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There are times, as an employer, when you may feel justified in reclaiming money from an employee. The person may have lost company property, broken or damaged your equipment, or they may have resigned and headed for the hills, never to be seen again.
But before you make any move to recover money from someone, you should take a step back. Deductions need to be handled carefully or you could end up in a legal wrangle.
The bottom line is that any deduction you make from an employee’s pay must be lawful and reasonable, but what does that mean in practice?
This blog post takes a look at recovering costs from employees, when you can and can’t make deductions from people’s wages or pay, and the process you should follow in all cases.
Fair Work Act
The general rule, under the Fair Work Act 2009, is that in most circumstances an employer can’t make a deduction from an employee's pay or require them to pay money to the employer (or any other person).
There are a few exceptions:
- The employee agrees to the deduction in writing and it is principally for their benefit, e.g. health insurance, the company social club, or accommodation.
- The deduction is required by law - e.g. tax, superannuation, student loan repayments, or child support payments. In these cases, the employer is paying something on the employee’s behalf, so the employee doesn’t have to agree and can’t ask you to stop.
- A court or the Fair Work Commission (FWC) orders that a deduction be made, e.g. court fines.
- The deduction is allowed under the employee’s modern award or registered agreement (the employee must still agree to it).
Adding a deductions clause to employment contracts
You and the employee might agree to include a general deductions clause in their employment contract, but, even if you have such a clause, you still have no right to make any deduction without a separate written agreement (if the employee is under 18, their parent or guardian has to agree in writing).
To ensure that a deduction is reasonable, a specific deductions clause is recommended, particularly for matters such as private use of employer property deductions and overpayments.
However, it’s important to recognise that employees can’t be forced to agree to a deduction; it must be genuine.
When an employee leaves without working out notice
If an employee leaves your company and doesn’t give the right amount of notice under their award, you can legally deduct up to 1 week's wages from their pay, if they are over 18 and the deduction isn't unreasonable.
You can only deduct from the week’s wages owed under the award and not from other entitlements you owe the employee, e.g. accumulated leave.
In all other situations, you can’t legally make deductions or withhold wages or leave for an early departure from the business, unless the employee gives their written consent.
This may vary depending on the award, so it’s recommended that you consult the applicable award when navigating these issues.
A word about final pay
If an employee does not receive all of the components of their final pay which are owing (usually within 7 days for award covered employees), including penalty rates and allowances, they may have a claim for unpaid wages or leave or other breach of their entitlements under the Fair Work Act.
Deductions for losses, damages, or shortfalls
If an employee privately uses company’s property, e.g. makes personal calls on a work mobile, or buys personal items with a work credit card, then the business can reasonably make a deduction to recover those costs.
Deductions for loss or damage caused by employees can be problematic, because what one person considers reasonable another might not.
As mentioned, if you have clauses that specifically cover how loss or damage to company property will be handled, e.g. a vehicle clause, this may be a reasonable deduction. But again, it's important to obtain the employee’s agreement in writing.
It is also important to be fair as well as reasonable. If the deduction amount is significant, we recommend discussing a deduction schedule with the employee, so the money is recovered over several pay periods to ensure the person can still meet their living costs.
You cannot deduct money from an employee's pay to cover a shortfall, e.g. if the day's takings in the till are short. These costs need to be met by the employer.
Overpayment
In the case there is a payroll error and the business has overpaid wages, it may appear to make sense to deduct the overpayment from the employee’s next pay. However, this is not lawful.
While it was a genuine mistake, you cannot make this deduction without the employee’s consent.
If you do find you’ve overpaid an employee, we would recommend requesting that employee pay back the money, or propose deducting it from their next pay (or over a series of pay periods). Before you make any deduction, negotiate an arrangement with the employee, considering their personal circumstances, and ensure that any agreement with the employee is in writing.
If an employee refuses to pay the money back, you should get expert advice before you take any action.
Learn more about deductions and overpayments at fairwork.gov.au.
In all cases: Consult, consult, consult.
As in any employment matter, be sure you consult with the employee before taking any money from their pay, even if there is a clause (or clauses) covering deductions in their employment contract, award or agreement.
You should inform them in writing of the prospective deduction you want to make, the reason for it - e.g. for lost tools or damages to company property - how much and how it was calculated, and when it will be taken from the employee’s pay. You must then seek their feedback and genuinely consider their response in making your final decision.
As we’ve said, the employee has to agree to the deduction in writing.
A few don’ts
Here are a couple of things that you shouldn’t ever do, even if it seems tempting:
- Don’t use pay deduction as a punishment for poor performance or mistakes. It must be for a real or genuinely estimated cost or loss. There are much better ways to handle poor performance or behaviour.
- Don’t deduct (charge) money to allow a person to get a job or to keep one. Aside from being morally bankrupt, it’s totally illegal!
