Q. Our company is negotiating an enterprise agreement and wish to integrate some of our company policies into the agreement. One such policy relates to deductions from wages. We currently have a policy that requires the employee to reimburse the company for any excess applied by an insurer in the event of a claim against the employer’s professional indemnity insurer caused by the employee’s conduct. A similar policy applies with respect to the excess related to a claim to an insurer as a consequence of damage to a company motor vehicle. 
 
One manager has questioned whether such deductions are permissible under the Fair Work Act. Would the agreement containing such terms be approved by the Fair Work Commission or do they breach the Fair Work Act? 
 
A. Deductions from an employee’s wages are strictly regulated under the Fair Work Act 2009 (Cth). In most cases, requiring employees to pay an insurance excess or reimburse the employer for loss or damage will contravene the Act, even if included in a policy or enterprise agreement.
 

Lawful deductions – the starting point (s.324)

Under s.324, an employer may only deduct amounts from wages if the deduction is authorised in writing by the employee, and the deduction is principally for the employee’s benefit, or the deduction is authorised by a modern award, enterprise agreement, or law. 

Requiring an employee to pay an insurance excess, or the cost of damage to company property is generally not for the employee’s benefit, but for the employer’s benefit. Therefore, such deductions will usually fail the s.324 test.

 

Unreasonable requirements to spend wages (s.325)

Under s.325, an employer must not require an employee to spend any part of their wages if the requirement is unreasonable in the circumstances. Requiring an employee to reimburse an insurance excess, or cover business losses is likely to be considered unreasonable, particularly where the loss arises in the course of employment and the employee has limited control over the risk.

 

Unreasonable deductions (s.326)

Even where a deduction is authorised, it must not be unreasonable (s.326). A deduction is more likely to be unreasonable where it shifts business risk to the employee, it operates like a penalty or fine and it is not connected to a personal benefit to the employee.

Insurance excess clauses typically transfer commercial risk from employer to employee and are therefore likely to be unlawful or unenforceable.

 

Enterprise agreements and FWC approval

Including such a deduction clause in an enterprise agreement carries additional risk. The Fair Work Commission must be satisfied that the agreement complies with the Fair Work Act, and
its terms are lawful and capable of operation. 

A clause requiring employees to reimburse insurance excesses, or damage costs may be considered invalid, or lead the FWC to refuse approval of the agreement unless amended.

When deductions may be reasonable

Deductions are more likely to be lawful where they relate to personal benefit or private use, for example personal purchases on a company credit card, private use of a company mobile phone or personal fuel use in a company vehicle. 

In these cases the employee has received a clear personal benefit, and the deduction is proportionate and authorised.

 

Bottom line

Employers generally cannot require employees to pay insurance excesses or business losses through wage deductions. Such clauses are likely to breach ss.324–326 of the Fair Work Act, and be unenforceable or rejected in an enterprise agreement. Lawful deductions must be authorised, reasonable, and primarily for the employee’s benefit. Employers should approach any wage deduction provisions with caution, as non-compliance can result in significant legal risk and penalties.