Deducting Money From Employee Wages

Your employee may steal from you. They may incur fines on behalf of your business. They may even damage your business in a way that you cannot remedy. But none of this affects your obligation to pay them in accordance with the relevant legal requirements.

Can you deduct money from an employee’s wages?

The Fair Work Act (the Act) requires payment for any work to be made in money and in full[ 1]. Taking money out of an employee’s pay before it is paid to them is called a deduction and in many cases to do so will be both be unlawful and a breach of the employment contract. Generally, employers are not entitled to deduct wages from an employee, if:

• The deduction benefits the employer either directly or indirectly; and
• It is unreasonable in the circumstances.

This rule will apply even if an award, enterprise agreement or employment contract allows for deductions.

Are there any exceptions to the general rule?

Overpayment of wages

Either due to payroll error, or a mistaken belief that an employee is entitled to a higher wage, an employer may overpay their employee. To an employer, the simplest way to rectify an overpayment is to deduct amounts from the employee’s future wages. However, before you proceed down this path, the Act requires that you first secure the employee’s written agreement[2].

The Fair Work Ombudsman (FWO) recommends that you discuss the mistake with the employee and agree to a repayment arrangement. This arrangement should be reasonable, confirmed in writing and set out the following:

• The reason for the overpayment (usually mistake);
• The total sum of money overpaid ;
• The manner in which the repayments will be made (i.e. EFT, cash, cheque, etc.); and
• The frequency of repayments (the frequency must be reasonable).

If the employee does not agree to a repayment arrangement, you must not deduct the amounts from future wage payments. If you cannot reach an agreement with your employee, you should seek legal advice about how best to recover the amounts.

Please note, if the employee is under 18 years of age, their parent or guardian must agree to the repayment arrangement.

Prohibited deductions

It is unlawful for you to:

• Require an employee to spend their own money; or
• Repay you for money spent on an employee,

if:

• It is unreasonable to do so; or
• The payment is made either for the employer’s benefit, or for the benefit of someone related to the employer.

This principle applies to any money belonging to an employee, not just their wages from your employment of them.

Employers cannot:

• Require potential employees to pay a money to receive a job offer. For example, you cannot ask a prospective employee for an upfront payment in return for sponsoring a visa or training[3]; or
• Ask employees to pay money to keep their job. For example, if you pay an employee the full award pay rate you cannot require them to pay back a portion in cash because other people might work for a lower rate[4].

These scenarios, sometimes known as “cashback” schemes, are strictly prohibited. Money paid by an employee to an employer in these circumstances will be treated as a deduction, and the employee will be entitled to backpay from you. This will apply even in relation to a potential employee who has not yet commenced work with you.

Another example of a prohibited deduction is a situation where an employer has applied pressure on an employee to spend their own money or wages in circumstances where it is unfair or unreasonable. For example, if you force an employee to purchase clothing from you on the basis it is required for their job[5] or ask them to make up a shortfall in the till.

The same rule applies even if theft or other criminal acts of your employees have caused you loss. Despite being criminal in nature, and potentially causing significant loss to the business, the fact that theft has occurred does not entitle you to deduct from wages to make up the difference. Doing so may lead you open to underpayment claims from the employee, even in circumstances where criminal activity has been proven in court.

When are deductions allowed?

Despite the prohibitions mentioned above, there are some circumstances in which deductions can be made from wages. These are known as ‘permitted deductions’ and include circumstances:

• Where an employee authorises the deduction in writing and the deduction is for the employee’s benefit. Examples of where a deduction may benefit an employee include salary sacrifice arrangements or additional payments into an employee’s super fund;
• Where a deduction is authorised under an employment contract or enterprise award and the employee agrees to the deduction;
• Where a deduction is authorised under a modern award; and
• Where a deduction is authorised under legislation, or by a court or Fair Work Commission order.

It should be noted that in circumstances where the employee is under the age of 18 and employee authorisation is required, you are unable to deduct money from wages if the employee’s parent or guardian has not agreed in writing.

Reasonable deductions that benefit employers

Usually, an employer is not allowed to deduct money if it will directly or indirectly benefit them and is unreasonable in the circumstances, however, there are some exceptions. These include:

• Where an employee has not given the correct amount of notice, is over the age of 18, and the amount deducted is not unreasonable. These deductions are only allowed from wages owed, not entitlements such as accrued leave or over-award payments;
• Where you have provided goods or services to an employee as a part of their business (such as a health fund who provides insurance to their employees), a deduction for the relevant fee may be allowable. However, if the expense that the employee pays is higher than the general public, this will not be a reasonable deduction; and
• Where an employee has used the company’s property for private use, and the company has incurred a loss as a result. Examples of this include:
  1. If an employee purchases personal items with a work credit card;
  2. If an employee uses a work phone to make personal calls; and
  3. If an employee uses petrol in a company car for private purposes.

Key takeaway

Deducting amounts from an employee’s wages is an area fraught with risk for employers. It is always best to seek legal advice before attempting to deduct amounts from your employees, or it may end up costing you more than you recoup.

 

[1] s323 Fair Work Act 2009 (Cth). This means an employer cannot pay an employee in stock or store credit, free services or benefits or withholding part of a worker’s pay for an extended period.

[2] s324 Fair Work Act 2009 (Cth)

[3] Fair Work Ombudsman v Gaura Nitai Pty Ltd & Anor [2017] FCCA 1242 (13 June 2017)

[4] Fair Work Ombudsman v Ausinko Pty Ltd & Ors [2018] FCCA 3524 (30 November 2018)

[5] Kent v Tal & Ors [2018] FCCA 3218 (9 November 2018)