As employers may be aware, there are very specific provisions in the Fair Work Act 2009 (Cth) (“FW Act”) regarding the circumstances when an employer can make deductions from an employee’s wage or salary. Therefore, it is essential for employers to understand their obligations to ensure they are not exposed to significant civil penalties for unlawfully deducting from an employee’s wage or salary.
When Can an Employer Make Lawful Deductions?
Under s 324(1)(a) of the FW Act, an employer can make authorised deductions from an employee’s wage/salary, incentive-based payments, bonuses, allowances if:
- the deduction is authorised in writing by the employee; and
- the deduction is principally for the employee’s benefit.
In addition to the above, s 324(1) of the FW 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.
It is also important to note that 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- may be withdrawn or varied, in writing, by the employee at any time.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 FW 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.
Notwithstanding the above, while it is common practice for employment contracts 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. Therefore, in the event an employer relies on such a contractual term and the employee later disputes the deduction, the employer may:
- have to repay the amount to the employee; and/or
- be subject to a civil penalty.
Sections 324(1) and 326 of the FW Act both refer to a “contract of employment”, which makes the issue more confusing because the term “contract of employment” is not included in section 324 as an instrument from which a deduction may be authorised.
What If An Employer Mistakenly Overpays an Employee?
The issue of overpayment is not specifically addressed under the reasonable deductions provisions in the FW Act or the Fair Work Regulations 2009 (Cth). 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 FW 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, especially if the reason for the overpayment was 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. In this case 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, (e.g. through a civil claim in the courts).
Key Take Outs for Employers
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. In most cases, an employer will be in no better position than any other creditor of the employee. The FW 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 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.
Need Specialist Help?
Recovering monies from employees can be a difficult and time-consuming practice, which can create tension in the workplace. Having good policies and procedures that deal with this can, therefore, be invaluable to an employer! We can assist you by providing tailored advice, and by reviewing and updating your policies, procedures and contracts.