25 February 2016

Deduct-do or Deduct-don’t: The Rules Around Employee Deductions

Elizabeth Kenny, Associate

When an employee owes an employer money, many employers assume that they are able to make deductions from an employee’s wage or salary to recover the money which is owed to them. However, the Fair Work Act 2009 (Cth) (the “FW Act”) is particularly prescriptive about the circumstances in which an employer can make lawful deductions from an employee’s wage and salary and further safeguards employees from unlawful deductions by exposing employers to civil penalties in circumstances where an unlawful deduction is made.

The Law

Under the FW Act, an employer cannot deduct amounts from the employees pay unless:

  • the employer has obtained consent from the employee in writing AND where it is principally for the employee’s benefit (eg. salary sacrifice arrangement); or
  • it is permitted by law, a court order, by the Fair Work Commission (“FWC”), or under the relevant industrial agreement or modern award.

An employer cannot deduct money if the employer gains a benefit, either directly or indirectly, and it is unreasonable in the circumstances.

Deductions by Consent

Employers must be mindful that getting express consent from the employee must be in relation to the specific deduction to be made including specifying the amount of the deduction. Therefore, a generalised consent to deductions without any specifications as to what kind of deduction and the amount of the deduction may not be considered to be valid or lawful.

Deductions Permitted by Law

While it may seem that the law is prescriptive about when a deduction is lawful or unlawful, it is often the most confusing for employers to determine whether a deduction is lawful when the employer has not received express consent from the employee.

For example, if an employee resigns without notice, is an employer able to deduct any amounts that the employee owes including notice of termination?

In circumstances where an employee has resigned on the spot and has not given the correct notice of termination, an employer may be able to deduct the equivalent period of notice from monies due on termination of employment, so long as this is specified in the applicable modern award or industrial agreement. It is common in modern awards to include a provision which states that:

“If an employee fails to give the required notice the employer may withhold from any monies due to the employee on termination under this award or the NES, an amount not exceeding the amount the employee would have been paid under this award in respect of the period of notice required by this clause less any period of notice actually given by the employee.”

Another example is when an employer has overpaid an employee. Can the employer deduct the amount overpaid from the employee’s next pay?

Generally speaking, the employer cannot take money from the employee’s pay to correct the mistake or overpayment. Similarly to the above, an employer will only be able to deduct an overpayment amount if it is allowed under an industrial agreement, modern award, legislation or court order. Therefore, it would be far more beneficial for employers to discuss and agree to a repayment arrangement with the employee in a scenario where an employee has been overpaid.

Lessons for Employers

Employers must be cautious when determining whether a deduction from an employee’s wage can be made, particularly as civil penalties can be imposed if a deduction is found to be unlawful. As best practice, employers should seek to obtain the employee’s express consent for any deduction, or ensure that they are permitted under an industrial instrument or modern award to make such deduction.

If you are unsure if a deduction is lawful or unlawful, please speak to the PCS Team on (02) 8094 3100.

Posted in Legal Advice & Consulting.
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