Deducting pay & overpayments
There are situations when an employer can make pay deductions or get an employee to pay them back, such as when an overpayment has occurred. However, there are other times where this isn't allowed - for example, 'cash back' schemes.
Taking money out of an employee’s pay
Taking money out of an employee’s pay is called a deduction.
An employer can only deduct money if:
- the employee agrees in writing and it’s principally for their benefit
- it’s allowed by a law, a court order, or by the Fair Work Commission, or
- it’s allowed under the employee’s award or registered agreement.
Examples include salary sacrifice arrangements or additional payments into an employee’s super fund.
An employee's written agreement must be genuine. They can't be forced to agree to a deduction.
Deductions have to be shown on the employee’s pay slip and time and wages records.
Deductions under an award or agreement
Some awards have a clause that allows an employer to deduct money from an employee’s pay without their agreement.
If a registered agreement allows the deduction the employee must still agree to the deduction.
Deductions that aren't allowed
An employer can’t deduct money if:
- it benefits the employer directly or indirectly and is unreasonable in the circumstances, or
- the employee is under 18 years of age and their parent or guardian hasn't agreed in writing.
This is the case even if the deduction is made in accordance with an award, registered agreement or contract.
Example: Deducting money for till shortages
Jenny works as a bar attendant in a tavern and is covered by the Hospitality Industry (General) Award 2010.
At the end of her shift her manager, Robert, counts the money for the day. He notices that the till is $20 short. Robert usually takes money out of the bar attendant’s wages to make up for the shortfall.
Even though the till is $20 short, Robert can’t deduct this money from Jenny’s wages. This is because the award does not allow it, the deduction would not benefit Jenny and it would be unreasonable in the circumstances.
This cost will need to be met by Robert as the employer.
Overpayments can happen when an employer mistakenly believes an employee is entitled to the pay or because of a payroll error.
Employers can’t take money out of an employee’s pay to fix up a mistake or overpayment. Instead, the employer and employee should discuss and agree on a repayment arrangement. If the employee agrees to repay the money, 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. cash, cheque or electronic transfer) and how often (this has to be reasonable).
If the repayment can’t be agreed an employer should get legal advice.
Example: How to pay back an overpayment
Tony was overpaid $2000 over 3 years because of a payroll error. His award does not allow a deduction to be made when an employee is overpaid.
Tony and his employer, Alice, meet to discuss the overpayment. Tony agrees to repay the money and they come up with a solution.
Alice says Tony can choose how the money is paid back and the amount and frequency of the payments. Tony tells Alice that he’d prefer if $20 was deducted from his pay each week until the $2000 is repaid. This arrangement is put in writing and both sign.
This repayment is reasonable because Tony had a choice about how the money was paid back, and the amount and frequency of each payment.
A deduction can be made to get back an overpayment if it’s allowed under a registered agreement, award, legislation or court order.
An employer isn't allowed to make an employee pay back a portion of their pay if there hasn't been an overpayment.
Example: Cash back schemes
James works as a sales assistant in a shop. His employer, Danielle, pays him the full award pay rate under the Retail Award but has told James that he has to pay a portion of his pay back to her each week in cash. She tells James if he doesn’t agree to pay back the money, he’ll stop getting shifts. James is on a student visa and needs the work.
James is now being underpaid because he is being made to hand back some of his pay. By coercing James into this cash back arrangement and threatening to take away his shifts, Danielle might also be taking adverse action against him, which isn’t allowed.
Best practice tips
- Check your award or agreement to find out when deductions can be made.
- Employers and employees should talk to each other if an overpayment has been made, then come to an agreement about repayment and put this in writing.
Source reference: Fair Work Act 2009 (Cth) section 324
Think a mistake might have been made?
Mistakes can happen. The best way to fix them usually starts with talking.
Check out our Help resolving workplace issues section for practical advice on:
- figuring out if a mistake has been made
- talking to your employer or employee about fixing it
- getting help from us if you can't resolve it.
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