Under the Fair Work Act, certain amounts can be withheld from an employee’s pay providing they meet the requirements of being “permitted deductions”. This part of the law is aimed at deductions like health insurance payments, union fees and similar. Such deductions can occur where the employee has made the request in writing and the deduction is for the employee’s benefit.
Permitted deductions under the law also include:
those that may be required by other laws (eg PAYG tax, child support) or by a court order (eg a garnishee); and
those provided for under an award or industrial agreement, if viewed as reasonable and for the employee’s benefit.
In the past the Fair Work Ombudsman (FWO) has taken the view that where an employee is overpaid, such overpayments cannot be recovered from an employee’s wages even if the employee agrees to it. The FWO has taken the view that such recovery is not “for the employee’s benefit”, despite it reducing a debt that the employee would otherwise owe their employer. The FWO stated that an employee would have to separately repay the employer each time they were overpaid, and could not have the amount deducted from their wages.
After submissions from many organisations, the FWO has recently changed this view of the law. Such overpayments can now be recovered direct from wages, provided the employee:
has a choice about how the money is repaid;
agrees to the deduction in writing; and
agrees on the amount and frequency of each deduction (which must be reasonable).
Jo was a full time employee but agrees with her employer to move to part-time work. The paperwork for the change is not processed until two weeks after Jo commences part-time duties and she is overpaid $400 gross ($300 net of tax). Jo agrees by email with HR that the overpayment can be recovered from her next five pays.
The situations involving an overpayment can be summarised as:
overpaid and discovered in same income year (the best result!); and
overpaid in one income year but discovered in a subsequent income year.
Overpayment Discovered in Same Income Year
Where this occurs, the correct amount should be disclosed on the payment summary. Generally the amount to recover will be the payment net of any PAYG withheld. This is because an adjustment to the PAYG can be done in the next PAYG remittance. In the above example involving Jo, Payroll would reverse the $400 gross wage and tax of $100 and then recover $60 for Jo’s after-tax pay over the next five pays (total $300). The tax portion of the overpayment ($100) would be recovered in the next PAYG remittance. The overpaid superannuation would be used to offset future super contributions for Jo.
Note that by fully reversing out the original overpayment, any change of income year prior to repayment will not affect the Payment Summary. The net owing is held as a loan in the accounts until repaid and the correct gross and tax are shown on the payment summary.
Overpayment Discovered in Different Income Year
If this occurs, the amount to recover from the employee will be the gross amount of the overpayment. This is because the employer will be unable to reclaim or adjust for the amount of PAYG that was sent to the ATO on this amount. The employer should issue an amended payment summary if possible and send a copy to the employee and the ATO (this may be in an amended empdupe file if possible).
The employee should contact the ATO about amending their income tax assessment (if issued) to exclude the payment. In the example involving Jo’s overpayment, the recovery would then be $400 over the five pays (ie $80 per pay).