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Deductions From Pay

Published April 2, 2015 (last updated on June 28, 2024) | Adam Wyatt - Content Writer

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Deduction from Pay or Wages

Taking money out of an employee’s pay or wages is called a deduction. Under the Fair Work Act 2009 (the Act) there are limits on when you can deduct pay and when you cannot. As an employer it is important that you understand what counts as a ‘permitted deduction’ and to follow the correct procedure.

Permitted Deductions

Deductions from an employee’s wages are only allowed under the Act if they are “permitted deductions” which is when:

  • Both you and the employee agree to the deduction in writing, and the deduction is mainly for the employee’s benefit.

  • the relevant modern award or enterprise agreement allows for the deduction, and the employee agrees to a deduction under the registered agreement

  • Another law permits the deduction

  • The deduction is ordered by a court or the Fair Work Commission (FWC)

An example of a permitted deduction is a salary sacrifice payments. An authorisation in writing must clearly state the full amount of the deduction or any variation to that amount. However, the employee may still withdraw the authorisation in writing at any time.

All permitted deductions must be clearly stated on an employee’s payslip or wages record. BrightHR can help you keep track of your employees’ entitlements by monitoring absences and shifts schedules, as well as working hours as they clock in and out with Blip. You can generate timesheet reports and store wage and time records securely in the cloud.

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Pay Deductions That Are Not Permitted

Generally, an employer cannot deduct an amount for an employee’s wages without specific written consent from the employee. Even with written consent, you cannot make a deduction purely for the benefit of yourself or a related party in most cases.

Employers often mistakenly believe the terms of an award, enterprise agreement or employment contract will automatically grant them permission to make a deduction, however this is not always the case. For example, an employee still needs to agree to any deduction made under a registered agreement. Also, deductions must be reasonable in all circumstances, even when permitted under an award or agreement.

Provisions in an award, agreement or contract will likely be unlawful if they:

  • Give you permission to deduct an amount from an employee’s wages which benefits the employer and is unreasonable in the circumstances (i.e. reduce an employee’s pay to cover accidental damage to a company vehicle).

  • Require an employee to make a direct payment to you or a related party and the payment only benefits you.

  • Allow an employee under 18 to have their pay or wage deducted without written permission by their parent or guardian.

However, some deductions that benefit an employer and are made in accordance with an award, registered agreement or contract may be reasonable in limited situations. Examples include deductions from the employee’s final pay if the employee doesn’t give sufficient notice of resignation under their award, or for costs incurred for the private use of the employer’s property, e.g. the purchase of personal items on a company credit card, or using the work phone to make personal calls.

Employees Spending Their Own Money

You cannot ask an employee or a prospective employee to spend their own money if the request is unreasonable, or the payment only benefits you or a related party. This rule applies to any money the employee or prospective employee owns, not just the wages you pay them.

This means you are not allowed to:

  • Ask an employee to give you money in exchange for a job offer

  • Ask an employee to give you money in return for keeping their job

  • Pressure an employee into spending their own money or the wages you pay them in a certain way

Cashback schemes are also not allowed under the Fair Work Act 2009. This means you cannot force an employee to pay back a portion of their wages or salary. This conduct would result in an employee or prospective employee being entitled to back payments from you.

The applicable modern award or registered agreement may provide information in regards to deductions. Some types of permitted deductions may also be incorporated into the employee handbook.

BrightHR allows you to store employee profiles and key documents such as contracts and handbooks securely in the cloud and determine employee access. You can upload updated policies and handbooks, set reminders and notifications of key dates, and get read receipts once your employees have accessed the latest version.

Overpayment of Wages

Sometimes a payroll error or a misjudgment can result in the overpayment of wages. It is unlawful for you to automatically deduct the extra amount paid from the employee’s next pay. A deduction can be made to get back an overpayment if it’s allowed under a registered agreement (and the employee agrees to it), award, legislation or a court or Fair Work Commission order.

Otherwise, once you learn of an overpayment, you must inform the employee as soon as reasonably possible in order to discuss repayment. You may reach an agreement with the employee on the terms of repayment, which must be reasonable. Any agreed repayment plan must be in writing and set out details as to the amount and how (e.g. electronic transfer) and when it will be repaid.  If the employee does not agree to a repayment plan, you may need to seek legal advice to try and recover the money by applying to the court.

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Damage to Company Property

Physical theft and damage to company property is a serious concern for any business. To avoid the financial and emotional stress of dealing with this issue, consider a company property policy.

By giving your employees guidelines on the use of company property, they will be across the company expectations and the necessary level of care associated with its use.

However, you generally cannot cover the cost of damage to company property by making a deduction from the employee’s wage. Even if there is a provision in an award or agreement or employment contract that says you have that right, it may still be considered unlawful in the specific circumstances.

We can help you understand deductions. Call us for free initial advice on 1300 651 415.

Frequently Asked Questions

What Can Be Deducted From An Employee’s Pay?

An employer can only take money out of an employee’s pay if it is permitted by the Fair Work Act 2009. Generally, the employee must agree in writing and the deduction must be principally for their benefit, for example a salary sacrifice arrangement. Awards may allow for deduction without the employee’s agreement in some circumstances provided it is reasonable, for example if they haven’t provided enough notice of their resignation, or for costs incurred due to the private use of company property.

Can An Employer Legally Deduct Money From An Employee’s Paycheck?

Yes. The Fair Work Act 2009 allows ‘permitted’ deductions from an employee’s wages (not entitlements) in limited circumstances, generally:

  • if the deduction is authorised by the employee; and
  • the deduction is principally for the employee’s benefit; and
  • the deduction is reasonable in all of the circumstances.

Deductions may also be authorised by an award, registered agreement or contract but may still not be lawful in the specific circumstances. Finally, deductions may also be permitted by an order of the Court or the Fair Work Commission, or by law.

Can You Make An Employee Pay For Damage To Company Property?

No. Generally, this will not be considered a permitted deduction as it is not principally for the employee’s benefit. There are however some awards that allow an employer to deduct the cost of damages from an employee’s wages, usually if the damage is deliberate and the deduction is reasonable in the circumstances.

Can An Employer Withhold Pay?

An employer cannot withhold an employee’s entire pay but may be able to make permitted deductions from their wages depending on the circumstances.

Can You Ask An Employee To Spend Their Own Money?

No. An employer isn’t allowed to make an employee or prospective employee, spend their own money. They also can’t make the employee pay the employer (or someone else) money if it’s unreasonable or the payment is for the employer’s benefit, or the benefit of someone related to the employer.

Can I Make An Employee Pay For A Mistake?

No. Deducting an amount from the employee’s wages because they made an error is likely to be considered unreasonable, and therefore unlawful.

How Far Back Can An Employer Collect Overpayment?

It will depend on where and how the employer is trying to recover the money. Generally, you can only pursue a claim to recover a monetary amount for up to six years from when the overpayment occurred.

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