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Taking money out of your employee’s wage is called a deduction. There are strict rules concerning how and when you can make pay deductions. These rules are set out in the Fair Work Act. As an employer, you need to understand: 

  • when you may make a deduction; and 
  • how to follow the correct procedures. 

This article will explain how permitted deductions work and set out the circumstances where pay deductions may be illegal. It also sets out what you should do if you have discovered a payroll error and realise that you have been overpaying your employees. 

When Can I Lawfully Deduct Wages?

The Fair Work Act sets out the circumstances where you can deduct wages lawfully. You may deduct wages where:

  • the deduction is for the employee’s benefit and the amount is agreed in writing;
  • a court has ordered the deduction or the Fair Work Commission has requested it;
  • the relevant modern award or enterprise agreement allows it; or 
  • another law permits the deduction. 

If you are seeking to deduct pay based on an agreement between you and your employee, you must make sure the agreement is in writing. The written agreement must clearly set out the full amount of the deduction and both you and your employee must sign it. The written agreement should also give the employee an option to withdraw or change the deduction at any time through a revised written agreement. 

Your payroll team should also make sure that any permitted deductions are clearly set out in the employee’s payslip or wage record. Clearly stating why the employee is receiving less than they would otherwise receive will help you if the employee claims that you have underpaid them. 

When Is It Unlawful to Deduct Wages?

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

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

No agreement or contract can undercut the strict requirements for wage deduction set out in the Fair Work Act. You should always make sure the deduction is a permitted deduction according to the law, not the contract or agreement. 

What Do I Do if I Have Overpaid My Employee?

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

  1. inform the employee as soon as you realise you have overpaid them; and
  2. work with your employee to reach an agreement on the terms of repayment (f your employee will not agree to a repayment plan, you will need to 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 of money the employee owes you;
  • 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 make sure the terms of the agreement are workable, and to save you potential problems down the track, you should ask your employee to nominate how they would like to repay you. You should keep written records of these discussions in case you need to refer to them later. 

Key Takeaways

If you have a reason to deduct pay from an employee’s wages, you must typically consult the employee and agree on an approach first. 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 of whether you can deduct your employees’ wages for any reason, you should speak to an employment lawyer. Getting the right advice upfront can avoid any potential claims or complaints later on. If you have questions about deducting wages, contact LegalVision’s employment lawyers on 1300 544 755 or fill out the form on this page.


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