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

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:

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:

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.