Deducting Money from Employee Wages: Practical Guidance for Employers

Relevant For:

Employers and HR managers considering deducting money from employees.

Key Points:

• Employers must pay employees fully in money for work performed (Fair Work Act).
• Deductions benefiting employers or deemed unreasonable are typically unlawful.
• Written employee consent is required for overpayment recovery.
• Prohibited deductions include forcing employees to spend own money unreasonably or demanding payments for job offers.
• Permitted deductions must benefit employees or be legally authorised.
• Seek legal advice before making wage deductions to avoid legal risks.

Full Article:

Employees may occasionally steal, incur fines, or cause damage to your business. Despite this, your obligation to pay them as per legal requirements remains unchanged.

Here’s what you need to know about lawful wage deductions.

Can You Deduct Money from an Employee’s Wages?

Under the Fair Work Act (the Act), employers must pay employees in full, in money, for any work performed. Deductions are often unlawful and may breach employment contracts, particularly if they benefit the employer or are unreasonable. This applies even if agreements or contracts allow for deductions.

Overpayment of Wages

If you overpay an employee due to error or misunderstanding, you must obtain their written agreement before deducting future wages.

Discuss the mistake, establish a repayment plan, and confirm it in writing. Include details such as:

• Reason for overpayment
• Total overpaid amount
• Repayment method (EFT, cash, cheque)
• Repayment frequency (must be reasonable)

If no agreement is reached, seek legal advice.

Prohibited Deductions

It is illegal to:

• Require employees to spend their own money unreasonably or for the employer’s benefit.
• Demand payments for job offers or to retain employment.

Such “cashback” schemes are prohibited, and affected employees are entitled to backpay. Examples include:

• Forcing employees to buy work-related clothing.
• Making employees cover shortfalls in tills.

Even if employees commit theft, you cannot deduct wages to recover losses.

Permitted Deductions

Deductions are allowed if:

• The employee authorises it in writing and it benefits them (e.g., salary sacrifice).
• Authorised under an employment contract, enterprise agreement, or modern award.
• Authorised by legislation, court, or Fair Work Commission order.

For employees under 18, parental or guardian consent is required.

Reasonable Deductions Benefiting Employers

Some exceptions allow deductions that benefit employers, provided they are reasonable, such as:

• When an employee fails to give proper notice and is over 18.
• For goods or services provided by the employer as part of their business.
• When an employee uses company property for personal purposes, leading to a loss.

Key Takeaway

Deducting wages is legally complex and risky. Always seek legal advice before proceeding to avoid costly repercussions.