Deductions from Pay

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Deductions from Pay

Deductions from pay can be made by employers under very specific circumstances. In New Zealand, the Wages Protection Act 1983 clearly outlines the limit on pay deductions, which aim to protect employees and ensure that wages are paid in a fair and reasonable manner.

When are paycheck deductions allowed?

Sometimes a deduction is necessary to correct a payment error, fulfil a court order or as part of an employment agreement. Examples of lawful deductions include PAYE tax, student loan repayments and child support.

An employer can request a deduction under the following circumstances:

  • the employee was overpaid due to a misjudgement or payroll error
  • the deduction was ordered by law, a court order, or the Employment Relations Authority
  • the employment agreement is legitimate and allows the deduction

Unlawful deductions from pay

The purpose of the Wages Protection Act 1983 is to protect employees from unlawful deductions and help employers understand the difference between a lawful and unlawful deduction. An employer can face serious repercussions if caught making unlawful deductions from an employee’s pay.

It is unlawful for an employer to make deductions from pay if:

  • it only benefits the employer
  • the deduction was done without written consent from the employee
  • the employee is under 18 and neither their parent or guardian has agreed to the deduction in writing
  • the circumstances were unreasonable – for example, the deduction was made because the cash register till was short or the employer felt it was justified due to poor performance

It is also unlawful to charge an employee a ‘premium fee’ in exchange for getting a particular benefit in the workplace, for example a promotion or sponsorship visa. Whether a payment of this nature is made as a lump sum or regular fee, it is always illegal and if caught the employer can be forced to pay the money back to the employee in addition to a penalty imposed by the Labour Inspector.

If an employee feels their payroll deduction is unlawful, they may contact Employment New Zealand or the Employment Relations Authority to report the employer. The employee has up to six years to contact the authorities following the issue.

Resolving an overpayment

An employer can legally get back an overpayment made to an employee if it was not practical or reasonable for the overpayment to be avoided, but they must follow the correct procedure. Even if the overpayment was caused by a misjudgement or technical fault in the payroll system, an employer cannot deduct an employee’s pay without an employee’s written consent.

To resolve the situation, an employer must notify the staff member about the overpayment and that they intend to deduct their paycheck to retrieve the full amount of the overpayment. The employer and employee can then discuss repayment options and confirm the arrangement in writing. An overpayment must be recovered within two months from the date the employer notifies the employee of this overpayment.

If an agreement cannot be reached on the overpayment matter, the employer can seek legal advice or talk to an employment relations specialist.

For advice on how to manage deductions from pay in the workplace, contact Employsure on 0800 568 012.

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