Can an employer deduct money from an employee’s pay?

This question often arises when an employee is either overpaid or their employment is coming to an end and they have not complied with their obligations upon the completion of their employment.

The Fair Work Act 2009 (Cth) provides that an employer can only make a deduction from an employee’s pay in certain circumstances:

1. Where the deduction is authorised in writing by the employee and is principally for their benefit,
2. Where the deduction is authorised by an Enterprise Agreement or Modern Award, or
3. Where the deduction is otherwise authorised by: law, an order of a court, or the Fair Work Commission.

1. Where the deduction is authorised in writing by the employee and is principally for their benefit

Overpaying an employee

If an employee has been overpaid, an employer can only deduct payment from their wages to recover the overpayment in instances where:

• The employee has provided written authorisation, and
• It is to the employee’s benefit that the deduction is being made.

The same applies in other situations where an employer may want to deduct money from their pay. This may occur for example in instances where the employee is participating in a salary sacrifice arrangement where an employer seeks to recover costs such as:

• training costs spent to benefit the employee, or
• where the employee has used the company credit card for personal use.

If an employee does not agree to the deduction, an employer may still be able to recover the amount owing. For example, legal proceedings could be initiated against the employee, seeking restitution of the overpaid money. Without the employee’s consent, however, an employer is not entitled to deduct the overpaid funds from their pay.

Benefiting the employee

Any deductions that are made must also be for the employee’s benefit.

The Fair Work Regulations provide that a deduction from an employee’s pay will be reasonable where the deduction is for the purpose of recovering costs directly incurred by the employee through their voluntary private use of the employer’s property. This would cover circumstances such as where an employee has used their employer’s credit card for personal use and has agreed in writing to repay the amount through deductions from their pay.

While it is not covered by the Regulations, if an employee agrees to allow for these deductions to be made because it is a convenient means of repayment, then it is likely that the deduction could be viewed as being to the benefit of the employee.

However, care must be taken to ensure that the employee does actually receive a benefit. If there is no benefit to the employee, the employer cannot make a deduction from their pay, even if the employee has provided their written consent.

Payment deduction clauses

It is not uncommon for employment contracts to include a clause allowing an employer to deduct amounts from an employee’s pay. An employer needs to be careful before relying on such a clause. This is because the Fair Work Act provides that the employee’s written authorisation must:

• Specify the amount of the deduction, and
• May be withdrawn at any time by the employee.

A contractual term will rarely specify the amount of the deduction, and so these clauses will generally be ineffective. Further, even if the clause were effective, the employee is entitled under the Act to withdraw their consent at any time, notwithstanding the term of the contract.

2. Where the deduction is authorised by an Enterprise Agreement or Modern Award

Awards and Enterprise Agreements can allow an employer to deduct money from an employee’s pay in certain circumstances. For example, many Modern Awards allow an employer to make a deduction from an employee’s final pay, where the employee has resigned without giving the required notice under the Award.

3. Where the deduction is otherwise authorised by: law, an order of a court, or the Fair Work Commission

The third category of permitted deductions is when an employer is required to make a deduction by law. For example, employers must make Pay As You Go deductions on behalf of employees and remit those monies to the Australian Taxation Office.

Another example would be where a court made a garnishee order with respect to an employee. A garnishee order requires an employer to pay a third party, such as a creditor of the employee, a certain amount per week from their wages.

The importance of getting it right

If an employer makes an unauthorised deduction from an employee’s pay, for the purposes of the Fair Work Act they will have underpaid the employee, even if they would otherwise be entitled to claim the money. In doing so, the employer will have breached the Fair Work Act and could face potential civil penalties. The current maximum penalty for underpaying an employee is $12,600.00 per incident for an individual and $63,000.00 for a company, or for a serious contravention $126,000.00 for an individual and $630,000.00 for a company.

For these reasons, caution should be taken before making a deduction from an employee’s pay. If you are an employer who is unsure of whether you are permitted to deduct money from an employee’s pay, we recommend that you obtain legal advice.

How can Sharrock Pitman Legal assist?

If you have any further queries or if you would like to get in touch in relation to any of the above, please feel free to call Mitchell Zadow on (03) 8561 3318 or alternatively fill in the form below. We have an Accredited Specialist in Commercial Law and our team is well equipped to address any concerns you may have relating to business or employment issues.

The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

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