Employers often get caught out by thinking that they can simply deduct money from an employee’s next pay packet if they owe them money. However, the law surrounding the deduction of wages is not as clear what many employers might assume.
Our Employment Department run through some of the common pitfalls below to ensure that you won’t end up having to pay your employees back after making deductions to their wages.
The basic principles
In general, you cannot pay a worker or employee less than what they are entitled to, other than in specific circumstances, including:-
- Where the law requires it, for example income tax or an attachment of earnings order for maintenance payments;
- When the contract allows it, for instance paying a proportion of training costs if the employee leaves shortly after completing the training;
- Where the worker agrees in writing before the deduction is made; or
- Where it is to rectify an earlier overpayment, such as a payroll error, or to recover payment from a fraudulent expenses claim.
However, problems can arise if you act outside the above circumstances.
Five common pitfalls are numbered below
- The employment contract does not allow for the deduction
Even if you are recovering a genuine overpayment, make sure that your employment contracts contain clauses allowing you to make a deduction in these circumstances. If not, the employee may have a breach of contract claim against you.
Make sure that the contract wording is sufficiently precise. If you are taking a risk, such as by paying for an employee’s training and you want to recover the costs if they fail or do not complete the course, then a bespoke agreement with the employee may be advisable. This should set out the specific circumstances and include the employee’s consent to deductions.
If you wish to deduct pay for lateness or unauthorised absence, then you should include this in the contract.
- The employment contract is inaccurate
You will not be able to lawfully deduct from an employee’s pay if an overpayment is made due to an error in drafting. For example, if the employee has a windfall because the contract says they work fulltime and they are paid accordingly but, in reality, they only work part-time then there is no right to deduct their pay to recover the overpayment. However, if you find yourself in a situation like this then we can advise you on other ways to recover the money.
- Pay falls below the minimum wage
Even if the employee wishes to sign up to deductions under a salary sacrifice scheme, for example childcare vouchers, you will have to ensure that they still receive at least the National Minimum Wage (NMW). If their pay falls below the NMW after the deduction under the salary sacrifice scheme has been made then you will be in breach of NMW rules.
- Rules about Retail
Additional provisions apply to protect retail workers against deductions made in respect of stock deficiencies or cash shortages. No single deduction can exceed one-tenth of the worker’s gross pay for that particular pay day. This limit does not apply to the final contractual payment when the worker leaves.
When deducting pay, make sure this is recorded on itemised pay statements. Since April 2019, workers as well as employees have been entitled to a pay statement which shows deductions from pay.
Potential Employment Tribunal claims
Employees may be able to bring an employment tribunal claim for historical deductions from pay if these form a series of deductions, as well as claiming for any single deduction within the last three months.
To ensure that your contracts give you the right to make deductions and that your pay arrangements comply with the law, please contact a member of our Employment Department.
We offer an Employment Law Service to protect your business from any issues that may arise with your employees, which includes policy drafting and the provision of practical advice on handling a deduction of wages, should the need arise. The service provides peace of mind and “on tap” advice for any employment law situation.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.