Australia: Permitted vs illegal deductions: when can an employer lawfully deduct money from employee pay?

Last Updated: 2 December 2015
Article by Michael Byrnes

Most Read Contributor in Australia, August 2016

Key Points:

A recent decision of the Federal Court has shed light on the scope of permitted deductions, and the repercussions for employers who unlawfully deduct money from an employee's salary.

Employers often assume that if an employee owes them money then that debt can be deducted from the employee's pay or entitlements. What might seem to some employers like a matter of commercial common sense is not consistent with Australian industrial law, which says that an employer cannot deduct amounts from an employee's pay unless:

  1. the employer has obtained the employee's consent or express lawful authority to do so; and
  2. the deduction falls within the scope of a permitted deduction under the Fair Work Act 2009 (Cth).

In Australian Education Union v State of Victoria (Department of Education and Early Childhood Development) [2015] FCA 1196, the Federal Court has found that an employer unlawfully deducted $20 million from the salaries of 40,000 employees for the cost of laptops used predominately for work purposes.

The media scrutiny surrounding this case has heavily focused upon the amount of money taken from the employees, but has shied away from discussing the nature of permitted deductions and of the issues that can arise where it is uncertain if a deduction is lawful. So what is the difference between a permitted deduction and one that is unlawful? How can an employer ensure compliance with the Fair Work Act?

Permitted deductions: the legal framework

Section 323(1) of the Fair Work Act requires an employer to pay its employees amounts payable for the performance of work, in full and in money, except where the making of a deduction from salary is permitted by section 324(1).

Section 324(1) permits an employer to make deductions if:

  1. the deduction is authorised in writing by the employee and is principally for the employee's benefit;
  2. the deduction is authorised by the employee in accordance with an enterprise agreement;
  3. the deduction is authorised by or under a modern award or an order of the Fair Work Commission; or
  4. the deduction is authorised by or under a law of the Commonwealth, a State or a Territory, or an order of a court.

This however is on condition that the deduction is not "unreasonable in the circumstances" or directly or indirectly for the benefit of the employer, or a related party (section 326).

The laptop program from employees

Between 1 July 2009 and 29 November 2013, fortnightly deductions of between $4 and $17 (amounting to $20 million) were made by the Victorian Department of Education and Early Childhood Development (DEECD) from the salaries of teachers and principals who participated in a workplace program, the "eduSTAR.NTP Program" (NTPP). In return, they received laptop computers and associated software. At least 90% of the employees engaged by the DEECD were involved in the NTPP.

The NTPP was designed to provide participating employees with a laptop for use in teaching, preparation, administration and professional development. Although the laptops were intended to be used as a "work tool", the employees were also permitted to use them for personal purposes.

The Australian Education Union (AEU) commenced proceedings against the DEECD (on behalf of the employees) in the Federal Court of Australia, seeking orders for the repayment of all deductions made to the date of any order for repayment.

It argued that the deduction of "contributions" from the employees' wages amounted to a contravention of section 323(1)(a) and of one or more of the enterprise agreements to which both AEU and DEECD were parties.

Given that the number of employees involved in the NTPP were in the tens of thousands, it was agreed between the parties that the proceedings would be run in the form of a class action. This meant that the AEU's claim of unlawful deductions by the DEECD would initially relate to a sample group of 11 teachers.

The issues in the DEECD proceedings: salary packaging and authorisation

The two key questions for the Court were whether the deductions were lawful, because they were authorised:

  • by the employee in accordance with an enterprise agreement; or
  • by or under a law of the Commonwealth, a State or a Territory, or an order of a court.

The DEECD argued that the deductions from the employees' salary were authorised by the relevant Enterprise Agreements, which said:

"An employee may enter into a salary packaging arrangement in respect of a range of salary packaged benefits including note books and lap top computers...

All costs associated with salary packaging, including administrative costs and any additional tax associated with the employment benefit, are to be met from the salary of the participating employee."

DEECD contended that the deductions were made pursuant to agreements with the employees, which in turn formed part of the salary packaging arrangements contemplated by the Enterprise Agreements.

In addition, a Ministerial Order made on 19 December 2012 listed a number of deductions which could lawfully be made "from and at all times after 1 July 2009", including these deductions.

The deductions were not authorised by the Enterprise Agreements

Justice Bromberg rejected the DEECD's submission that the deductions were authorised by the employees in accordance with the applicable Enterprise Agreements and thus permitted by section 324(1)(b). This largely depended upon whether the NTPP deductions could be characterised as "salary packaging arrangements" within the meaning of the Enterprise Agreements.

Justice Bromberg held:

"In broad terms, because the NTPP laptops were not provided to teachers as remuneration for their services, I have concluded that the NTPP arrangements were not 'salary packaging arrangements' and therefore not made in accordance with the Agreements".

Retrospective authorisation not effective ? and the deductions weren't reasonable

Justice Bromberg also rejected DEECD's argument that the deductions fell within the scope of section 324(1)(d), concluding that the Ministerial Order could not be retrospectively applied to deductions that had been made since 2009. Further, he held that the Ministerial Order had no effect because the deductions were "unreasonable in the circumstances" under the Fair Work Act.

In arriving at this conclusion, he relied upon the following:

  • the contributions made by the employees to the cost of the laptop computers were made in the absence of a "genuine choice" to participate in the NTPP;
  • the contribution to the cost was excessive;
  • the deductions were not principally for the benefit of the employees; and
  • the value of the benefits actually received by the employees (ie. personal use of the laptops) did not provide a "countervailing justification".

The deductions were not permitted under the Fair Work Act

As a result of these findings, Justice Bromberg held that the NTPP deductions made from the employees' salaries were not deductions permitted by section 324(1), and that the failure of DEECD to have paid those teachers in full was, in each case, a contravention of section 323(1).

He concluded that a declaration in relation to the contravention of the Fair Work Act by the DEECD should be made. However, there were some issues that remained unresolved, including the appropriate compensation orders for the Sample Group, whether the Court should grant an injunction to prevent further deductions, whether the DEECD should repay deductions plus interest to each employee in the NTTP and whether the Court should direct DEECD to pay penalties to the AEU for contravening the Fair Work Act.

We'll continue to monitor the case and report any developments.

Deductions can be done by employers ? carefully

Employers must carefully consider the terms of any applicable modern awards, enterprise agreements or contracts of employment before deducting moneys from an employee's salary.

The deduction must also be reasonable. The Fair Work Regulations 2009 (Cth) provide further clarification as to the types of deductions that will be considered reasonable under the Fair Work Act. One very common type is "a deduction for goods or services provided by an employer or related party to an employee in the ordinary course of the employer's business", which permits:

  • a deduction of health insurance fees made by an employer that is a health fund; or
  • a deduction for a loan repayment made by an employer that is a financial institution.

Another is "a deduction which is to recover costs directly incurred by the employer as a result of the employee's voluntary private use of property of the employer, whether the use is authorised or not"; examples include:

  • the cost of items purchased on a corporate credit card for personal use by the employee;
  • the cost of personal calls on a company mobile phone; and
  • the cost of petrol purchased for the private use of a company vehicle by the employee.

While the above examples will generally be considered reasonable, the deduction must still be authorised by a modern award, enterprise agreement or a contract of employment to be lawful under the Fair Work Act.

As the AEU case clearly demonstrates, however, any term of a modern award, enterprise agreement or contract of employment that requires an employee to sacrifice their salary for the cost of an item that is required for the performance of an employee's job is unlikely to be considered reasonable under the Fair Work Act, and is likely to be unenforceable.

If an employer unlawfully deducts money from an employee's salary, in contravention of the Fair Work Act, there is a real and substantial risk that the employer will be exposed to underpayment claims and the imposition of civil penalties.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.