The Do’s and Don’ts of Payroll Deductions

It’s not uncommon for our small-medium sized business clients to ask for advice on payroll deductions. Not because they’re trying to short-change their workers, but because it can be a very confusing piece of legislation to understand. This is particularly the case around employee requests for voluntary deductions.

So what are the do’s and don’ts of payroll deductions? In response to this oft-asked question, we’ve put together some useful information to help you navigate this part of the law.

WHAT IS A PAYROLL DEDUCTION?

A payroll deduction occurs when funds are taken out of a worker’s pay before that pay is ‘in hand.’ Some deductions are mandated by legislation, and some are due to a private agreement between an employer and an employee.

ARE PAYROLL DEDUCTIONS COMPULSORY OR VOLUNTARY?

Child support payments ordered by the Department of Human Services, and government decreed tax charges, are examples of compulsory payroll deductions that employers are mandated, by law, to complete.

Insurance premiums, union fees, and salary sacrifice payments are examples of private payroll deductions that are permitted when an agreement between an employer and an employee is in place.

Payroll deductions can be compulsory or voluntary. As a business owner, you need to understand the difference between the two and be ready to manage both.

WHAT IS AN ALLOWABLE PAYROLL DEDUCTION?

There are very specific regulations regarding the circumstances in which an employer can make deductions from an employee’s wage.

Unlawful deductions can cause irreparable damage to the reputation of your business, and may even result in hefty financial penalties.

THE RULES ABOUT ALLOWABLE PAYROLL DEDUCTIONS

    According to the Fair Work Ombudsman, an employer can deduct money only if:

  • the employee agrees in writing and the deduction is principally for their benefit
  • the deduction is allowed by a law, a court order, or by the Fair Work Commission, or
  • the deduction is allowed under the employee’s award or registered agreement.

An employee’s written agreement must be genuine. It is illegal to force an employee to agree to a deduction. Deductions must be included on the employee’s pay slip and wages records.

WHAT IS AN UNALLOWABLE PAYROLL DEDUCTION?

Some workplace award agreements include a clause that appears to allow an employer to deduct money from an employee’s pay without their agreement. The confusion caused by the inclusion of such a clause can cause workplace disputes and disharmony. It is important for business owners to be aware that according to Section 324 of the Fair Work Act 2009, even if this clause does exist, the employee must still agree, in writing, to the deduction. In other words, if your employee doesn’t consent to the deduction in writing, it’s illegal.

WHAT ARE THE RULES ABOUT UNALLOWABLE PAYROLL DEDUCTIONS?

    According to the Fair Work Ombudsman, an employer cannot deduct money if:

  • the deduction benefits the employer directly or indirectly
  • the deduction is unreasonable in the circumstances
  • the employee is under 18 years of age and their parent or guardian hasn’t agreed in writing.

Remember, Section 324 still applies so even if the deduction is made in accordance with an award, registered agreement or contract it is still, lawfully, unallowable.

WHAT HAPPENS IF I MAKE A PAYROLL MISTAKE?

Over the years we’ve had many clients come to us for assistance rectifying payroll mistakes. It happens. The most important first step in sorting out any payroll error is to communicate it clearly and be proactive when trying to solve the problem.

Overpayments are the most commonly made payroll mistake, often when an employer mistakenly believes an employee is entitled to the pay or simply because of a payroll error.

HOW DO I RECTIFY AN OVERPAYMENT?

Employers cannot just take money out of an employee’s pay to fix up an accidental overpayment. The employer and employee need to discuss and agree on a repayment arrangement.

    If the employee agrees to repay the money, a written agreement must be made. The Fair Work Ombudsman stipulates that the agreement must clearly communicate the following:

  • the reason for the overpayment
  • the amount of money overpaid
  • the way repayments will be made (e.g. cash, cheque or electronic transfer)
  • how often the repayments will be made.

If you’re having difficulty agreeing on a repayment schedule, please seek advice.

WE CAN WORK IT OUT

Remember, we are here to help. The do’s and don’ts of payroll deductions can be tricky, and as business owners ourselves, we understand the difficulty in trying to comply with the law, while also accommodating the requests of your employees.

To protect yourself, and your employees, we recommend you seek advice from a legal professional about the lawfulness of a payroll deduction. If you’re unsure about where to start, book a consultation with Bookkeeping Matters – we have the resources and the networks to point you in the right direction. An hour of your time might just save you from making a costly mistake.

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