Taking money out of an employee’s pay or wages is a deduction. Under the Fair Work Act 2009 (the Act) there are limits on when you can deduct pay and when you cannot. As an employer, you must understand what counts as a ‘permitted deduction’ and follow the correct procedure. In this guide for employers, we discuss permitted deductions and answer your questions such as can an employer reduce pay?
Permitted deductions
Deductions from an employee’s wages are only allowed under the Act if they are “permitted deductions” which is when:
- Both you and the employee agree to the deduction in writing, mainly for the employee’s benefit.
- The relevant modern award or enterprise agreement allows for the deduction, and the employee agrees to a deduction under the registered agreement.
- Another law permits the deduction.
- The deduction is ordered by a court or the Fair Work Commission (FWC).
An example of a permitted deduction is a salary sacrifice payment. An authorisation in writing must clearly state the full amount of the deduction or any variation to that amount. However, the employee may withdraw the authorisation in writing at any time.
All permitted deductions must be clearly stated on an employee’s payslip or wages record.
Pay deductions that are not permitted
Generally, an employer cannot deduct an amount from an employee’s wages without specific written consent. Even with written permission, you cannot make a deduction that benefits yourself or a related party in most cases.
Employers often mistakenly believe the terms of an award, enterprise agreement, or employment contract will automatically grant them permission to make a deduction, however, this is not always the case. For example, an employee still needs to agree to any deduction made under a registered agreement. Also, deductions must be reasonable in all circumstances, even when permitted under an award or agreement.
Provisions in an award, agreement, or contract will likely be unlawful if they:
- Give you permission to deduct an amount from an employee’s wages that benefits the employer and is unreasonable in the circumstances (i.e. reduce an employee’s pay to cover accidental damage to a company vehicle).
- Require an employee to make a direct payment to you or a related party and the payment only benefits you.
- Allow an employee under 18 to have their pay or wage deducted without written permission by their parent or guardian.
However, some payroll deductions that benefit an employer and are made per an award, registered agreement, or contract may be reasonable in limited situations. Examples include deductions from the employee’s final pay if the employee doesn’t give sufficient notice of resignation under their award, or for costs incurred for the private use of the employer’s property, e.g. the purchase of personal items on a company credit card or using the work phone to make personal calls.
Employees spending their own money
You cannot ask an employee or a prospective employee to spend their money if the request is unreasonable, or the payment only benefits you or a related party. This rule applies to any money the employee or prospective employee owns, not just the wages you pay them.
This means you are not allowed to:
- Ask an employee to give you money in exchange for a job offer.
- Ask an employee to give you money in return for keeping their job.
- Pressure an employee into spending their own money or the wages you pay them in a certain way.
Cashback schemes are also not allowed under the Fair Work Act 2009. This means you cannot force an employee to pay back a portion of their wages or salary. This conduct would result in an employee or prospective employee being entitled to back payments from you.
The applicable modern award or registered agreement may provide information regarding payroll deductions. Some types of permitted deductions may also be incorporated into the employee handbook.
Overpayment of wages
Sometimes a payroll error or a misjudgement can result in the overpayment of wages. It is unlawful for you to automatically deduct the extra amount paid from the employee’s next pay. A deduction can be made to get back an overpayment if it’s allowed under a registered agreement (and the employee agrees), award, legislation, or a court or Fair Work Commission order.
Otherwise, once you learn of an overpayment, you must inform the employee as soon as possible to discuss repayment. You may reach an agreement with the employee on the terms of repayment, which must be reasonable. Any agreed repayment plan must be in writing and set out details as to the amount and how (e.g. electronic transfer) and when it will be repaid. If the employee does not agree to a repayment plan, you may need to seek legal advice to try and recover the money by applying to the court.
Damage to company property
Physical theft and damage to company property is a serious concern for any business. To avoid the financial and emotional stress of dealing with this issue, consider a company property policy.
You must give your employees guidelines on the use of company property, so they will be across the company expectations and the necessary level of care associated with its use.
However, you generally cannot cover the cost of damage to company property by making a deduction from the employee’s wage. Even if there is a provision in an award or agreement or employment contract that says you have that right, it may still be considered unlawful in the specific circumstances.
The expert team at Peninsula can help you understand deductions and your obligations as an employer. Call for free initial advice.
This article is for general information purposes only and does not constitute as business or legal advice and should not be relied upon as such. It does not take into consideration your specific business, industry or circumstances. You should seek legal or other professional advice regarding matters as they relate to you or your business. To the maximum extent permitted by law, Peninsula Group disclaim all liability for any errors or omissions contained in this information or any failure to update or correct this information. It is your responsibility to assess and verify the accuracy, completeness, and reliability of the information in this article.
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