Project1_Layout 1 07/FINANCE AND BUSINESS
‘You owe me!’ – The pitfalls of making
deductions from wages
Damaged van? Lost tools? You may fi nd yourself in a situation where you need to make a deduction from an employee’s wages. But are you
confi dent that you know the legal rules about when you can and can’t make deductions from wages? Andrew Rayment, a partner at law fi rm
Few realise that workers are protected
from having deductions made from
their wages, except in certain specifi c
circumstances. The law puts the
onus fi rmly on employers to obtain
authorisation from the worker to any deductions
before they are made. The overriding aim is to
protect staff from unscrupulous employers, but
employers also need to protect themselves against
falling victim to the strict legal rules.
Section 13 of the Employment Rights Act 1996
sets out the provisions that protect workers from
unauthorised deductions (known as unlawful
deductions) being made from their wages.
Quite simply, the law says it is unlawful
for an employer to make a deduction from a
worker’s wages unless the deduction is required or
authorised by statute or a provision in the worker’s
contract; or the worker has given their prior
written consent to the deduction.
Unlike breach of contract claims which
can only be brought after the employment has
ended, employees can bring unlawful deductions
claims in the Employment Tribunal while their
employment is ongoing.
Who is protected?
The protection against unlawful deductions from
wages applies to all workers. This includes not
only an employee, but an individual who has
entered into “any other contract... to do or perform
personally any work or services”, unless the
individual is carrying on a “profession or business
undertaking” and the other party to the contract
is “a client or customer” of that undertaking. In
practice, anyone who is on your payroll regardless
of whether they are full-time, part-time, casual,
direct agency hire or zero-hours will be protected.
Does this apply to late payment of wages?
Late payment of wages still counts as a deduction.
However, if the employer subsequently pays
the wages in full, a tribunal would not order
the sum to be paid again, although it may order
the employer to compensate the worker for
consequential loss, such as bank overdraft charges
caused by the late payment.
How to make deductions lawfully
So, given all of the above, how can an employer
make deductions from wages lawfully? Under the
heading of “deductions allowed if ‘required or
authorised by statute’”, an employer can lawfully
make a deduction from a worker’s wages if the
payment is required or authorised by statute. This
would include deductions for income tax and
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Walker Morris, discusses
national insurance contributions under the PAYE
system; and deductions made pursuant to the
Attachment of Earnings Act 1971 (i.e. where the
courts have made an attachment of earnings order).
But for “deductions allowed if authorised by
a provision in the worker’s contract”, a deduction
will not be unlawful if it has been authorised by
a provision of the worker’s contract. This means
one that is set out in a written contract which has
been given to the worker before the deduction
was made. The contractual provision must make
it clear that the deduction may be made from
the worker’s wages and, obviously, the employer
must also be able to demonstrate that the event
justifying the deduction has occurred.
In short, employers should always make sure
that their employment contracts contain a specifi c
clause to authorise deductions from wages or
other payments due to the employee in the event
that the employee owes money to the company.
But what of “deductions allowed because
worker has given prior written consent”? Here
a deduction will not be unlawful if “the worker
has previously signifi ed in writing his agreement
or consent to the making of the deduction”. The
written consent must be given before the event
giving rise to the deduction (so no getting the
worker to sign just before the deduction is made)
and the written consent must make it clear that the
deduction may be made from the worker’s wages.
It is always advisable to obtain prior written
consent from the employee in cases where, for
example, the employer pays enhanced maternity/
paternity/shared parental or adoption pay, but
reserves the right to recover the enhanced
payment if, for example, the employee does
not return to work; loans the employee a sum
of money (say a season ticket loan); or pays an
employee’s course fees or the cost of training, but
reserves the right to recover all or some of the cost
if, for example, the employee does not complete or
fails the course.
One more thing
There is a further sting in the tail. Once an
Employment Tribunal has ordered an employer
to pay back an amount that has been deducted
unlawfully, the employer cannot attempt to
recover that money later in another way, for
example by bringing a civil action in the county
court. This rule applies even though the sum may
have been properly due from the employee to the
employer. The fact that the employer has sought
to recover it unlawfully effectively extinguishes
the previous debt and the employer does not get a
second bite at the cherry.