Ask an expert: Deducting a PI insurance excess from an employee’s wages

Question

We recently had a claim against our professional indemnity insurance policy arising from the conduct of one of our property managers. The insurer applied the standard excess of $5,000. Our company policy requires an employee to reimburse the agency for any excess applied under an insurance policy where a claim arises due the employee’s conduct. Can we deduct this amount from the employee’s wages over time?

Answer

Such a term in a company policy may have no effect, because it could be argued that it doesn’t relate to the employment relationship. This is because the insurance policy relates to the employer in its capacity as the insured and the employee is not a party to the policy.

Also, such a term contravenes section 325 of the Fair Work Act 2009, which states that:

“(1) An employer must not directly or indirectly require an employee to spend, or pay to the employer or another person, an amount of the employee’s money or the whole or any part of an amount payable to the employee in relation to the performance of work, if:

(a) the requirement is unreasonable in the circumstances; …”

A deduction for an insurance excess would also certainly be found to be unreasonable.

The bottom line is that employers are generally prohibited from making a deduction from an employee’s wages without the employee’s specific authority. Even when authority is obtained, a deduction can only be made principally for the employee’s benefit.