Mike Huss, senior employment law specialist at Peninsula looks at deductions from wages and explains the circumstances in which an employer has the authorisation to deduct money from hard earned salary.

So what does ‘pay’ mean? The word used in the main legislation covering this subject (Employment Rights Act 1996) is ‘wages’, but this is widely defined as ‘any sums payable to the worker in connection with his employment’ and includes salaries, fees, bonuses, commission and holiday pay; together with a range of statutory payments such as guarantee pay, statutory sick pay and statutory maternity or paternity pay.

The main exclusions from the definition of wages are loans by way of an advance of wages, payments in respect of expenses incurred by the employee and payments in respect of redundancy, retirement or compensation for loss of office.

An employer can lawfully make deductions from wages as defined above only in the following circumstances:

• where the deduction is required or authorised by virtue of a statutory provision. Obvious examples are income tax and National Insurance contributions, but this will also include deductions under Attachment of Earnings Orders (e.g. CSA payments);





• as reimbursement of previous overpayments of wages or expenses. However common law also plays a part here, and the courts may judge some overpayments to be unrecoverable by the employer – this is most likely to happen where the employee had reason to believe that they were entitled to the excess pay or where the employer has failed to make the recovery in a ‘reasonable’ time;





• any payment to a third party to which the employee has consented in writing – obvious examples are trade union dues or pension contributions;





• any deductions on account of an employee’s participation in industrial action. This is a highly sensitive area and advice should always be sought before making any such deductions;





• as a statutory deduction for cash shortages or stock deficiencies in retail employment. Traditionally retail employers have deducted till or stock shortages from employee’s wages. Whilst statute gives employee’s wages. Whilst statute gives employers the right to do this, it is nevertheless essential that contractual terms make clear how this will happen. Statute defines “retail transactions” as “the sale or supply of goods or the supply of services (including financial services).
• deductions can be made for any dishonesty, or any other conduct on the part of the worker (e.g. a mistake) which resulted in any shortage or deficiency”.
• there are limits on the amount which can be deducted, basically no more than one tenth, i.e. 10% of gross pay due on payday although this limit does not apply a maximum, which cannot be exceeded, for deductions from any final salary payments due to a leaver.
• there are also rules about limits and methods of timing and the documentation necessary. Any readers not thoroughly conversant with the rules should take immediate advice; and any deduction to which the employee has consented in writing prior to it being made.

This last situation is one that is most likely to raise questions. What amounts to an employee’s written consent? Consent is most commonly given by a term in the contract of employment giving the employer authority to deduct from pay in certain defined circumstances.

Examples might be loss of, or damage to, company property, parking penalties, or terminating employment without giving or working the required contractual notice.

If there is such a term it is lawful to make deductions in the relevant circumstances – although we would advise that the employee should be informed in writing of the intention to make a deduction and the term relied on in the contract.

The employer must be able to show that the employee was aware of this term – it is therefore essential that the document containing that term (e.g. the employee handbook) has been given to the employee or that they have been referred to it and had a reasonable opportunity to read it.

The employer should ensure that there is evidence of this by the employee’s signed receipt or acknowledgement. It is important also that any deductions must be strictly in accordance with the relevant term, and must be reasonable in the circumstances.

Where the employer has suffered a financial loss by the employee’s actions, and this is recoverable through a term in the contract, the employer must still be able to demonstrate that the amount deducted is properly attributable to the employee’s actions – thus for example if an employee leaves without giving notice it will not be lawful to make a deduction unless the employer can show that the employee’s breach has directly resulted in losses, or additional costs, greater than the money saved by not having to pay the employee’s wages over that period.

If recovery is sought by damage to company property, the employer must be able to show that the damage was caused by the employee’s negligence and was not simply accidental.

Note also that such terms often say something to the effect that a deduction from pay will be made if the employee does not make reimbursement – in this case deductions are a last resort, and the employee should always be given an opportunity to reimburse (perhaps agreed in writing e.g. deductions from pay over a period).

In some cases the employee’s consent may not be in a statement of terms and conditions but in a document setting out a specific agreement – for example a ‘training agreement’ whereby the employee agrees to reimburse part of their training costs if they leave within a certain period.

Such agreements entitle the employer to make deductions from pay (if no alternative can be agreed), but again this is only strictly in accordance with the terms of the agreement.

Note also that ‘deductions’ also covers a failure by the employer to make a contractual payment at the appropriate time – late payments of wages, or say a bonus, is therefore unlawful.

In most cases this is unlikely to lead to a problem if the matter is remedied quickly, but it should be remembered that unlawful deductions, especially if it happens more than once, can cause an employee to resign and bring a claim of constructive dismissal. In most cases however the employee’s remedy is a claim at Employment Tribunal for the amount deducted (or unpaid).

Such claims must be brought within three months of the date of the deduction or non-payment, or within three months of the latest deduction where there has been a series of such occurrences – but since unlawful deductions will amount to a breach of contract by the employer claims could alternatively be brought in the civil courts where there is a much larger time limit in which to make a claim.

Deductions from pay are therefore fraught with potential dangers for employers, and advice should be taken before any deduction is made. In our experience one of the most common areas of difficulty is that of bonuses and commissions – it is vital in avoiding disputes to ensure that the operation of such schemes is fully documented and that the employees concerned have been provided with a copy of that document.