If a salary debt arises, deductions may be one way to recover the overpaid amount. However, incorrect handling of set-offs can lead to serious consequences and may expose the employer to liability. It is therefore essential to understand the rules governing deductions. This article explains how salary debts may arise and the legal framework for managing them.
How salary debts arise
There are several reasons why a salary debt might occur due to payroll errors. For example:
- Employee absences may not have been properly reported.
- The employee may have changed their working hours multiple times within a single month.
- The employee may have switched from hourly pay (in arrears) to a fixed monthly salary, leading to an overpayment in the transition month.
Common scenarios involving salary debts and set-off
Advance holiday pay
Employees typically earn paid holiday during their first year of employment and take it the following year. However, new employees may be offered advance holiday pay, allowing them to take paid leave before it has been earned. This creates a debt owed to the employer.
If the employee leaves within five years, the employer may reclaim the outstanding amount. After five years of continuous employment, the debt is written off. Exceptions apply—for example, if the employee is made redundant or leaves due to illness, repayment may not be enforced. This type of set-off is regulated under Section 29a of the Swedish Annual Leave Act (Semesterlagen).
Absence adjustments – Is it set-off or salary correction?
Absences such as sick leave, care of a sick child (VAB), and parental leave are normally adjusted in the following month’s payroll. These adjustments are not considered debts, and therefore do not constitute a set-off. Employers can correct such payroll without the employee’s consent.
However, if employment ends, it's important to ensure all absences are settled before the final salary is paid—so there is salary available to offset.
Employer loans to employees
If the employer lends money to an employee, this creates a formal debt that should be documented—usually in a loan agreement specifying the amount, interest, terms of repayment, and provisions in case of termination. If the employee fails to repay the loan as agreed, set-off may become relevant.
Deliberate misconduct by the employee
In rare cases, an employee may intentionally cause harm to the business. In such situations, the employer may use deductions to recover damages. However, the burden of proof lies with the employer, who must demonstrate that the employee acted with intent.
Best practice: Set-off of salary debt
Often, payroll errors are identified before salary payments are finalized and transferred to the bank. While the general principle is that overpaid wages must be repaid, employers often prefer to deduct the excess amount from a future salary.
Set-off is governed by the Swedish Set-Off Act (Kvittningslagen). Employers are obligated to pay employees the full salary agreed upon for work performed. Therefore, they may not unilaterally withhold part of an upcoming salary due to an earlier overpayment.
Deductions is only permitted with the employee’s explicit consent—either included in the employment contract or agreed upon at the time the debt arises.
Exceptions to the rule
Set off becomes more complicated when the employee, in good faith, has received and spent the overpaid amount without realizing the error. In these cases, the employee’s consent is required before any deduction can be made.
However, if the employee should have realized the overpayment—such as in cases where a clearly incorrect working percentage was applied and the salary was unusually high—compulsory set-off may be possible. This is especially true if the pay slip clearly reflected the overpayment.
What Is compulsory set-off?
Even though deductions normally requires the employee’s consent, that consent can be withdrawn at any time. In certain situations, the employer may be entitled to apply for compulsory set-off. This requires approval from the Swedish Enforcement Authority (Kronofogden).
In compulsory set-off, the employer must request a ruling from the Enforcement Authority to determine how much of the employee’s salary is protected from deduction. This sets a cap on how much may be deducted each month—unlike voluntary set-off. In some cases, if the employee has a low income, the Enforcement Authority may deny the employer’s request altogether.
When compulsory set-off is allowed without involving the enforcement authority
There are specific cases where employers can carry out compulsory set-off without prior approval from the Enforcement Authority:
- A written loan agreement in which the employee has given the employer the right to deduct repayments from their salary.
- When an employee has intentionally caused damage in the course of their duties.
- If a collective agreement allows the employer to set off a claim—such as when an employee disregards their notice period, causing disruption to the business.
How Azets can support you
The regulations in this area are, by all accounts, not entirely clear—and certainly not straightforward. Employers who apply deductions incorrectly may risk liability for damages. This makes it all the more important to thoroughly review the legal framework and specific circumstances before taking any action.
We at Azets have extensive experience with both collective agreement provisions and the legal aspects of deductions. If you, as an employer, have any questions or concerns—or would like guidance on how to act in a specific situation involving set-off—you are always welcome to contact us.
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