Deductions From Wages – A Risky Business
Most employers are not fully aware of the circumstances entitling them to make deductions from an employee’s wage particularly in situations where the employer seeks to recover money they believe is owed to them.
The Fair Work Act 2009 (Cth) (the “Act”) contains specific provisions regarding circumstances when an employer may make deductions from an employee’s payments.
Unlawful deductions can expose an employer to civil penalties.
Section 323 of the Act requires an employer to pay an employee the amount owing to him/her in full in relation to work performed. The exceptions to this obligation are contained in section 324 of the Act which permits an employer to make deductions where (S.324(1)):
- the deduction is authorised in writing by the employee and is principally for the employee’s benefit (eg a salary sacrifice arrangement); or
- the deduction is authorised by the employee in accordance with an enterprise agreement; or
- the deduction is authorised by or under a modern award or a Fair Work Commission Order; 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, child support, or a garnishee Court order).
A written authorisation from an employee must specify the amount of the deduction the authorisation may be withdrawn at any time.
There is no express provision in section 324 allowing an employment contract to generally “authorise” deductions from salary or wages, unless the authorisation falls within section 324(1).
Although it is common practice for contracts of employment to contain provisions which expressly allow an employer to make deductions, such terms may not expressly comply with section 324 of the Act. Section 326 of the Act provides that certain terms have no effect the section provides:
(1) A term of a modern award, an enterprise agreement or a contract of employment has no effect to the extent that the term:
- permits, or has the effect of permitting, an employer to deduct an amount from monies payable to an employee for work performed; or
- requires, or has the effect of requiring, an employee to make a payment to an employer or another person;
if either of the following apply:
- the deduction or payment is:
(a) directly or indirectly for the benefit of the employer, or a party related to the employer; and
(b) unreasonable in the circumstances;
Unreasonable requirements to spend an amount:
A term of a modern award, an enterprise agreement or a contract of employment has no effect to the extent that the term:
- permits, or has the effect of permitting, and employer to deduct an amount of monies payable to an employee in relation to the performance of work; or
- requires, or has the effect of requiring, an employee to make a payment to an employer or another person.
Section 326 refers to a contract of employment which makes the issue even more confusing, as the term contract of employment is not included in section 324 of the Act as an instrument from which deductions may be authorised.
In the decision of Andreas Bader v Cyclone City Cleaners Pty Ltd  NTMC 044, the Court held, in reliance of section 326 of the Act that an employer was not permitted to unilaterally withhold award wages owing to an employee against an debt the employer alleges he owed to if for damaged the employee was alleged to have caused to the employer’s motor vehicle.
Deductions for the Benefit of the Employer
It is important for employers to recognise that deductions for an employer or a related entity, must be authorised by an industrial instrument or, if relevant, a contract of employment, otherwise the employer cannot lawfully make a deduction.
If the deduction is directly for the employer’s benefit (or a related party) and, it is unreasonable in the circumstances, the deduction can not lawfully be made.
Examples of terms that will have no effect:
- deducting an amount payable to an employee in relation to the performance of work (where, for example, an employer thinks the performance is substandard); or
- deducting an amount for a job placement agency fee from an employee’s wages.
The Fair Work Regulations 2009 (Cth) (the “Regulations”) provide that for the purposes of section 326, employer deductions for goods and services will only be reasonable if they are provided to the employee on no less favourable terms than the employer provides those goods and services to the general public.
Employers may not automatically make deductions from an employee’s wages/salary or other payments in the following circumstances:
- to recover the cost of repairs or the insurance excess where the employee damages the employer’s property during the course of their employment; or
- to recover a short fall in takings at the end of the day in the register; or
- if an employee continually arrives late for work (or leaves early).
Requirements for Employees to Spend money from Payments
Section 325 of the Act prohibits employers from requiring, either directly or indirectly that an employee spend any part of his/her salary or wages where the requirement is unreasonable in the circumstances.
Any term of a modern award, enterprise agreement or contract of employment requiring an employee to spend an amount that is not reasonable will have no effect and will be unenforceable.
Employers should be aware that amounts deducted or required to be spent by an employee in contravention of the Act are taken as never having been paid and there are owing to the employee.
The issue of overpayment is not specifically addressed under the reasonable deduction provision in the Act or the Regulations.
An employer can only deduct money from payments to an employee to recover an overpayment if permitted to do so by an industrial instrument, 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 the employer to automatically deduct monies to recover an overpayment from the employee’s future wage payments without their written authority.
It is likely that recovery of overpayment of wages with the employee’s authorisation would be regarded as a reasonable deduction for the benefit of the employer, particularly where the overpayment was simply due to a payroll error.
The High Court considered the right to recover incorrect payments in David Securities Pty Limited v Commonwealth Bank of
In line with this decision, an employer may seek to recover an overpayment by negotiating and recording the agreement in writing between the employer and the employee.The employee should be given a choice about how the money is to be repaid and the amount and frequency of each payroll deduction. Deductions must be reasonable.
If the employee refuses to enter into an agreement for repayment, the employer would need to take independent action to recover amounts overpaid.
There are, however, occasions where an employer may not recover mistaken payments to employees as was demonstrated in the decision of TRA Global Pty Ltd v Kebakoska  VSC 480 (27 September 2011).In this matter, an executive employee was told by her employer that she was entitled to a redundancy of 12 weeks pay which amounted to over $27,000.00. Following termination, Ms Kebakoska was required to disclose this amount to Centrelink in an application for unemployment benefits, which were refused due to the amount she received. She actively sought work but was unemployed for eight months and spent most of the redundancy payment on living expenses.
After obtaining alternative employment, Ms Kebakoska sued her former employer for contractual bonus entitlements.Her former employer discovered that it had mistakenly paid redundancy and counter-claimed for recovery of the redundancy payment.
The court held that Ms Kebakoska was entitled to claim for contractual bonuses but that the employer was not entitled to recover the redundancy payment because Ms Kebakoska had substantially changed her financial position after receiving the redundancy money by disclosing the payment to Centrelink and being denied unemployment benefits and having to use the money for living expenses.
Normally if a payment is made by a legitimate mistake, there is a fundamental right to recover the money. However, if the person who received the money can show that they changed their position to their detriment in reliance on the belief that they were entitled to the money, they have a partial defence and are entitled to keep the money only to the extent their position changes. The Magistrate held in this case Ms Kebakoska was entitled to retain the amount based on the full common law defence of estopple by representation that is, because the employer’s representation that Ms Kebakoska was entitled to the money.
On appeal by the employer the Court upheld the Magistrate’s findings.
In conclusion, the issue of payroll deduction is one where employers need to be especially vigilant and cautious and should seek legal advice if hey are unsure about a deduction.
Author: Nicole Dunn