The Fair Work Act 2009 (Cth) (the Act) has placed impediments upon the capacity of employers to make deductions from an employee's wages or recover monies owing from employees.

A common clause in standard employment contracts often states that 'The employee agrees that the employer may deduct from the employee's final pay monies which is owed to the employer'.

On this basis the employer simply could deduct the amount that was owed to it from the final pay, however the law has swept this aside.

Division 2 of Part 2-9 of the Act has placed a number of hurdles on the capacity of an employer to recover monies owed through agreed deduction arrangements or through a debt recovery action in a court.

Deductions

The Act permits an employer to deduct an amount from monies owed to an employee arising from their performance of work but only if:

  • the deduction is authorised in writing by the employee
  • the deduction is 'principally' for the employee's benefit
  • in the case of a contract, the authority is not withdrawn and the exact amount that can be deducted is specified in the contract.

This means that an employee might accept a payment from an employer as a loan under a contract and then withdraw the right to deduct the money at any time; or if part of the amount has been paid off, argue that the balance cannot be deducted because it is not the specific amount that was authorised to be deducted under the contract.

This should still leave the right of the employer to recover the balance of the loan in a civil proceeding... but wait... there is more.

Recovery of monies

The Act sets out further provisions that limit the right to make deductions and/or recovery monies from employees.

A term of a modern award, an enterprise agreement or a contract of employment has no effect to the extent that the term permits an employer from deducting an amount payable to an employee or requires an employee to make a payment to an employer if the deduction or payment is: directly or indirectly for the benefit of the employer; or is unreasonable in the circumstances.

Regulation 2.12 of the Fair Work Regulations sets out some examples that do amount to reasonable circumstances:

  • providing an employee with goods and services on the same terms as the goods and services that the employer provides to members of the public, like health insurance or financial loans
  • corporate card expenses
  • personable phone call expenses
  • petrol purchases for private use.

The effect of the Act is that if the term of the contract is directly or indirectly for the benefit of the employee or is 'unreasonable', then the employer cannot make the deduction and cannot even recover the debt that is owed in a debt recovery action in a court.

A classic example is where an employer pays for an employee's training/education costs but on the basis that if the employee leaves within a certain period of time, he or she must repay these costs (or a proportion of them). The Act might now prevent the employer from recovering the money because the terms are 'unreasonable' as determined by a court.

Courts in the past have considered the enforceability of training bonds or requirements to repay relocation expenses based on claims that:

  • the payment exceeds the true costs of the employer and therefore is a 'penalty'
  • the agreement was achieved through duress and therefore is not enforceable
  • the time period that the employee had to remain in the employment to avoid having to repay the monies was so long as to amount to a restraint of trade.

These remain available defences for employees, but the Act now sets a higher bar for employers to satisfy, namely whether the 'benefit' was essentially for the employer's benefit or that the requirement to repay is just 'unreasonable' in the circumstances.

Comment

In practical terms, even if the transaction is lawful but a deduction from wages is not permitted, do employers wish to commence a timely and costly recovery action against a former employee for a relatively nominal amount of money?

Employers must ensure that agreements about loans or training/education costs and the like are carefully drafted and agreed without duress, are principally for the benefit of the employee and set repayment conditions that are reasonable and not onerous.

© DLA Piper

This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.


DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to www.dlapiper.com