Employers often ask us if it’s OK to deduct money which they believe the employee owes to them.

Before you deduct any money from an employee’s pay it is very important to understand what you can and can’t do.

We recommend, before employing a member of staff, using our recruitment calculator to help you identify the most common recruitment costs incurred. It allows you to determine how much impact employee turnover is really having on your bottom line.

What many employers don’t know is the very precise provisions in the Act regarding the circumstances when they can make deductions from an employee’s wage or salary.

Unlawful deductions will expose you to heavy civil penalties, which range up to $$630,000 for companies and $126,000 for individuals for ‘serious contraventions’ of the Fair Work Act.

Generally, an employer can only deduct money from an employees pay if:

• It’s allowed by Commonwealth Law
• It’s allowed by the employee’s award or registered agreement
• You have received a private authorisation in writing from the employee AND it’s principally for their benefit AND considered as ‘reasonable’

Legal Deductions

• Obvious lawful deductions that do not require authorisation in writing from the employee include PAYG withholding tax and court orders
• There is also a lawful provision to deduct monies if an employee fails to give the required notice of resignation required under an Award or National Employment Standard (NES)
• Other legal deductions could include: health insurance premiums, union dues and salary sacrifice payments, but requires written authorisation

Employers must make sure that the written authorisation from the employee specifies the amount of the deduction. Note also that the authorisation may be withdrawn or varied, in writing, by the employee at any time.

Illegal Deductions

Deductions that benefits the employer and are ‘unreasonable’ in the circumstances are illegal.

Examples

• Cash / till shortages, stock being damaged by the employee or theft occurring under their watch
• Recovery of monies due to Insurance Excess, broken machinery or equipment
• ‘Fines’ due to lateness or breach of company policy

The Act does not permit an employer to take the easy option of recovery money owing by deducting the employee’s wages. In most cases an employer are in no better position than any other creditors unless the employee agrees in writing. Whilst there should be accountability in relation to things like till shortages, the law says it can’t come in the form of a deduction from wages.

Over-payment of wages

Employers cannot fix an over-payment made to an employee by deducting the excess amount from that employee’s next or future pay.

If an employee refuses to enter into an agreement for repayment, the employer will need to take independent action to recover amounts overpaid, for example, through a civil claim and recovery action.

If you would like to learn more on this important subject or assistance with any workforce issue, please contact us.