As an employer, what do you do if an employee say, damages a work vehicle or fails to repay an advance or loan? Is your first response to say “Right, its coming out of your wages!”. If so, then read on.

Under the Fair Work Act, employers cannot deduct debts owed to them by employees from wages/entitlements without specific written consent. In particular, “debts” cannot be set off against amounts payable to an employee on termination of employment. A general authorisation in a contract of employment or expressed in a policy will not be sufficient. Under the Fair Work Act, an employer can only make a deduction if:

  1. the employee has authorised the deduction in writing (specifying the amount), the deduction is principally for the employee’s benefit and it has not been withdrawn; or
  2. the deduction is authorised by the employee under an enterprise agreement; or
  3. the deduction is authorised by a modern award, state or federal legislation or court order.

Salary sacrifice deductions are an example of the first category. Income tax and compulsory superannuation fall into the last category.

But wait there’s more. The Act goes further and says that an award, enterprise agreement or contractual term allowing a deduction is of no effect if the deduction is for the employer’s benefit and is unreasonable. Reasonable agreed deductions can relate to things such as the provision of goods and services by the employer and voluntary private use by an employee of employer property, eg an employee’s private use of a corporate credit card or mobile phone, or petrol for an employer provided car.

Employers who do not follow these rules risk a complaint being made to the Fair Work Ombudsman and possible prosecution or private action for breach of legislative requirements and stiff penalties (up to $51,000 for corporations and $11,200 for individuals). An employer may be able to sue the employee for a debt in the civil courts but should first obtain advice about whether the amount owing really is a recoverable debt (eg employee damage to motor vehicles is a controversial area).

To sum up, it is wise to think twice and get advice if in doubt about whether a deduction can be made or not.