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Unlawful Deductions from Wages

The Employment Rights Act 1996 provides specific statutory protection for workers against having unauthorised deductions made from their wages.  Making a deduction from a worker’s wages is one way of the employer seeking redress where the worker has breached their contract, for example because they have failed to work out their notice period.  Employers may also purport to make deductions for a number of other reasons, including in respect of the repayment of loans or overpayments of wages, to recoup annual leave taken in excess of accrued entitlement on termination of employment or to cover the financial cost of loss or damage suffered to the employer’s premises or equipment as a result of the employee’s carelessness, negligence or wilful default.  However, deductions are only permitted in limited circumstances.

This fact sheet sets out the circumstances in which it is permissible for employers to make deductions from workers’ wages.  It also covers the legal position where unlawful deductions are made.

Who does the legislation protect?

The law in this area protects ‘workers’, which includes employees, persons working under a contract of apprenticeship and individuals working under any other type of contract (whether express or implied and whether oral or in writing) by virtue of which the contractor performs the work or services personally for the other party of the contract who is not a customer or client of any profession or business undertaking carried on by the contractor. 

Meaning of ‘wages’

‘Wages’ means any sums payable to the worker in connection with his employment’ and this includes:

  • Any fee, bonus (including quantifiable non-contractual bonuses in consideration for work done or under a contract of employment), commission (including those payable after the termination of employment), holiday pay or other payments referable to the worker’s employment, whether payable under the contract or otherwise.
  • Statutory sick, maternity, paternity and adoption pay, including any payments made during suspension on medical or maternity grounds.
  • Guarantee payments.
  • Any payments for time off for carrying out trade union duties and activities.
  • Any payments due following an employment tribunal order for reinstatement or re-engagement.
  • An employment tribunal protective award.
  • Benefits in kind only if they are vouchers or stamps of a fixed monetary value capable of being exchanged for money, goods or services, for example luncheon vouchers and gift tokens.

Certain other types of payments do not count as wages and workers have no special statutory protection if deductions are made from them, although they may still be entitled to make a breach of contract claim.  These include:

  • Loans or advances of wages.
  • The payment of expenses incurred in employment.
  • Pension, redundancy and retirement payments.
  • Lump sums payable as compensation for loss of office or employment.
  • Benefits in kind, other than vouchers or tokens that can be exchanged and are of fixed monetary value.
  • Any payment to the worker other than in his or her capacity as a worker.
  • Unquantifiable amounts relating to loss of chance/business opportunities.

Lawful deductions

Broadly speaking, there will be a deduction made from a worker’s wages where the total amount of wages paid on any occasion by the employer is less than the total amount of wages properly payable by him to the worker on that occasion.  The amount of the shortfall in the wages will amount to a deduction.   For these purposes, a deduction also includes the complete non-payment of wages. 

One of three conditions has to be met for an employer lawfully to make deductions from a worker’s wages.  These are:

  • The deduction is required by or has been authorised by legislation, for example, income tax and National Insurance Contributions.
  • The deduction is authorised by the worker’s contract, provided always that the worker has been given a written copy of the contract or a written explanation of the relevant terms before the deduction is made.
  • The worker has provided his or her prior written consent to the deduction being made.

Authorised by contract

It is up to the parties to agree the clauses for compensation should one party breach any contractual terms.  The most commonly used clauses include, but are not limited to, recoupment of external training fees, recovery of pay in respect of annual leave taken in excess of accrued entitlement on termination of employment and compensation for failure by the worker to work their notice period on termination of employment.  It is vital for the clause to be drafted as accurately and precisely as possible.  If the clause is unclear or drafted too widely (for example, it permits the employer to make any deductions from wages at will), the employer will not be able to rely on it.

A deduction clause is only permitted if, from the employer’s point of view, it represents a genuine pre-estimate of the loss that might be suffered in the event that the worker is in breach of contract.  It cannot act as a penalty clause on the worker because penalty clauses are not enforceable. A tribunal will look at the reality of the working relationship and what the parties intended. For example, if there is a clause in the worker’s contract which permits the employer to withhold any outstanding wages should the worker fail to work the whole or part of their one-week notice period and the worker resigns with immediate effect, the employer may not always be permitted to simply deduct one week’s wages from the worker’s outstanding salary in this circumstance.  First of all, the clause must have been drafted in such a way as to represent a genuine pre-estimate of the employer’s potential loss (for example, by limiting the employer’s claim to one day’s pay for each day of the notice period not worked) and the employer will only be able to deduct any losses that have actually been suffered as a result of the worker’s breach (for example, the difference between the worker’s wages and a temporary replacement during the notice period or any loss of business as a direct result of the worker’s breach).  The employer cannot compensate himself for the costs of recruiting a new employee because these costs would have still had to be incurred even if the worker had worked his or her notice period.

Finally, what has to appear in writing is not only provision for the worker to repay the sum to the employer but also for the sum to actually be deducted from the worker’s wages.

Worker’s prior written consent

If there is not already a written and signed contract allowing for a deduction to be made, the employer may obtain the worker’s written consent for deductions to be made in the future.  For there to be a prior written consent, the consent must precede not only the deduction itself but also the event or conduct giving rise to the deduction.  This means that the worker cannot give retrospective consent to deductions from wages being made.  For example, an employer might obtain a worker’s consent to allow for tapering deductions to be made on account of the worker leaving employment within 12 months of completing employer-funded external training courses.  The employer would then be entitled to make deductions on account of any future training courses (subject always to the agreement not acting as a penalty on the employee) but would not be entitled to make deductions on account of any such training courses that the worker attended before his or her consent was obtained.

Excepted deductions

The law provides for certain deductions to be made other than in the circumstances set out above.  These are where the deduction is:

  • Made to reimburse the employer in respect of an earlier overpayment of wages or expenses.
  • Made following any statutory disciplinary procedure (for example, relating to those in the police and fire services).
  • A statutory payment due to a public authority.
  • Payable to third parties under an agreement with the worker, such as trade union dues or pension scheme contributions.
  • Made because the worker has taken part in a strike or other industrial action.
  • Made with the worker’s written consent for the purpose of satisfying an order of a court or tribunal requiring the payment of an amount by the worker to the employer.

In respect of an overpayment of wages, it is relatively straightforward for the employer to make a deduction where the overpayment was a single occurrence.  The employer can simply recover the relevant sum from the worker’s pay in the following week/month.  However, where an employer has made overpayments to a worker over a long period of time, it would be reasonable for the employer to agree a repayment plan with the worker for deductions to be made over a period of months.  In addition, where the worker has acted in good faith (i.e. he or she was not aware that they were being overpaid), they may seek to argue that they have changed their position by incurring expenditure as a result of the overpayment that they would not otherwise have incurred.  In this situation, the worker may have a defence to any subsequent claim by the employer to recover the overpayment.

Retail workers

Special provisions apply to deductions from the wages of workers in retail employment.  This is defined as employment involving the carrying out by workers of retail transactions (i.e. the sale or supply of goods and services, including financial services) directly with members of the public, fellow workers or other individuals in their personal capacities.  Workers covered by the special protection include:

  • Those who undertake selling activities to the public or to fellow workers not on a regular basis but on odd occasions.
  • Those who collect or receive money in connection with retail transactions with the public or fellow workers but are not themselves involved in the sale or supply of goods or services (for example, cashiers who do not serve customers).

Workers not covered by the special protection include those who sell or supply goods or services only to companies.

The special protection relates to deductions or payments made because of cash shortages or stock deficiencies.

It is unlawful for an employer to deduct more than 10% from the gross amount of any payment of wages to a retail worker if the deduction is made because of shortages or deficiencies.  Accordingly, where deductions can be made from a retail worker's wage to pay for shortages or stock deficiencies, the sums owed may be recovered in instalments of no more than 10% of the worker's gross wages.  However, the 10% limit does not apply to deductions from the worker’s final payment of wages on termination of employment.

A deduction of any size from the wages of a retail worker is unlawful if it is made more than twelve months after the cash shortage or stock deficiency to which it relates was (or ought reasonably to have been) established by the employer, unless:

  • The deduction is one in a series resulting from a particular shortage or deficiency; and
  • The first deduction in the series was made less than twelve months after the shortage or deficiency was (or ought reasonably to have been) established.

In addition, the employer may not receive from a retail worker any payment on account of a shortage or deficiency unless certain requirements are met.  These requirements are that:

  • The employer must, before receiving the first payment for any particular shortage or deficiency, let the worker know in writing the full amount that he or she owes.
  • The employer must make a written demand for payment on a pay day.
  • A demand for payment (or the first in a series of demands) relating to a particular shortage or deficiency must be made no earlier than the first pay day on or after the date of the written notification and not later than 12 months after the date when the employer discovered (or ought reasonably to have discovered) the shortage or deficiency.
  • Any such demand must not require the worker to pay more than 10% of the gross wages payable on that pay day.
  • The payment demanded on a pay day, added to any deductions made on the pay day because of shortages or deficiencies, must amount to no more 10% of the gross wages payable.

Notification and recording of deductions

Any deductions from wages should be notified to the worker and appear as itemised deductions set out in the worker's payslip. A failure to do so may lead to the employer being required to repay part or all of the sums deducted without notification. 

Unlawful deductions from wages

Any deductions made that are not permitted by law or by contract are unlawful, entitling the worker to present a complaint against the employer in the employment tribunal.  This applies regardless of the worker's length of service.  Such complaints must normally be made within three months of the date on which the wages were due to be paid.  In the case of a series of deductions or payments, the three months runs from the last deduction or payment in the series.

Following the introduction of the Deduction from Wages (Limitation) Regulations 2014, all claims for unlawful deductions made in the tribunal from 1 July 2015 onwards are limited to sums claimed for the period of up to 2 years' prior to the date the claim is lodged. For claims lodged prior to 1 July 2015 there is no such limit and if claimants are able to argue that a series of deductions has been made then they can recover the whole of the series, so long as the chain of deductions is not broken. Reaching an assessment on a series of deductions is fact specific and you should seek further legal advice on this point if required.

It is extremely important that unlawful deductions from wages are not made.  Not only may sums wrongfully deducted be ordered to be repaid by the employment tribunal, but also the employer will then lose the right to recover the sums which he was seeking to deduct by other means, even if the sums are properly owed to the employer.  In addition, from 6 April 2009, the employee may seek compensation for any financial loss they have suffered (such as bank charges) which is attributable to the unlawful deduction from wages.

There is also the risk that an employee with two or more years' service may resign and then claim constructive dismissal, on the basis that the employer has fundamentally breached his or her contract of employment by making the unlawful deduction.

This document has been created by, or on behalf of ESP Ltd, as a general document and as a guide in relation to its subject matter and has not been bespoke drafted for you or the specific circumstances in which you are looking to use it. Prior to using this document and undertaking any HR process you must consult your organisation’s own policies and procedures to ensure that you do not do anything in conflict with your own policies and procedures.  If in any doubt as to how to use this document or, if you require any legal advice, please feel free to contact ESP Ltd on 0333 006 2929 and our legal team will be more than happy to assist.  ESP Ltd will not be liable in any way for any actions undertaken by you or your use of this document unless we have been consulted regarding your use of this document as legal advisor to your business or have bespoke drafted any documentation in response to a specific support request.