“We’ll just deduct it from their final pay”
It’s a familiar story: an employee resigns, and when payroll starts wrapping things up, they discover a few financial loose ends – maybe the employee has a negative annual leave balance, failed to give the required notice, or a PAYG error from earlier in the year needs correcting.
To tidy things up, the employer deducts the amounts from the final pay.
Problem solved, right?
Not quite. In fact, this is one of the most common mistakes employers make.
What the law says
Under section 324 of the Fair Work Act 2009 (Cth), an employer can only make deductions from an employee’s pay in very limited circumstances. A deduction is only lawful if it is authorised:
- in writing by the employee and principally for their benefit; or
- by the employee in accordance with an enterprise agreement; or
- by or under a modern award of Fair Work Commission order; or
- by law, or a court order.
A deduction that benefits the employer, such as in relation to recouping overpaid tax, negative leave, or insufficient notice, will almost never meet the “principally for the employee’s benefit” requirement.
Modern award provisions are very strict and only permit deductions in limited circumstances. For example, most awards cap deductions for insufficient notice to no more than one week’s wages, regardless of the employee’s notice period. Deducting more than that can expose the employer to claims and penalties.
The risks of getting it wrong
Unlawful deductions can expose employers to:
- Allegations of wage theft (which can carry criminal liability)
- Civil penalties
- Claims for unpaid wages (even if the employee genuinely owed the money)
- Fair Work Ombudsman investigations and penalties
- Reputational damage if underpayment issues are reported publicly.
Importantly, PAYG correction deductions are not lawful unless specifically authorised by the employee. Once wages are paid, the obligation to remit tax to the ATO sits with the employer, not the employee.
The law significantly limits an employer’s ability to withhold amounts from an employee’s final pay. Often the safest approach is to pay all final entitlements in full and, if necessary, pursue recovery of amounts owed separately.
If you’re not sure if you can make deductions from an employee’s pay, get advice before taking action.
Get in touch to discuss your options with our team.