Be careful about deducting amounts from employees' pay

The Fair Work Act imposes hefty fines on individuals and corporations in cases where unauthorised deductions are made from an employee's pay, so it's important to understand the circumstances where deductions are allowed.

The Fair Work Ombudsman advises that an employer can only deduct money from an employee's pay if:

  • the employee agrees in writing and the deduction is principally for their benefit (this could include health fund deductions)
  • the deduction is allowed by a law, a court order, or by the Fair Work Commission, or 
  • the deduction is allowed under the employee’s award or registered agreement. 

It is not usually permissible to deduct money from an employee's pay to cover a shortage in the till or a cash float, or to cover the cost of breakages.

It is not even safe to assume you can deduct money to recover an overpayment unless you have agreement of the employee. In this case, you need to discuss and agree on a repayment arrangement. The Fair Work Ombudsman says that a written agreement has to be made and has to set out: 

  • the reason for the overpayment;
  • the amount of money overpaid;
  • the way repayments will be made (eg. pay deduction, cash, cheque or electronic transfer); and
  • how often repayments will be made and what amount will be taken (this has to be reasonable).

To avoid breaching the Fair Work Act and minimise the risk to your business, it is important to adopt a sound procedure to cover pay deductions. This could include:

  • Where deductions are made in line with a provision of the employee's award or registered agreement, ensure that the relevant provision of the particular award/agreement is clearly recorded and this record is kept on the employee's file;
  • Where deductions are made in line with an order of a court, Fair Work Commission or law (e.g. child support payments) keep a copy of the relevant documentation on the employee's file;
  • In cases of overpayment, act quickly to discuss the situation with the employee and work out a reasonable repayment plan, ensuring that the agreement is in writing and kept on the employee's file.

These measures will help you demonstrate that any pay deductions you made were properly authorised.