Wage deduction agreement

What it means

A wage deduction agreement is a written agreement between employer and employee under which the employer deducts an amount from pay to settle a claim that the law does not allow it to deduct without the employee’s consent. The Labour Code sets out precisely what an employer may deduct from pay on its own.

Without an agreement the employer can deduct, for example, tax advances, insurance contributions, unsettled advances on pay or travel expenses and amounts ordered by a court or enforcement officer. For anything else, such as repayments of a loan from the employer, compensation for damage or private phone calls, an agreement is needed.

By agreement the employee can also consent to deductions in favour of third parties, such as bank loan repayments. The order of deductions and their maximum amount are set by law: statutory and enforcement deductions take priority, and the employee must always keep a protected amount.

How it works in practice

We recommend always concluding the agreement in writing and specifically: which claim it covers, the amount and the instalments to be deducted. For loans to employees we attach it to the loan agreement, and for damage to the damage report and any agreement on liability for entrusted assets.

In payroll the deduction is recorded as a separate item and appears on the payslip. Where enforcement is also running we must respect the statutory order and limits, so a deduction under an agreement may be lower or nil in a given month if nothing remains after enforcement.

When employment ends, a deduction from the final pay is often discussed, for instance for work equipment not returned. An agreement is necessary here too. If the employee refuses to sign, the employer must recover the claim in another way, including through the courts.

What to watch out for

The most common mistake is deducting damage or a fine from pay without an agreement in the belief that the employer is entitled to do so. Such a deduction is invalid, the employee can turn to the labour inspectorate and the employer risks a fine and having to repay the amount.

Watch for deductions that are too high. Even with an agreement, the employee must keep at least the amount protected by law. An agreement that would take the whole wage is invalid to that extent, and the payroll system should cap the deduction automatically.