Failing to correctly make deductions from an employee’s wage can have costly consequences for individuals and corporations. Unlawful deductions that are not permitted in the Fair Work Act 2009 (Cth) (Act) attract civil penalty amounts ranging up to $12,600 (per breach) for an individual and up to $63,000 for a corporation (per breach). As such, it is important to ensure that employers are getting it right.
Read on if you would like some more information about getting it right (or, more importantly, avoiding getting it wrong).
What you should know
- Employers need to ensure that any deductions that they make from employee wages are permitted in accordance with the Act.
- Employers may not be able to rely on terms in modern awards, enterprise agreements and contracts of employment that permit deductions.
- Due to the complexity of the sections of the Act pertaining to deductions, employers should seek legal advice prior to making any deductions from employee wages.
1. When can employers deduct monies from employee wages?
There are limited circumstances in which an employer may deduct an amount from an employee’s wages. Importantly, the employer must have obtained the employee’s written consent to make the deduction and the deduction must be a permitted deduction as defined by the Act.
The Act provides that a deduction is permitted if:
- the deduction is authorised in writing by the employee and it is principally for their benefit (such as a salary sacrifice arrangement or supplementary payments into an employee’s superannuation fund); and/or
- the deduction is authorised by the employee in accordance with an enterprise agreement or is allowed by or under a modern award or a Fair Work Commission order; and/or
- the deduction is authorised by or under a law (i.e. taxation in accordance with federal income laws) or court order (i.e. court ordered garnishees).
Deductions must be clearly recorded on pay slips and time and wage records.
2. When are employers not permitted to deduct monies from wages?
An employer cannot deduct money if:
- it benefits the employer directly or indirectly and is unreasonable in the circumstances (regardless of whether the deduction is made in accordance with a modern award, enterprise agreement or contract of employment); or
- the employee is under 18 years of age and their parent or guardian has not agreed in writing.
3. The relevant enterprise agreement or modern award contains terms permitting certain deductions, surely the employer can rely on those terms?
The short answer is no, not necessarily. As noted above, an employer cannot make a deduction (regardless of whether the deduction is made in accordance with a modern award or enterprise agreement) if:
(a) it benefits the employer directly or indirectly; and
(b) it is unreasonable in the circumstances;
The Fair Work Regulations 2009 (Cth) (Regs) do provide some examples regarding the types of deductions that may be considered reasonable(subject to the applicable modern award or enterprise agreement containing a term that permits said deduction), namely:
- Health insurance fees made by an employer that is a health fund (note that if the employee has to pay more than the general public for the goods or services, then the deduction is not reasonable);
- Loan repayments made by an employer that is a financial institution;
- Costs directly incurred from an employee’s private use of the employer’s property (i.e. costs associated with personal calls on a company mobile phone, costs associated with personal items purchased on a corporate credit card and costs associated with petrol purchased for the private use of a company vehicle).
A word of caution, whilst the Regs may provide that a certain deduction is reasonable, it is important to be cognisant that the deduction must also be principally for the employee’s benefit in order for it to be a permitted deduction.
In view of the above, employers should seek advice prior to making any deductions in accordance with terms in an enterprise agreement or modern award.
4. What if the employment contract authorises the deduction?
Most contracts of employment contain terms permitting certain deductions, however, there is no provision in the Act which specifically allows a contract of employment to authorise deductions. This being the case, the reality is that such terms in contracts of employment are unlikely to be in compliance with the Act. Therefore, if an employee disputes a deduction made by an employer in reliance on the contractual terms, the employer may be required to repay the monies deduction and could also be subject to civil penalties.
In view of the above, employers should seek advice prior to making any deductions in accordance with terms in a contract of employment.
5. Can employers deduct money for overpayments made due to a payroll error?
The Fair Work Ombudsman has provided guidance for employers in these circumstances. Essentially, employers can potentially make deductions to rectify an overpayment if it is allowed under an enterprise agreement, modern award, legislation or court order (and, in the case of the former two, employers should exercise caution before relying on any such provisions for the reasons discussed at 3 above).
If the deduction is not allowed under an enterprise agreement, modern award, legislation or court order, employers are required to discuss the overpayment with employees and agree on a repayment arrangement. The repayment arrangement may involve making deductions from the employee’s pay at the employee’s election subject to any such arrangement being reasonable. For the reasonableness requirement to be satisfied, the employee must (at the very least) have a choice about how the money is paid back and the amount and frequency of each payment. Assuming that a repayment arrangement is agreed to, the employer is required to record the agreement in writing and specify the amount of, and the reason for, the overpayment and the method in which the repayments will be made (i.e. whether in cash, cheque, electronic transfer or deduction from pay and the amount and frequency of each repayment).
Again, given the complexities involved, employers should seek advice prior to making any deductions and/or entering into any repayment arrangements to recover overpayments.
The circumstances in which employers may deduct amounts from employee wages are limited. As the consequences of getting it wrong are severe, we recommend that employers seek legal advice prior to making any deduction arrangements with employees.