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Do standard clauses give an automatic right to set off?

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Legal news
calendar 17 September 2021
globus Norway

After an employee had received more compensation for travel expenses than he was entitled to, a company wanted to set the amount off in his salary. Pursuant to a standard clause in his employment agreement, the company was entitled to set off the amount against his salary. The employee disagreed that the clause was enough to allow for automatic set off. The Norwegian Frostating Court of Appeals agreed.

The case involved a company with activities within the infrastructure industry, which paid out compensation to its employees for travel expenses pursuant to fixed rates. Due to new taxation rules, the company had to introduce a new calculation system for fixing the rates. However, because the new rates were introduced six months before the new calculation system was ready, compensation was paid out according to the old rates.

After the new calculation system had been set up, the company discovered that one employee had received more compensation for his travel expenses than he was entitled to. Despite the fact that the employee had not been informed on the new rates, the company decided to set off the amount against the employee’s salary. The company relied on a standard clause in the employee’s employment contract, which entitled the company to set off against the employee’s salary.

Because the parties disagreed on whether the standard clause could entitle set off, the case ended up with the Norwegian Frostating Court of Appeals. The Court then had to decide if such standard clauses could entitle companies to set off against its employee’s salary.

Set off requires information and consent

Set off as a main rule requires a prior written agreement. Many companies therefore include standard clauses in employment contracts as a standard practice, to have access to set off.

Irrespective of that practice, the court concluded that in this case, the standard clause did not allow for automatic set off against the employee’s salary, when the employee had neither received prior information or given consent to the specific amount which was being set off against his salary. The employee had neither had the necessary predictability or control for the set off to be lawful.

The court referred to the Norwegian Working Environment Act, which is designed to protect the employees and includes the rule that set off cannot occur lawfully unless there is a prior written agreement in place. This main rule ensures, among other things, control and predictability for employees. Nonetheless, if standard clauses in employment agreements simply gave companies an automatic right to set off without the employee’s knowledge or consent in each specific case, the employee would neither have control or predictability.

Although the court considered that the standard clause in the case was not sufficient to allow for set off, it emphasized that it could not exclude that a more specific clause could allow for lawful set off. While not giving more specific details, the court emphasized that a standard clause which provided the necessary predictability and control oppositely could provide for an automatic basis for lawful set off.

IUNO’s opinion

Although the case is now before the Norwegian Supreme Court, which may come to another conclusion that the Norwegian Frostating Court of Appeals, companies should be careful when applying standard clauses allowing for automatic set off. The reason is that companies as a main rule cannot set off amounts against its employees’ salaries.

IUNO also recommends that although standard clauses may, depending on the circumstances, allow for companies to lawfully set off amounts, companies should be aware of the conditions and boundaries that apply. Deductions should always be discussed with employees in advance, and new agreements should be concluded each time a deduction is made. In this connection companies must also be aware that in any case, employees must be left with sufficient salary to provide for themselves and their household.

[The Norwegian Frostating Court of Appeals’ judgement LF-2020-73757 of 22 March 2021]

The case involved a company with activities within the infrastructure industry, which paid out compensation to its employees for travel expenses pursuant to fixed rates. Due to new taxation rules, the company had to introduce a new calculation system for fixing the rates. However, because the new rates were introduced six months before the new calculation system was ready, compensation was paid out according to the old rates.

After the new calculation system had been set up, the company discovered that one employee had received more compensation for his travel expenses than he was entitled to. Despite the fact that the employee had not been informed on the new rates, the company decided to set off the amount against the employee’s salary. The company relied on a standard clause in the employee’s employment contract, which entitled the company to set off against the employee’s salary.

Because the parties disagreed on whether the standard clause could entitle set off, the case ended up with the Norwegian Frostating Court of Appeals. The Court then had to decide if such standard clauses could entitle companies to set off against its employee’s salary.

Set off requires information and consent

Set off as a main rule requires a prior written agreement. Many companies therefore include standard clauses in employment contracts as a standard practice, to have access to set off.

Irrespective of that practice, the court concluded that in this case, the standard clause did not allow for automatic set off against the employee’s salary, when the employee had neither received prior information or given consent to the specific amount which was being set off against his salary. The employee had neither had the necessary predictability or control for the set off to be lawful.

The court referred to the Norwegian Working Environment Act, which is designed to protect the employees and includes the rule that set off cannot occur lawfully unless there is a prior written agreement in place. This main rule ensures, among other things, control and predictability for employees. Nonetheless, if standard clauses in employment agreements simply gave companies an automatic right to set off without the employee’s knowledge or consent in each specific case, the employee would neither have control or predictability.

Although the court considered that the standard clause in the case was not sufficient to allow for set off, it emphasized that it could not exclude that a more specific clause could allow for lawful set off. While not giving more specific details, the court emphasized that a standard clause which provided the necessary predictability and control oppositely could provide for an automatic basis for lawful set off.

IUNO’s opinion

Although the case is now before the Norwegian Supreme Court, which may come to another conclusion that the Norwegian Frostating Court of Appeals, companies should be careful when applying standard clauses allowing for automatic set off. The reason is that companies as a main rule cannot set off amounts against its employees’ salaries.

IUNO also recommends that although standard clauses may, depending on the circumstances, allow for companies to lawfully set off amounts, companies should be aware of the conditions and boundaries that apply. Deductions should always be discussed with employees in advance, and new agreements should be concluded each time a deduction is made. In this connection companies must also be aware that in any case, employees must be left with sufficient salary to provide for themselves and their household.

[The Norwegian Frostating Court of Appeals’ judgement LF-2020-73757 of 22 March 2021]

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Etgen Reitz

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Aurora Braut Bache

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