Deductions from wages

Overview

• Workers are protected from unauthorised deductions being made from their wages - this includes both employees and the wider definition of workers.
• Employers can only make deductions from a worker's wages if:
  • the deduction is required or authorised by statute, e.g. income tax, national insurance contributions and attachment of earnings orders
  • the deduction is required or authorised by a provision in the worker's contract - the worker must have seen the contractual term in question or must have been individually notified of it in writing before the deduction is made (i.e. retrospective authorisation is not possible)
  • the worker has given their prior written consent to the deduction - the consent must be given before the event giving rise to the deduction and not just before the deduction itself

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Definition of 'wages'

• The definition of 'wages' includes any sums payable to the worker by their employer in connection with employment including commission, holiday pay, statutory sick pay, statutory maternity/paternity/ adoption pay, protective awards, and sums paid during suspension on medical grounds.
• Excluded from the definition of 'wages' are advances of wages under a loan agreement, expenses, pension and retirement payments, redundancy payments (statutory or enhanced).
• Case law has established that most types of payment in lieu of notice are not 'wages'.
• A non-contractual bonus will be treated as 'wages' when payment has been made

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Allowable deductions

• Employers can made certain deductions without an employee's consent as follows:
  • overpayment of wages or expenses - deductions made in order to pay back to the employer an overpayment of wages (even if the error is because the employer has wrongly calculated the amount due) or an overpayment in relation to expenses
  • statutory payments due to a public authority - e.g. a payments made to HM Revenue and Customs. The deduction must be the amount specified by the authority
  • deductions payable to third parties - e.g. employees’ contributions to a pension scheme or trade union dues. The payments must be made under a contractual term or must be with the prior written consent of the worker
  • deductions due to a strike - if an individual has been on strike, the employer can make deductions from his or her wages
  • deductions ordered by a court or tribunal - if a court or tribunal orders the payment of an amount by the worker to the employer, the employer can make deductions from the worker’s wages, provided the worker has given his or her consent

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Retail workers

• Additional provisions apply to retail workers when there are cash shortages or stock deficiencies.
• Deductions can be made because of:
  • dishonesty or other conduct on the part of the worker which resulted in any shortage or deficiency
  • any other event for which they have contractual liability which resulted in a shortage or deficiency
• Certain conditions must be satisfied in order for deductions from retail workers to be made lawfully:
  • the amount of any deduction must not exceed 10% of the gross wages on any pay day (although the deficiency or shortage can be deducted over a number of pay days)
  • the 10% limit does not apply to deduction made from a retail worker’s final instalment of wages
  • the deduction must be made within 12 months of the discovery of the shortage or deficiency

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Remedies

• A worker can bring a claim to the employment tribunal for any unlawful deductions from wages.
• The claim must be brought within 3 months beginning with the date of the payment of wages from which the deduction was made.
• If an employer attempts to recover payments due from a worker in breach of the relevant provisions, the employer risks losing the right to recover the amount in question at all.

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Resources

Business Link

• Making Deductions

• Deductions from Pay

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