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Q: How can we ensure that our rules for making deductions from pay are lawful?
A: The key issues to consider are those defined under the ‘Protection of Wages’ provisions of the Employment Rights Act 1996 (ERA), as found in section 13 to 16. These provisions apply, not just to employees, but to “workers”, including agency staff, apprentices and fixed-term workers.
Deductions from wages made by an employer, or payments from wages made by a worker, are only lawful if
- they are required by statute (e.g. tax, NICs, court orders, student loan deductions), or
- the worker has given prior written authority (e.g. loan repayments, trade union check-off deductions), or
- the deduction is authorised under a provision of the worker’s contract.
It is sensible, therefore, to include as many deduction situations as possible in each worker’s contract, e.g. the recovery of overtaken holiday pay, fines for stock losses (taking into consideration the special rules for this is sections 17 to 22 of ERA), fines for non-return of company property (e.g. tools, protective clothing), repayment of training costs or relocation costs for early termination, recovery of an overpayment of wages, deductions for not working notice.
All of such deductions may be lawful if they are clearly defined in the worker’s contract. Any deductions that are made routinely but that are not in the contract, or not agreed individually with the worker before the situation arises, are unlawful. A common example of a deduction that is commonly made by many employers but that is unlawful is the recovery of ‘overtaken’ holiday pay on termination.
The Working Time Regulations 1998 allow employers to pay ‘undertaken’ holiday pay on termination, but only allows the recovery of ‘overtaken’ holiday pay if it is provided for contractually. No deduction of “overtaken” holiday is permitted from a worker’s basic four-week statutory holiday entitlement – only from any additional contractual entitlement and only then if provided for in the worker’s contract.
However, contractual deductions may still be unlawful if any rules or conditions defined in the contract are not properly followed by the employer. For example, if the contract states that overtaken holiday may be deducted from the worker’s “final wages”, it would be unlawful to make a deduction from termination holiday pay.
It would be better to state that the deduction will be made from “final payments due on termination” (remembering that no deduction may be made from any statutory holiday pay due on termination). Or, if the contract allows the costs of repairs to be deducted from a worker’s wages if damage is due to the worker’s negligence, the deduction would be unlawful if the employer has not properly established the worker’s negligence.
Problems can also arise if a contractual deduction provision is unreasonable. For example, if a deduction may be made from termination pay where a worker has not worked full notice, the deduction may be unlawful if it is of the nature of a penalty, e.g. “an amount equal to the period of notice not worked”, rather than an amount that properly reflects the value of the damage caused to the employer because the employer has not worked notice.
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