Making Deductions from an Employee’s Pay

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Is it ever OK to withhold or make deductions from an employee’s pay? In a recent case before the ERA, and as reported in Stuff, the ERA awarded an employee more than a whopping $25,000. The claim was for “unfair dismissal” and related to the employer failing to pay wages during a Covid lockdown. The employee had left his job and claimed constructive dismissal as he had not been paid for a number of weeks. The employer didn’t remedy the issue after he raised it with them. Unsurprisingly, not being paid had created hardship and jeopardised the employment relationship. The company counter-claimed that they were owed money and had issues with the employee, however they could provide no evidence to support this. The ERA were clear that failure to pay wages in full when due and owing is a serious breach of the duty owed by an employer.

When Deductions are Allowed

The Wages Protection Act 1983 prohibits making deductions from an employee’s pay. However, there are limited exceptions to this rule.

  • If the deduction is legally required – for example, income tax or student loan repayments.
  • When a court directs that a deduction be made.
  • If the deduction is for a lawful purpose, and the employee has requested or authorised the deduction in writing. Note that the employee can vary or withdraw their consent by giving notice in writing at any time.
  • When the deduction is to recover an overpayment because the employee has been absent without permission, been on strike, locked out or suspended. There is a specific process to follow to do this. Employers do not have a general right to make deductions from wages to recover overpayments that were simply due to miscalculations or other mistakes.

Making Lawful Deductions

Having a general deductions clause in your employment agreements is a good starting point to support any deductions. We recommend making this clause as specific as possible. However, case law has often ruled that this is not enough to support deductions. Explicit informed consent is required. Consequently, if you want to dock wages:

  • Consult before making a deduction.
  • Make sure the deduction is for a lawful and reasonable purpose. For example, you can’t deduct money for loss or damage that was caused by someone else.
  • Get the employee to consent to the deduction in writing – include how much will be deducted and when, and the reason for the deduction.

And While We’re Talking About Pay

You must pay employees on your agreed pay day. This means the day of the week and the pay period that you agreed to when they started work. You can’t change an employee’s normal pay day without their agreement.

Employees must be paid in cash (remember banknotes and coins!) unless the employment agreement provides for some other form of payment. You need your employee’s written consent (or written request) to pay by direct credit.

There is no statutory requirement to provide employees with a payslip (unless it’s in the employment agreement), but these are useful tools to make sure that you have a shared understanding of how the pay is made up.

Any changes to pay should be treated carefully and follow a fair and reasonable process as outlined in our recent blog. Get in touch if you would like advice on to manage pay.

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