Deductions From Your Employees’ Pay – When Are They Permitted?

A deduction is when an employer takes a portion of money out of an employees pay before it is given to them. There are limited situations when employers may lawfully make a deduction from an employees pay or ask them to pay back a sum of money. Employment contracts will often include a clause which states that in certain instances the employer can deduct money that is ‘owed’. Circumstances where this may arise could include where an employee has undergone training at the employer’s expense and then resigned, or where an employee fails to do something, they are obliged to, such as repay a loan.

It can be difficult to determine when an employer can lawfully deduct money from an employee’s wages or final pay. Even if the employment contract states that the employer is entitled to make deductions, it may not be permitted by law and making deductions unlawfully can be met with heavy penalties.

What are “Permitted Deductions”?

There are very limited circumstances when employers can make deductions from an employees pay. However, there are some common lawful instances in which employers can make deductions. These include deductions made for:

• Superannuation,
• Salary sacrifice payments, or
• Income Tax deductions

An employer can only deduct other money from an employee’s wages or pay if it is permitted under section 324 of the Fair Work Act 2009 (Cth). This provision permits deductions from employees’ wages where:

• The deduction is authorised in writing by the employee and is principally for the employee’s benefit; or
• The deduction is authorised in accordance with an enterprise agreement; or
• The deduction is authorised by or under a modern award or a Fair Work Commission order; or
• The deduction is authorised by or under a law of the Commonwealth, a State, or Territory or an order of a court.
• It is allowed under an employment contract and the employee agrees to it, so long as it is not unlawful for any other reason.

The Courts have determined that a deduction will be considered for the ‘employees’ benefit’ when the deduction is the result of a salary sacrifice or making additional elective payments towards their superannuation. Deductions must also be properly and clearly recorded on the employees pay slip and time and wages record.

When are Deductions Unlawful?

Generally, deductions that do not comply with the requirements of section 324 of the Fair Work Act 2009 (Cth) are unlawful. Even in circumstances where an award, enterprise agreement or employment contract permits deductions, the deduction must still be reasonable.

Examples of unlawful deduction include:

• A reduction in an employee’s pay to cover the cost of accidental damage to a company vehicle.
• Deductions made from the wage of an employee under the age of 18 without the written permission from their parent or guardian.
• Deductions from an employee’s wage to make up an unbalanced till.

Permitted Deductions without the Employees Consent

Some modern awards may allow for deductions without the employee’s consent, provided that it is reasonable. For example, some awards provide that if an employee over 18 does not give sufficient notice of resignation, an employer can deduct an equivalent amount from the employee’s wages or final pay. For instance, the Hospitality Industry (General) Award 2020 allows employers to deduct money from employee’s pay for the costs of accommodation or meals provided to an employee in certain circumstances. As the deduction is authorised under the relevant award, the written consent of the employee is not required but there is still a requirement that the deduction must not be unreasonable in the circumstances.

The Risks and Penalties for Unlawful Deductions

Unlawful deductions can result in civil penalties of up to $10,200.00 for an individual and $51,000.00 for a corporation. Any deductions made outside the scope of section 324 of the Fair Work Act 2009 (Cth) may expose employers to legal liability and underpayment claims which can result in heavy civil penalties upwards of $10,000.00 per contravention.

Let’s look at some examples…

Fair Work Ombudsman v Yogurberry [2016] FCA 1290

In this case the frozen yoghurt chain faced $146,000.00 in penalties after making unlawful deductions from the wages of four employees. Additionally, the part-owner of the organisation was personally penalised $11,000.00 for her involvement in exploiting the workers. The company was ordered to commission a professional external audit of all Yogurberry stores in Australia as well as rectify any underpayments that were uncovered.

Australian Education Union v State of Victoria (Department of Education and Early Childhood Development) [2015] FCA 1196

This case reflects the importance of clearly drafted provisions surrounding deductions from employees’ wages. In this case it was found that the Department of Education and Early Childhood Development had unlawfully deducted over $20 million from the salaries of over 40,000 employees for the costs of laptops provided by the employer. It was found that because the Enterprise Agreements and Employment contracts were not drafted clearly enough to get the employees express consent for the deductions, that the deductions were unlawful. The court found that the deductions for the costs of the laptops were not authorised under the Fair Work Act, and the Department of Education and Early Childhood Development were ordered to pay civil penalties for the offences.

Get legal advice

The above cases serve to demonstrate the importance of obtaining legal advice before drafting employment contracts seeking to deduct money from employees or making attempts to deduct money from employees’ wages or entitlements. Employer’s need to be on the front foot in ensuring their workplace documents are properly drafted to ensure they are protected, and legal advice should always be sought before any deductions are made.

 

Contact our Workplace Law Team for any queries regarding permitted deductions.