While it’s commonplace for money to be deducted from employees’ wages for purposes such as taxation or salary sacrificing, there are strict requirements governing other wage deductions, especially if an employer is attempting to recover funds they believe are owed to them. 

Unauthorised deductions can result in civil penalties, so it’s essential businesses are up to speed on the laws surrounding permitted and prohibited deduction scenarios outlined in the Fair Work Act 2009. 

What wage deductions are allowed? 

The Fair Work Act mandates that employers must pay employees in full for work performed, however some exceptions are outlined which allow deductions only when:  

• Authorised in writing by the employee for their benefit (e.g. salary sacrifice), 
• Permitted by an enterprise agreement, 
• Allowed by a modern award or Fair Work Commission order, and 
• Required by law, such as tax or court orders (e.g. child support). 

Any employee authorisations must detail the deduction amount, and employees may withdraw this authorisation at any time. General authorisations cannot be included in employment contracts, restricting employers from making contractual provisions for deductions aside from the above. 

What wage deductions are prohibited? 

Despite it being common for employment contracts to contain deduction provisions, these may not fully comply with the Fair Work Act which invalidates terms that permit employer-benefiting deductions without authorisation, or unreasonably require employees to make payments to the employer or related entities.

Deductions that benefit the employer are unlawful if unreasonable, for example, deducting wages for perceived poor performance or charging a job placement fee to employees.  

Regulations further stipulate that employee-paid goods and services must be offered at terms comparable to the public.  

In addition to this, Employers cannot make any deductions for repairing costs for damages caused by an employee at work, cash register shortages or penalties for late arrivals or early departures. Similarly, the Fair Work Act prohibits unreasonable requirements for employees to spend, or pay to the employer or another person, portions of their wages if the requirement is unreasonable and the payment is for the benefit of the employer. Any such requirement is unenforceable.  

Can I recoup a mistaken overpayment to an employee? 

Overpayments are not directly addressed in the Fair Work Act’s reasonable deduction provisions. Employers may only deduct overpaid amounts with written employee authorisation or through an agreement. Without employee authorisation, employers cannot automatically deduct from wages to recover overpayments.  

Useful case studies: 

Fair Work Ombudsman v Glasshouse Mountains Tavern

In Fair Work Ombudsman v Glasshouse Mountains Tavern Pty Ltd, the employer paid a $495 fee for an employee’s gaming nominee license, a job requirement at their expense per their contract terms. While the contract allowed for wage deductions, it did not specify the $495 amount, violating section 324 of the Fair Work Act, which requires a written authorisation specifying the deduction amount. Consequently, the deduction was deemed unauthorised, establishing a breach without needing to consider further issues about who primarily benefited from the license. 

Australian Education Union v State of Victoria Department of Education and Early Childhood Development

In Australian Education Union v State of Victoria (Department of Education and Early Childhood Development), the Federal Court ruled that the Department of Education and Early Childhood Development (DEECD) had violated the Fair Work Act 2009 by deducting over $20 million from the salaries of more than 40,000 teachers and principals for work-related laptops. The court found that these deductions, made between 2009 and 2013, were not authorised under the Act’s salary packaging provisions, as laptops were not part of a genuine salary arrangement.

Additionally, the deductions were deemed “unreasonable” under section 326 of the Act, as they provided minimal employee benefit, involved excessive contributions and lacked voluntary choice. This case underscores that employer deductions must be both legally authorised and reasonable, avoiding detriment to employees or undue employer benefit. Final orders regarding specific employees and unresolved claims were set for a later trial.  

How to navigate wage deductions in your business 

Employers must exercise caution when implementing wage deductions and seek advice if they encounter a scenario where they are uncertain of the legal requirements. Mistakes or unauthorised deductions can lead to significant legal, financial and reputational liabilities.