PAY - 25.03.2021

How to make lawful deductions from a worker’s wages

Statutory protection

Making a deduction from a worker’s wages is one way you can seek redress where they’ve breached their contract, e.g. if they’ve failed to work their full notice period on resignation. You might also wish to make wage deductions for other reasons, such as the repayment of a loan, to recoup annual leave taken in excess of accrued entitlement on employment termination or to cover the financial cost of damage to company property caused by the worker’s misconduct or negligence. However, ss.13-14 Employment Rights Act 1996 (ERA) provide statutory protection for both employees and workers against unauthorised deductions being made from their wages.

Meaning of wages

“Wages” means “any sums payable to the worker in connection with his employment” , including: (1) any fee, bonus (including non-contractual bonuses), commission, holiday pay or other payments referable to their employment, whether payable under their contract or otherwise; (2)  statutory sick, maternity, paternity, adoption, shared parental and parental bereavement pay (but an employment tribunal has no jurisdiction to determine entitlement to these statutory payments as this rests with HMRC); (3) statutory guarantee payments; (4) any payments for time off under Part VI ERA , e.g. time off for antenatal care, or for carrying out trade union duties and activities; (5) medical or maternity suspension payments; (6) payments due following a tribunal order for reinstatement or re-engagement; and (7) a tribunal protective award.

Certain other payments don’t count as wages and so workers have no specific statutory protection if deductions are made from them. These include: (1) advances of wages or payments under a loan agreement (but the protection will still apply to any later deductions made from wages in respect of any such advance); (2) expenses payments incurred by the worker in carrying out their employment; (3) any payment by way of a pension or gratuity in connection with the worker’s retirement or as compensation for loss of office; (4) any payment referable to their redundancy; (5) any payment to them other than in their capacity as a worker; and (6)  any monetary value attaching to a benefit in kind, other than vouchers or stamps of a fixed monetary value which are capable of being exchanged for money, goods or services.

Pro advice. Case law has also held that non-contractual pay in lieu of notice and employers’ pension contributions don’t amount to “wages”.

Lawful wage deductions

There will be a deduction made from a worker’s wages where the total amount of wages you pay them on any occasion is less than the total amount of wages properly payable to them, unless it’s attributable to an error of computation. The amount of the deficit is the deduction.

Pro advice. A deduction also includes the complete non-payment, or the late payment, of wages, and unilateral pay cuts made without contractual authority or the worker’s consent.

Pro advice. There can’t be a deduction if the wages weren’t properly payable to the worker in the first place. They must have a legal entitlement to them. For example, in unauthorised absence cases, it can be argued that wages aren’t properly payable, so non-payment isn’t a deduction. However, it’s advisable to nevertheless include a suitable clause on this in the contract (see Follow up ).

Under s.13 ERA , one of three conditions must be met for you to lawfully make deductions from a worker’s wages: (1) the deduction is required or authorised by legislation, e.g. income tax and NI; (2) the deduction is authorised by a relevant provision of the worker’s contract, provided the worker has been given a written copy of the contract or has been notified in writing of the existence and effect of the relevant terms before the deduction is made; or (3) they’ve previously signified in writing their agreement or consent to the making of the deduction.

Pro advice. Specific provisions exist in ss.17-22 ERA relating to deductions for cash shortages and stock deficiencies in retail employment. These aren’t discussed further here.

Contractual provision

You must draft a wage deductions clause as clearly and precisely as possible (see Follow up ). If it’s unclear, or drafted too broadly to cover a particular deduction, you won’t be able to rely on it. In addition, the clause must represent a genuine pre-estimate of the losses you’ll suffer as a result of the worker’s contract breach or other acts or omissions. It can’t act as an extravagant penalty on them out of all proportion to your loss, as penalty clauses are unenforceable. You can then only deduct any losses you’ve actually suffered as a result of the worker’s breach; you can’t make deductions for your inconvenience.

Pro advice. What must appear in writing is not only provision for the worker to repay the sum but also for it to be deducted from their wages.

Worker’s prior written consent

If there’s no existing provision in the contract allowing for a deduction to be made, you can obtain the worker’s written consent. However, for there to be a prior written consent, it must precede not only the deduction itself but also the conduct of the worker or other event giving rise to the deduction.

Pro advice. This means that a worker can’t give retrospective consent to deductions from wages being made for conduct or events that have already happened.

Excepted deductions

S.14 ERA provides several cases where the statutory regime gives no protection. If a deduction falls within these exceptions, it will be outside the tribunal’s jurisdiction. These are where the deduction is: (1) made to reimburse you in respect of an earlier overpayment of wages or expenses; (2) made in accordance with a statutory requirement to deduct and pay over to a public authority amounts determined by that authority to be due to it from the worker (provided the deduction is made in accordance with that determination); (3) payable to third parties under an agreement with the worker, e.g. trade union dues or pension contributions; (4) made because they’ve taken part in a strike or other industrial action; or (5) made with their prior written consent for the purpose of satisfying a court or tribunal order for the payment of an amount by them to you.

Unlawful wage deductions

Any deductions that aren’t permitted by law or contract are unlawful, entitling the worker to make a tribunal claim even while employment exists.

Pro advice. A deduction from wages claim is also the way in which a worker can enforce their right to the national minimum wage.

Pro advice. The tribunal can only consider certain deductions from wages occurring in the two-year period ending with the date on which the claim was presented, i.e. claims for any fee, bonus, commission, holiday pay or other payments referable to the worker’s employment, whether payable under their contract or otherwise. Claims for other types of deduction aren’t time-limited in this way.

Pro advice. If you have made unlawful wage deductions, not only will you be ordered by the tribunal to repay them, but you will then lose the right to recover that sum by other means, even if it’s properly owed to you. In addition, the tribunal can order you to pay compensation to the worker for any financial loss they’ve sustained which is attributable to your deduction, e.g. bank charges.

Pro advice. In the case of employees who have been employed for two years or more, they might also resign and claim constructive dismissal. This may be the bigger risk for you in making unlawful wage deductions.

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