Many employers do not understand the circumstances in which they are permitted to make deductions from their employees’ wages, particularly in situations where the employer seeks to recover money which they believe the employee owes to them.
Under the Fair Work Act 2009(Cth), amounts payable to an employee in relation to the performance of work must be paid in full and at least monthly.
There are very specific provisions in the Act regarding the circumstances when an employer can make deductions from an employee’s wage or salary and it is important for employers to understand their obligations.
Unlawful deductions expose an employer to the imposition of civil penalties, which range up to $10,200 for an individual and up to $51,000 for a corporation.
When is it clear that an employer can make deductions from wages or salary?
Section 323 of the Act requires an employer to pay an employee amounts owing to them in full in relation to the performance of work, except as provided for in section 324 of the Act.
Section 324(1)(a) of the Act provides that authorised deductions may be made from an employee’s wage/salary, incentive-based payments, bonuses, allowances, and so on ONLY if:
- the deduction is authorised in writing by the employee AND
- the deduction is principally for the employee’s benefit (eg a salary sacrifice arrangement).
Section 324(1) of the Act also permits the employer to make deductions where:
- the deduction is authorised by the employee in accordance with an enterprise agreement
- the deduction is authorised by or under a modern award or an order of the Fair Work Commission, or
- the deduction is authorised by or under a law of the Commonwealth, a State, or a territory, or an order of a court (eg income tax deductions, a deduction made for the purposes of child support by the Department of Human Services, or a garnishee court order).
The written authorisation from the employee must specify the amount of the deduction and may be withdrawn or varied, in writing, by the employee at any time.
The is no express provision in section 324 of the Act to allow a contract of employment to generally “authorise” deductions from wages or salary unless the authorisation falls within section 324(1)(a) of the Act and specifies the amount of the deduction.
This means that although it is common practice for contracts of employment to contain terms which may expressly allow an employer to make deductions, such terms do not appear to expressly comply with section 324 of the Act. This may mean that if an employer relies on such a contractual term, and the employee later disputes the deduction, the employer may not only have to repay the amount to the employee but can also be subject to a civil penalty.
Section 326 of the Act (discussed in detail below), and the notes to section 324(1) of the Act, both refer to a “contract of employment” and make the issue more confused, as the term “contract of employment” is not included in section 324 as an instrument from which a deduction may be authorised.
This may be an error in the drafting of the Act. However, because section 326 of the Act is clearly referable to section 324, even if a contract term authorising a lawful deduction is arguably within the terms of section 324 of the Act, it may still not satisfy the requirement that the amount of the deduction is specified in writing.
What if a deduction is “for the benefit of the employer”?
It is important for employers to recognise that deductions for an employer’s (or a related party’s) benefit must be authorised by a modern award or enterprise agreement (or if relevant a contract of employment), otherwise, the employer cannot lawfully make a deduction.
Even if a modern award or enterprise agreement (or if relevant, a contract of employment) contains an authority to make a deduction, section 326 of the Act provides that the authorisation will have no effect (and the deduction is likely to be unlawful) if the:
- authorisation is to allow a deduction from the amount otherwise payable to the employee, or
- requires an employee to make a payment to an employer or another person
If the deduction:
- is directly or indirectly for the employer’s (or a related party’s) benefit and it is unreasonable in the circumstances; and
- has not been agreed to in writing by a parent or guardian of the employee, where the employee is under 18.
Examples of terms that will have no effect include the following:
- deducting an amount payable to an employee in relation to the performance of work (e.g. where the employer considers the employee has performed substandard work), or
- deducting an amount for a job placement agency ‘fee’ from an employee’s wages.
The Fair Work Regulations 2009 (Cth) provides further clarification and examples of circumstances where deductions from wages for the benefit of the employer may be considered reasonable:
1. A deduction for goods or services provided by an employer, or a related party to the employer, to an employee in the ordinary course of the employer’s business, and which are provided on terms and conditions that are the same as, or not more favourable than, to the general public. Some examples include:
(a) a deduction of health insurance fees made by an employer that is itself a health fund, and
(b) a deduction for a loan repayment made by an employer that is itself a financial institution.
2. A deduction which is to recover costs directly incurred by the employer as a result of the employee’s voluntary private use of particular property of the employer, whether the use is authorised or not. Examples include:
(a) the cost of items purchased on a corporate credit card for personal use by the employee
(b) the cost of personal calls on a company mobile phone, and
(c) the cost of petrol purchased for the private use of a company vehicle by the employee.
However, although these deductions will be considered reasonable, the deduction must still first be authorised by a modern award or enterprise agreement (or if relevant, a contract of employment).
An example of a common modern award provision, that provides for a permissible deduction for the benefit of the employer without written authorisation from the employee, is the following clause in relation to the notice of resignation required to given by an employee:
The notice of termination required to be given by an employee is the same as that required of an employer except that there is no requirement on the employee to give additional notice based on the age of the employee concerned. If an employee fails to give the required notice the employer may withhold from any monies due to the employee on termination under this award or the NES, an amount not exceeding the amount the employee would have been paid under this award in respect of the period of notice required by this clause less any period of notice actually given by the employee.
Importantly, employers cannot automatically make a deduction from an employee’s wages/salary or other payments in the following circumstances:
- to recover the cost of repairs or the insurance excess where an employee damages the employer’s property during the course of employment (these costs may not recoverable in any event)
- to recover the shortfall of a cashier at the end of the day in their register, or
- if an employee continually arrives late for work (or leaves early).
Requirements of an employee to spend an amount of their payment
In addition to the strict provisions with respect to deductions, section 325 of the Act prohibits an employer from requiring (either directly or indirectly) an employee to spend any part of their wages or salary where the requirement is unreasonable in the circumstances.
This issue has recently attracted much attention in the retail industry where there is often a requirement that employees buy their employer’s brand of clothing in order to promote the items being sold in store.
Under the Act, it is not automatically reasonable for an employer to require an employee to buy and wear particular clothing, for example, clothing of a specific brand or “current” or “in season” stock.
If the employer does have such a requirement, then the employer will need to establish that that requirement is reasonable (perhaps by not requiring a significant financial outlay from the employee) or the employer will need to supply or pay for the clothing (or reimburse its employees for the purchase of the clothing).
However, if there is no requirement to wear a particular brand or type of clothing and the employer simply encourages employees to wear certain clothing without making it compulsory, it is likely that that requirement will be reasonable. An example of this is a direction that employees adhere to a dress code, e.g. wear all black clothing, or a neat, casual dress code.
Any term of a modern award, enterprise agreement (or contract of employment) that requires an employee to spend an amount that is not reasonable has no effect and is unenforceable.
Employers also need to be aware that amounts deducted or required to be spent by the employee, in contravention of the Act, are taken to have never been paid to the employee and will be required to be repaid by the employer to the employee.
What if an employer mistakenly overpays an employee?
The issue of overpayment is not specifically addressed under the reasonable deductions provisions in the Act or the Regulations.
An employer can only deduct money from payments to an employee to recover an overpayment if allowed by an industrial instrument (for example, an enterprise agreement or modern award), legislation or court order.
In the absence of an express provision permitting deductions and in the event of an overpayment, the Act does not permit an employer to automatically deduct the overpayment from an employee’s future wage payments without their written authority.
It is, however, probable that recovery of an overpayment of wages, subject to authorisation by the employee, will be regarded as a reasonable deduction for the benefit of the employer. This is particularly so if the reason for the overpayment was simply due to a payroll error.
The High Court considered the right to recover incorrect payments in David Securities Pty Ltd v Commonwealth Bank of Australia. This case addressed the issue of an entitlement to be reimbursed money paid under a mistake of law, The Court held that payments made by mistake should not give rise to unjust enrichment and ordered that the reimbursement should occur.
Accordingly, an employer may seek recovery of an overpayment by negotiating and recording the agreement in writing between the employer and the employee. The employee must generally be given a choice about how the money is to be repaid and the amount and frequency of each payroll deduction. The amount and frequency of the deductions must be reasonable.
However, if an employee refuses to enter into an agreement for repayment, the employer will need to take independent action to recover amounts overpaid, for example, through a civil claim and recovery action.
The issue of payroll deductions is one where employers need to be especially vigilant and cautious.
The Act only permits payroll deductions in limited circumstances. Employers should be aware that there is a distinction between a “belief” that there is a right to recover money from an employee, a legal right to recover money from an employee, and the method that the employer can ultimately use to recover any money.
In most cases, an employer will be in no better position than any other creditor of the employee. The Act does not simply permit an employer to take the easy option of making a deduction from the employee’s future wages or salary to recover money which the employee owes the employer.
Further, employers should be cautious in simply seeking to rely on any general deduction wording in their employment contracts. Despite such contractual wording, an employee’s express written authorisation of a specific amount will still be required, unless the deduction is properly authorised by an industrial instrument, legislation or court order.
In addition, employers are prohibited from requiring employees to spend any part of their payment in relation to the performance of work where the requirement is unreasonable. Where employees are required to wear a particular brand or type of clothing and are required to purchase that clothing, then that requirement has to be reasonable to be enforceable and not be in breach of the Act.
Employers should seek professional advice if unsure about the lawfulness of a payroll deduction for the employer’s benefit, BEFORE proceeding, as an unlawful deduction may attract a civil penalty under the Act.