Everyone
Deductions and premiums
Employers can generally only take money out of an employee’s pay (make a deduction) if required by law, they have the employee’s written consent, or in some cases if they have been overpaid. They cannot take money to give or keep them in a job.
When an employer can deduct money
Employers can only deduct money from an employee’s pay if:
- it is required by law – for example, PAYE (Pay-As-You-Earn) tax, student loan repayments or child support
- an employee asked for or agreed to it in writing, and it is for a legal and reasonable purpose
- an employee has been overpaid (in some circumstances)
- the court directs a deduction to be made.
If an employee has a clause for general deductions in their employment agreement, the employer must still consult with (talk to) the employee before making a specific deduction from their pay.
Meaningful consultation includes talking about:
- what the deduction is for
- when the deduction will be made
- how much the deduction will be.
For example, the employer may want to deduct $500 from a single pay period, but after consultation with the employee, they agree that $50 will be deducted over the next 10 pay periods.
If money is deducted from an employee’s pay, it is good practice to show it on their payslip.
If an employee has agreed to or requested a deduction, they can ask in writing to change or stop the deduction at any time. Their employer must do what they have asked as soon as possible or within 2 weeks of receiving the request.
An employer must not make a deduction to penalise an employee for breaching their employment agreement.
Deductions must be reasonable
If the employee has agreed to a deduction, it must be legal and reasonable.
Any deduction an employer makes must be related to a measurable loss to them (for example a financial loss that can be calculated and proven) and in proportion to the loss. If it is excessive or out of proportion, it is likely to be considered unreasonable.
A deduction is also likely to be unreasonable if the employee had no control over the situation, for example, theft or damages caused by customers or others. An example of this could be a customer driving off without paying for petrol. In this situation, the employer must not deduct the cost of the petrol from the employee’s pay.
Examples of deductions
Taxes
If an employee is earning any sort of income, they must pay income tax. They will need:
- an IRD number
- a tax code.
IRD Number - Inland Revenue(external link)
Tax Code for individuals - Inland Revenue (external link)
Employers will deduct tax using the code employees give them when they start working. Employees should make sure their employer is using the right code or they may be taxed the wrong amount.
If a person is a self-employed contractor, they usually pay their own tax.
Paying tax on your salary or wage – Inland Revenue(external link)
KiwiSaver
KiwiSaver is a work-based retirement savings scheme employees can choose to be a part of. Both employees and employers make contributions.
Employee contributions
Unless employees have opted out of KiwiSaver or have a savings suspension, employers will deduct their employee contributions from their pay and pass them on to Inland Revenue.
Employer contributions
Employees can negotiate with their employer about whether the employer’s compulsory contributions are part of their total pay. Employees paid a salary should check if the salary offered by the employer includes employer contributions or if those payments are extra.
Whatever is agreed, the employer’s compulsory contributions are their responsibility and must be paid on top of the employee’s gross pay.
The employer’s contribution to an employee’s superannuation must be on top of the minimum wage. An employee’s pay must never go below the minimum wage because their employer paid compulsory KiwiSaver contributions, or other superannuation, from their pay.
Employers can make deductions from an employee’s pay on behalf of a union:
- to pay their union fee
- if a bargaining fee arrangement applies.
Employers must not just pay employees in accommodation or board. Payment for work must be in money.
Employees can agree with their employer that they will provide accommodation and that the cost of the accommodation will be taken out of the employee’s pay. This often happens if employees work in agriculture or farming. The agreement should be in writing and clearly state what has been agreed and how much it will cost, which should be reasonable.
The calculation for minimum wage must be done before deductions for accommodation are made.
If an employee does not have an agreement about the cost of accommodation, their employer must not take more than:
- 15% of the relevant minimum wage rate for board (accommodation and meals)
- 5% for lodging (just accommodation).
The tenancy or accommodation agreement should be separate from the employment agreement.
Sometimes, employers might provide other goods or services like the use of farm property or providing firewood or an animal. However, they must not deduct money from an employee’s pay to cover these things unless they have both agreed to it, and agreed how much they should cost.
The calculation of minimum wage must be done before any deductions are made.
The employee’s payslip should show the total wage, as well as how much was deducted for the goods or services.
Employers should put what was agreed to in writing, separate from the employment agreement.
Employees should get advice about how these deductions might affect the tax they pay.
Occasionally, an employer can make deductions to help an employee pay debt to a lending company. This can only happen if:
- the employee has asked for or agreed to it in writing
- the lending company has a court order for the deduction.
If an employee asks for or agrees to the deductions, they can change their mind at any time and ask in writing for them to be changed or stopped. The employer must make the change within 2 weeks of receiving the request.
Both the employee and their employer need to think about what will happen if the payments to the lending company stop or do not get passed on. It's a good idea to talk to a lawyer before agreeing to this type of deduction.
Employers must not force an employee to agree to make debt payments or tell them how or where to spend their pay.
If an employer loans an employee money, for example to help them if they are facing financial hardship, they can agree that the employee will pay the money back through deductions from their wages.
To do this, the employer and employee must agree:
- how much the deductions will be
- how often the deductions will be made.
The employer should also record details of the deductions in writing, for example:
- the date the money was lent
- the reasons for the loan
- arrangements for paying the money back.
It's a good idea for an employer to talk to a lawyer before lending money to an employee.
If an employee leaves without giving their employer the notice required in their employment agreement, the employer must not make deductions or withhold their wages or holiday pay unless the employee agrees in writing.
If an employment agreement includes a deductions clause that says the employer can deduct wages or holiday pay if the employee resigns without giving the required notice, the employer can only enforce it if:
- the employee was given enough time to consider, and ask for, independent advice on the terms and conditions of the employment agreement
- the employee signed the employment agreement
- any deductions relating to that clause are based on the actual loss suffered by the employer because the employee did not work for some or all of their notice period.
Employers may wish to seek professional advice before enforcing a deduction clause.
Employers must not deduct wages for time lost because of poor performance.
Deductions must be for a real or genuinely estimated cost or loss, not as a punishment for poor performance. There are better ways to manage performance.
Whether an employer has to pay an employee if time is lost because the employee has been absent from work will depend on the circumstances.
If the employee is entitled to paid leave (for example sick leave) for the time they were absent, the employer must pay them.
If the employee is not entitled to any paid leave, the employer does not have to pay them for the time they were absent from work. However, the employer must not make any further deductions, for example, to punish the employee for being absent.
Deductions for overpayments
Sometimes an overpayment can happen when something happens too close to the pay run to stop or change a payment.
In such cases an employer can only deduct money from an employee’s pay without their written consent if they overpaid them and they were:
- absent from work without their agreement
- on strike or partial strike
- locked-out (as part of collective bargaining)
- suspended (if seeking to suspend without pay, seek legal advice).
If an employer makes such an overpayment, they must tell the employee about it before their next normal pay day, unless:
- the employee does not have a fixed workplace (fixed workplace means they work in one set workplace) – then they must inform the employee no more than 10 days after their next normal pay day
- the employee has a fixed workplace but does not go there during normal working hours – then they must tell the employee no later than the first day they are back at the workplace after their next normal pay day
- the employee has 2 or more fixed workplaces and did not go to either of them during normal working hours on their next normal pay day – then they must tell the employee no later than the first day they go to one of the workplaces
- the deduction is for a partial strike – then they must tell the employee no more than 10 days after the overpayment was made.
Employers must deduct the overpayment from the employee’s pay within 2 months of letting them know about it.
Overpayments due to one-off miscalculations or errors
Sometimes an employer may make a one-off overpayment due to miscalculations or errors, for example, payroll staff enter the wrong amount, or a computer system failure causes incorrect pay. When this happens, they must not automatically deduct overpayments from an employee’s wages.
They must get the employee’s written consent to deduct the overpayment from their wages.
If the employer cannot get the employee’s written consent or the employee has left the employment, the employer may consider recovering this overpayment through mediation.
Premiums or fees for employment
It is illegal for employers to ask employees for money, sometimes known as a premium or fee for:
- giving them a job
- keeping them in a job.
It also includes situations where the money is paid to a third party. For example, someone else (like a family member or agent) pays money to the employer on behalf of the employee, or the money gets paid to another person or company on behalf of the employer.
It is always illegal, whether:
- the employee pays the fee in a one-off or regular amount to the employer
- the employer deducts the money from the employee’s pay
- the employee has to pay back some or all of the wages the employer paid them – either the gross (before tax) amount or net (after tax) amount. For example, the employer pays wages into the employee’s bank account, then the employee withdraws the cash and gives it back to the employer – commonly called wage recycling.
Some deduction or bonding arrangements where employees have agreed to have amounts deducted from their wages for on-the-job training or recruitment costs if they end their employment within a certain time may also be considered premiums.
If an employee or someone they know is being charged a premium, they should contact us for help. A Labour Inspector can seek a penalty against the employer and the employer will be required to pay the money back to the employee.
Spending pay
Employers must not tell employees how or where to spend their pay. Examples include requiring an employee to:
- buy their own uniform
- buy specific branded clothing to wear to work
- wear clothing that can only be bought from the employer’s shop (for example, retail clothing shops)
- buy food or drinks from the workplace.
This includes telling an employee to get uniform or equipment from the workplace and then deducting payment for it from their pay.
An employer must not dismiss an employee because they have spent their pay in a certain way.