An employer may make deductions from an employee’s pay under specific circumstances. However, employers must be aware of the rules regarding deductions as pay is heavily protected by the Wages Protections Act 1983. When deciding whether to make a deduction from an employee’s pay, an employer must make careful considerations about the reason for the deduction and any proposals they want to present as any unlawful deductions can bring serious consequences.
This guide will provide you an overview of deductions from pay, processes and when a deduction may be considered unlawful.
Pay deductions
Deductions from an employee’s wages can be made by employers under very specific circumstances. The Wages Protections Act 1983 provides guidance regarding regulations when making deductions, consent and proposals. These laws aim to protect employees and ensure that wages are paid in a fair and reasonable manner.
When is a deduction allowed?
When employers pay an employee their salary or wages there will already be numerous lawful deductions that need be made due to external factors.
Examples of these deductions 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:
- An overpayment due to a misjudgement or payroll error.
- The deduction was ordered by law, a court order, or the Employment Relations Authority.
- An employment agreement or other written agreement is in place and allows the deduction.
Calculating tax deductions
Employees will complete an IR330 form (a New Zealand tax code declaration) as a part of the onboarding process. The tax code assigned to the employee will depend on their work type and financial circumstances.
If the employee does not complete an IR330 form, the employer should make tax deductions at the 45% non-declaration rate.
If the Inland Revenue Department becomes aware that the employee is using the wrong tax code, they will provide notification writing. This letter will outline the correct tax code deductions which should be made based on the appropriate tax code. The employee may be able to reclaim any excess tax deductions as a rebate at the end of the tax year.
Penalties for making improper deductions
Employers are responsible for making various deductions from your employees’ net income, such as PAYE tax, KiwiSaver, ESCT, student loans and child support.
Failing to make the appropriate tax deductions from an employee’s income may result in breaches of tax law. As a result, employers may face Inland Revenue penalties if they fail to meet their obligations.
If employers feel that they will not be able to make the appropriate deductions within a certain timeframe, they should contact the Inland Revenue Department.
Unlawful deductions from an employee’s pay
The purpose of the Wages Protection Act 1983 is to protect employees from unlawful deductions and ensure they are paid on time. 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.
Resolving an overpayment
An employer can legally make deductions from future pay when an overpayment has been made to an employee for unauthorised absence, strikes, lockouts and suspension, provided it was not practical or reasonable for the overpayment to be avoided. However, they must follow the correct procedure. The employer must give notice of their intention to deduct from an employee’s pay. Such an overpayment must be recovered within two months from the date the employer notifies the employee of the overpayment.
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 inform the employee about the overpayment and propose the deduction to allow them the opportunity to provide feedback. The Wage Protections Act sets out that they may withdraw their consent which may jeopardise an employer’s ability to make a lawful deduction.
If an agreement cannot be reached on the overpayment matter, the employer can seek legal advice or talk to an employment relations specialist.
Managing employees with Peninsula
Employers are obliged to pay employees accurately and on time. If you fail to meet your responsibilities, it can lead to serious penalties as well as the repayment of lost wages. Knowing when to reach out for help or external support is also important as you may not have access to specialist support or inhouse HR. Our mission at Peninsula is to be the external HR and health and safety support for small businesses and employers. We are available 24/7, 365 days a year, working behind the scenes so you can grow your business smoothly. Contact us today and talk to our team members.