Deductions from an employee’s wages can be made by employers under very specific circumstances. In New Zealand, The Wages Protection Act 1983 clearly outlines the regulations when making deductions. These laws aim to protect employees and ensure that wages are paid in a fair and reasonable manner.
When is a pay deduction allowed?
When you pay an employee their salary or wages you will need to make deductions for different reasons. Examples of a lawful deduction include:
- PAYE
- Child support
- Student loan repayments
- KiwiSaver employee contributions
- KiwiSaver employer net contributions
- Employer Superannuation Contribution Tax (ESCT)
An employer can also 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.
- An employment agreement is in place and allows the deduction.
Calculating tax deductions
Employees need to give you a completed IR330 form (a New Zealand tax code declaration). The tax code assigned to your employee will depend on their work type and financial circumstances.
If your employee does not give you a completed IR330 form, you should make tax deductions at the 45% non-notified rate.
If New Zealand’s Inland Revenue notices that one of your employees is using the wrong tax code, they will notify you in writing. This letter will tell you what their correct tax code should be. You’ll need to start using the correct code and deduct tax based on that code. The employee may be able to reclaim any excess tax deductions as a rebate at the end of the tax year.
Child support and protected net earnings
When you deduct child support from an employee’s pay, the maximum amount of child support you can deduct is 40% of their gross income (after tax). This is called protected net earnings. Protected net earnings only change when you’re paying an employee less than their usual pay (for example, if they take unpaid leave).
Protected net earnings only apply to child support. Other tax deductions should still be made even if these add up to more than 40% of an employee’s gross income.
Penalties for not making deductions
As an employer you’re responsible for making various deductions from your employees’ gross wages, such as PAYE tax, KiwiSaver, ESCT, student loans and child support.
It’s a breach of tax law if any employer does not properly deduct from an employee’s income, and you may face Inland Revenue penalties if you do not meet your responsibilities.
If you believe you’ll be unable to file or pay deductions by the due date, contact Inland Revenue as soon as possible. By raising the issue with Inland Revenue before the due date, you may be able to reduce the penalties that will be charged.
Unlawful deductions from an employee’s pay
The purpose of the Wages Protection Act 1983 is to protect employees from illegal deductions and help employers understand the difference between a lawful and unlawful deduction. An employer can face serious repercussions if they are found to have unlawfully deducted from an employee’s pay.
It is unlawful for an employer to make a pay deduction if:
- The deduction only benefits the employer.
- The deduction was done without written consent from the employee.
- The employee is under 18 and neither their parent nor guardian has agreed to the deduction in writing.
- The circumstances were unreasonable – for example, the deduction was made because the cash register was short, or the employer felt the deduction was justified due to poor performance.
Premium fee deduction
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 make deductions from future pay when an overpayment has been made to an employee, providing it was not practical or reasonable for the overpayment to be avoided. However, 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 make deductions from an employee’s pay without the same employee’s written consent.
To resolve the situation, an employer must notify the staff member that they have been overpaid, and that they intend to deduct the full overpayment from future wages. Alternatively, the overpayment can also be reclaimed as part of an annual leave cash up.
The employer and employee can then discuss repayment options and confirm any deduction arrangements in writing. An overpayment must be recovered within two months from the date the employer notifies the employee of the 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 tax laws and making deductions from an employee’s pay, contact Employsure’s FREE 24/7 Advice Line on 0800 365 514.
