You’re thinking of reducing your employees pay, but you also don’t want to get slapped with a $12,000 compensatory fine for unfair dismissal (yes – it’s been held to equate to unfair dismissal). Read on to learn how to legally reduce an employee’s pay.

First step: review contract

As an employer, the first step when adjusting an employee’s pay is to review the employee’s contract. Industry awards, enterprise agreements, The Fair Work Act (2009) and any included annual performance reviews govern your capability to reduce an employee’s pay.

Review of Pay

It may be wise to include a review of pay, or an annual performance review in your contracts when hiring a new employee. If your employee is not performing accordingly, an annual performance review can justify a reduction in pay.

Hiring an employee is at times a complex task, but it is important to consider these specific terms when drafting an Employment Agreement to ensure your powers as an employer are not limited in the future.

What Rules do I need to Follow?

S 324 of the Fair Work Act (2009) states that you are permitted to deduct an employee’s pay if the deductions are any of the following:

(a) Authorised in writing and is mainly for the employee’s benefit

It may seem bizarre that an employee would agree to this, but businesses often negotiate job security with a deduction of pay. For example, during the GFC many businesses employed various measures, such as flexible working arrangements, cutting hours, and decreasing payment, to retain as many jobs as possible.

It is important to note that any variation in the amount of the deduction must be authorised in writing by the employee. The authorisation must specify the specific amount of the deduction and may be withdrawn in writing by the employee at any time.

(b) Authorised by an employee in accordance with an enterprise agreement

Enterprise agreements are agreements made at an enterprise level between employers and employees about the terms and conditions of employment. It sets out minimum employment conditions, and the National Employment Standards still apply. If an employer utilises a registered agreement, the award does not apply.

(c) Authorised by or under a modern award of a Fair Workers Commission order

In Australia, entitlements such as working conditions and minimum wages are set out in awards. Awards depend on the industry an employee works in, and the specific job they do in that business. Make sure you consider whether an industry award covers your employee, as your ability to alter an employee’s pay will depend on the type of award.

(d) Authorised under a law of the Commonwealth, a state or a territory or an order of a court

There are circumstances where it is perfectly legal for an employer to reduce an employee’s pay, for example, the following:

  • Income tax deductions
  • Superannuation
  • Salary sacrifice payments
  • Deductions authorised by employees such as insurance premiums, union dues and loan instalments

Restrictions to Consider

Even if you are your employee reach an agreement, there are still enforceable restrictions.

National Employment Standards (NES)

According to the Fair Work Act 2009 (Cth), an employment contract cannot remove employee entitlements provided for employees in the National Employment Standards (NES). This includes entitlements such as annual, sick and parental leave and penalty rates for working on public holidays.

Minimum Wage

The reduction cannot fall below the minimum pay rate. As of 1 July 2015, The Fair Work Commission has increased the minimum wage for employees over 21 years of age by 2.5% to $656.90 per week or $17.29 per hour for full or part time workers, and $21.61 an hour for casual workers. This of course varies depending on an employee’s age, experience and position in your business.

Unsure where to start? Contact a LawPath consultant on 1800LAWPATH to learn more about customising legal documents, obtaining a fixed-fee quote from our network of 600+ expert lawyers or to get answers to your legal questions.

Sharlene Han

Sharlene is a paralegal at LawPath that works on our content team, which aims to provide free legal guides to facilitate public access to legal resources. In accordance to her belief that the law should be accessible by all, her writing focuses on trending topics in both the legal and technological spheres.