work performed.

Salary debt – how does it happen?

People often forget to report absence, or an employee may have changed their working hours several times in a month. It may also be the case that the employee switched from an hourly rate paid in arrears to a monthly salary during the current month and too high a salary has been paid. Here are a few more examples of how salary debt can arise:

Advance vacation

We often talk about an employee having to earn their vacation entitlement in year one in order to take paid holiday leave in year two. In many cases, vacation is given in advance, which means that a recently hired employee has the opportunity to take paid leave during their first summer of employment, despite not having accrued any paid vacation. When the employee takes vacation in advance, a debt to the employer arises, which loses money so that the employee can be paid for their leave.

This is a debt the employer can get back if the employee terminates their employment within five years. However, if the employee who took vacation in advance works at the company for more than five years, the debt is written off in full and the employer is not entitled to claim back the amount. There are other exceptions where employers cannot reclaim the amount for annual leave taken in advance, such as termination of employment due to a lack of work, illness, etc. Unlike a pure deduction, employee debt is regulated in § 29A of Sweden’s Annual Leave Act.

Deductions in arrears

In addition to holidays, there is absence in the form of things like illness, childcare, and parental leave. These are settled in the month after the absence occurred (i.e. in arrears). Although this can sometimes be seen as a debt, in this case it is an adjustment, which does not give rise to a salary deduction and entitles the employer to make the adjustment without the consent of the employee the following month. Since salaries are adjusted to account for the absence, it’s especially important that all absence is dealt with when the final salary payment is made in cases where the employee is absent during their notice period. This is to ensure that there is a salary to adjust in the first place.

Loan from employer to employee

Occasionally, an employer will lend an employee money. In this case, a direct debt arises. This debt is usually regulated by way of a promissory note or similar. The promissory note must state who the parties are, the credit amount, interest, fees, term, repayment schedule, late payment terms, and other conditions. Usually the other conditions regulate how the debt is to be managed should the employee terminate their employment before the debt is settled. Should a situation arise where the employee is unable to pay off the debt for whatever reason, a compulsory salary deduction may come into play.

Intentional damage

Unfortunately, but thankfully not often, an employee may want to harm the company and cause intentional damage. In this case, the company can make deductions. In such situations, the employer has the burden of proof when it comes to demonstrating that the employee has acted with intent.

Things to bear in mind when deducting wage debt

In practice, salary deductions may be made only when the employee has given their consent to do so through a voluntary salary deduction. Employee consent can be obtained from the contract of employment or by way of a claim when the debt arises. It’s important to be aware that the employee can withdraw their consent at any time. In the event that the employee withdraws their consent, a voluntary salary deduction cannot be made. A compulsory salary deduction must be made instead, for which there is a different process. This requires the approval of the Swedish Enforcement Authority, which can in turn limit how much can be deducted each month. There is no such regulation of amounts in a voluntary deduction.

However, there are exceptions, such as when an employer loses their claim in respect of the employee and a salary deduction becomes more difficult to implement. This can arise when the employee receives the money, spends it in good faith, and does not realise (nor should have realised) that they have received too much money and actually have an obligation to pay it back. In this case, consent for the deduction is required.

The situation can also be reversed when the employee should have realised that the payment is incorrect and there is an obligation to pay the money back. An example of this could be when an employee is employed on a half-time basis but is paid as if they are employed full time. In this case, it is not reasonable for the employee to spend the money in good faith if the salary specification is clear. In this case, a compulsory salary deduction may be considered.

A compulsory salary deduction differs from a voluntary deduction with the employee’s consent, as the deduction may be made only once the employer has requested a notification from the Swedish Enforcement Authority regarding how much of the employee’s salary is protected from deduction. In some cases, it can be very difficult to get a decision on a compulsory salary deduction from the Swedish Enforcement Agency if the employee in question has a low income.

There are some exceptions where a compulsory deduction may be made independently of a notice from the Swedish Enforcement Agency:

  • A deduction agreement in the form of a loan document where the employer has lent money to the employee, where the agreement is that the employer is entitled to make salary deductions for the repayment of the loan.

  • Where the employee causes intentional damage in their employment.

  • If there is a provision in a collective agreement that entitles the employer to deduct a claim from an employee’s salary, such as if an employee does not observe their notice period and puts the employer in a difficult situation.

How can Azets help?

By all accounts, the regulations on this matter are not exactly clear and certainly not simple. Employers who make an incorrect salary deduction put themselves at risk of having to pay compensation, which is all the more reason to look at the rules and conditions around salary deductions in detail. At Azets, we have extensive experience in the regulations on collective agreements as well as in the rules regarding salary deductions. If you as an employer have questions or concerns about what you should do in such a situation, please don’t hesitate to get in touch.

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