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Deductions from pay.

(Last Updated On: March 5, 2019)

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 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.

Based on wage deduction laws you can only make a deduction under one of the following conditions:

  • Both you and the employee agree in writing, and the deduction is for the employee’s benefit.
  • The relevant modern award or enterprise agreement allows it
  • Another law permits the deduction
  • The deduction is a court order or request by the Fair Work Commission (FWC)

When you create a written wage deduction form for the employee to sign, it must clearly state the full amount of the deduction. It should also give an employee the option to withdraw or vary the deduction at any time through a revised written agreement.

All permitted deductions must be clearly stated on an employee’s payslip or wages record.

Illegal Pay Deductions

Under the Act it is unlawful to make a deduction without specific written consent from your employee. Even with written consent, you cannot make a deduction purely for the benefit of yourself or a related party.

Another common mistake made by employers is they assume the terms of an Award, enterprise agreement or employment contract will automatically grant them permission to make a deduction.

An award, agreement or contract will have no effect if they:

  • Give you permission to deduct an amount from an employee’s wages (i.e. reduce an employee’s pay due to ‘poor performance’).
  • Require an employee to make a direct payment to you or a related party and the payment only benefits you.
  • Give permission for an employee under 18 to have their pay or wage deducted without written permission by their parent or guardian.

Employee Spending 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 under any circumstances:

  • 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
  • Force an employee to spend their own money or the wages you pay them

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 being entitled to back payments from you, and you may be forced to pay an additional fine too.

For peace of mind, look at the terms of your employee handbook or modern award in regards to deductions. If you are still unsure, talk to an employment relations specialist who can advise you on your legal rights and obligations.

Overpayment of Wages

Sometimes a payroll error or a misjudgement can result in the overpayment of wages. In most cases, you are allowed to reclaim the full amount of the overpayment.

Once you learn about the overpayment, you must inform the employee as soon as reasonably possible. From there, both you and the employee have to reach an agreement on the terms of repayment. If the employee does not agree to a repayment plan, you may need to seek legal advice or talk to an employment relations specialist.

If the employee does agree, you must then calculate the overpayment and have the employee sign a written repayment plan stating: the reason for the overpayment, the amount of money owed to the employer, how the money will be repaid (i.e. cash, electronic transfer or cheque), and the frequency of each payment.

It is generally best practice to let the employee choose the method of repayment and frequency. This way, they can comfortably repay the owed amount and keep their finances afloat.

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, put down your requirements in writing with a damage to company property policy.

By giving your employee’s these guidelines, they will know exactly how to treat company property, and what the consequences will be if property is stolen or damaged.

That being said, you cannot force an employee to cover the cost of damage to company property by making a deduction from their wage. Even if you have an agreement or employment contract that says you have the right, it may be considered unlawful and may not be enforceable under the Fair Work Act.

Employsure advisers can help you with the proper process for making deductions from pay. For peace of mind, please call 1300 651 415 to learn more.

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