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.