A recent case demonstrates the need to be clear on what is due to or owing from an employee before you agree to a negotiated exit.

In this particular case, the employment relationship ended part way through the first year on negotiated terms entered into at mediation.

It had been the employer’s practice to pay wages monthly, 2 weeks in advance and 2 weeks in arrears. It paid the employee on the 15^th of the last month of employment, and this included pay to the end of the month. The employment relationship then formally ended following mediation on the 25^th. Payments had therefore already been made for the 26^th, 27^th, 28^th and 29^th (days the employee was not employed).

Instead of accounting for this in the negotiation (and ensuring that the agreed terms of settlement incorporated the overpayment), the employer sought to make a deduction when paying out the employee’s final annual leave entitlement.

The Employment Relations Authority held that this approach was incorrect, and inconsistent with the agreed terms of settlement.

The most relevant term of the settlement was that the employer would provide the employee with “all salary and annual leave that may be owing up to and including the termination date”. This meant the employee was entitled to receive the full balance of annual leave owing and the employer would breach the settlement agreement if this did not happen.

Because the employee had been with the company less than 12 months, he was entitled to 8% of all wages earned up to and including the last day (the 25^th) less any annual leave payments made in advance. In this case, the total amounted to $6,853.81.

The overpayment of 4 days amounted to $2,307.69, and the employer lost this too, despite having provision in the individual employment agreement to make deductions for over-payments. This was because a further term of the settlement agreement stated “The parties acknowledge that, except as set out within the settlement agreement, no other money whatsoever (including… salary…) is due or owing from either party to the other.”

The ERA held that the employer should have known, when it signed the agreement, that 4 days salary were owing from the employee to the employer. By agreeing to this further term within the settlement, it waived its right to deduct any amount for the overpayment.

Alan Knowsley

Employment Lawyer Wellington