Withholding money from an employee’s pay for tax is common practice for employers. Withholding money for other purposes may, however, be a more complicated issue.

The Fair Work Act 2009 (Cth) (FWA) deals with payment of and deduction from wages. Deductions may only be made in particular circumstances set out by the FWA. Employers should be wary of these circumstances to avoid HR mistakes that can cause grief and cost money.

Section 323 of the FWA requires employers to pay employees, in full, all amounts relating to the performance of work. This includes wages, salary, bonuses, loadings, allowances, leave payments, and overtime or penalty rates. Section 324 provides exemptions to section 323 and sets out circumstances in which an employer may deduct amounts from an employee’s pay. Those circumstances are:

1. Where a deduction is authorised in writing by the employee and is principally for the employee’s benefit;

2. Where a deduction is authorised by an enterprise agreement;

3. Where a deduction is authorised under an award or order of the Fair Work Commission; and

4. Where a deduction is authorised under a law of the Commonwealth, a State or Territory, or an order of a court.

 

A common example of a deduction for the employee’s benefit is a salary sacrifice arrangement. This type of arrangement is only permitted where the deduction is authorised in writing.

The authorisation must specify the amount to be deducted from the employee’s pay. Authorisation may be withdrawn by the employee at any time.

 

An example of an award that allows for deduction is the Hospitality Industry (General) Award 2010. This award permits employers to make deductions for accommodation or meals provided to an employee covered by the award. As this type of deduction is authorised by the award, no written authorisation from the employee is necessary.

Tax withheld from an employee’s pay is an example of a deduction authorised by a law of the Commonwealth. As this deduction is authorised by law, no written authorisation is required.

Deductions from pay outside the scope of section 324 of the FWA may expose employers to legal liability. In addition to having to comply with section 324, employers should also be aware that money deducted from the pay of an employee who is under 18 may only be withheld with the written consent of a parent or guardian. This is the case even where an award or law permits deductions.

 

As an example of unlawful deduction, an employer cannot fix a mistaken overpayment to an employee by deducting the excess amount from that employee’s future pay. To comply with the law, an employer must arrange a reasonable repayment strategy with the employee while making all future payments in full. If a repayment can’t be negotiated, the employer should seek legal advice for other avenues to recover the overpaid money. An employer is also not permitted to withhold pay from an employee as a means of punishing employee misconduct, including unauthorised absences from work.

 

Making unlawful deductions can cost employers dearly. Civil penalties of up to $126,000 may apply for contraventions, in addition to a requirement that the employer pay back the amount deducted.

It is therefore important to seek advice as to the legality of any deduction before withholding money from employees.