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I Am an Employer. Can I Make Pay Deductions?

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As an employer, there are many circumstances where you may wish to deduct a certain amount from your employee’s wages, including instances of theft, overpayment or negative leave balances. However, strict rules govern how and when you can make these deductions according to the Fair Work Act 2009 (Cth). As an employer, you need to understand when you may make a deduction and the correct procedure to make a deduction. This article will explain how permitted deductions work and set out the circumstances where pay deductions may be unlawful. It will also detail the proper process and steps to take if you discover a payroll error that has led to the overpayment of your employees. 

When Can I Lawfully Deduct Wages?

The Fair Work Act outlines the circumstances where you can lawfully deduct from employee wages. It specifically allows deductions where: 

  • the deduction is principally for the employee’s benefit and authorised by the employee in writing;
  • the employee authorises the deduction under an enterprise agreement;
  • a Fair Work Commission order or modern award authorises the deduction; or
  • another law or court order permits the deduction. 

If you seek to deduct pay based on an agreement between you and your employee, you must ensure that the agreement:

  • is in writing;
  • specifies the full amount of the deduction; 
  • is signed by you and your employee; and
  • gives the employee an option to withdraw or change the deduction at any time through a revised written agreement. 

The employer should also carefully consider whether the deduction is principally for the employee’s benefit, as this creates a relatively high bar for employers. For example, where an employer has paid for a training course for one of their employees and intends to recoup this cost if the employee resigns within a certain timeframe, there would be contention as to whether the training course was principally for the employees benefit given the business now has a more experienced employee as a result of the course.

Your payroll team should also ensure that any permitted deductions are clearly set out in the employee’s payslip or wage record. A clear statement of the reason for the deduction and reduced payslip will assist if the employee makes an underpayment claim. 

When is It Unlawful to Deduct Wages?

It is unlawful to deduct an employee’s wage when you do not have specific written authorisation from the employee to do so. However, it is also unlawful to deduct wages where the deduction is not principally for the employee’s benefit, even if you obtain the employee’s written consent.

It is a common misconception that the terms of an employment contract can permit you to make a wage deduction. Some contracts include clauses allowing the employer to deduct an amount from an employee’s wage or require an employee to pay the employer in certain circumstances.

However, employment agreements must uphold the strict requirements for wage deduction set out in the Fair Work Act. Ensure the deduction is permissable according to the law, not only the contract or agreement. A specific and separate document to obtain authorisation is also required, as the amount to be deducted must be clearly stated in the written agreement, which is often unknown when signing an employment agreement. 

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What Do I Do if I Have Overpaid My Employee?

If you have accidentally overpaid your employee, you will likely be able to recover the full amount of the overpayment. To do so lawfully, you will need to:

  • inform the employee as soon as you realise you have overpaid them; and
  • work with your employee to reach an agreement on repayment terms.

If your employee does not agree to a repayment plan, you must speak to an employment lawyer.

If the employee agrees to the repayment plan, the plan should set out:

  • the reason for the overpayment;
  • the amount owing;
  • how the employee will repay the money (e.g. by deduction or by payment to a nominated account); and
  • the frequency of each payment.

To ensure the agreement’s terms are workable and avoid potential disputes in the future, you should ask your employee to nominate how they would like to repay you. Keep written records of these discussions in case you need to refer to them later. 

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Key Takeaways

If you have a reason to deduct pay from an employee’s wages, you must consult the employee and agree on an approach. There are many circumstances where you might seek to make pay deductions. However, the purpose and outcome of doing so must be in the employee’s best interest. If you are unsure whether you can deduct your employees’ wages for any reason, you should speak to an employment lawyer. Obtaining the right advice upfront can avoid any potential claims or complaints later.

If you have questions about deducting wages, our experienced employment lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page

Frequently Asked Questions

What is a permitted deduction? 

A permitted deduction is a lawful reduction from your employee’s wages as authorised by the Fair Work Act. A deduction must be principally for the employee’s benefit and authorised by the employee in writing to be permitted under the Fair Work Act. Furthermore, the employee must authorise the deduction under an enterprise agreement. Alternatively, the deduction must be authorised by a Fair Work Commission order, modern award, or another law or court order. 

What should I do if I overpay an employee?

If you overpay an employee, you should first inform the employee of the overpayment and discuss with them how they will repay the overpayment amount. If an employee refuses to repay the amount, you should discuss this with an employment lawyer. You should ensure that any agreement reached with an employee is in writing and includes the reason for the overpayment, the amount of money they owe you, how they can repay it, and the frequency of each payment.

Eleanor Kenny

Eleanor Kenny

Law Graduate

Eleanor is a graduate lawyer in LegalVision’s Employment team. She graduated in 2020 with a Bachelor of Business and a Bachelor of Laws from the University of Technology Sydney. She began her career working in an international professional services firm providing corporate clients with regulatory tax advice in relation to their globally mobile employees.

Qualifications: Bachelor of Laws, Bachelor of Business, University of Technology Sydney. 

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