Deductions and underpayments

Under section 13 of the ERA 96, an employer is only entitled to make deductions from a worker’s pay if:

• the employer has a statutory duty or authority to do so (for example, income tax and National Insurance);

• an express term in the contract, agreed to before the deduction, allows the deduction and the employer has notified the worker in writing; or

• they have the written consent of the worker, which must have been given before the incident leading to the deduction.

A signed authorisation form for union subscriptions is a written consent, making this a lawful deduction.

If an employer deducts pay without consent, the worker can bring a claim for unlawful deduction from wages in an employment tribunal. This includes shortfalls in wages and late payment. Failure to pay wages in full when due is an unlawful deduction. There are important exceptions to the protection against unlawful deductions, explained on page 108.

A claim for unlawful deduction from wages must be made within three months of the date the last payment was due or, if there is a series of deductions (for example, a month-on-month failure to pay the NMW), within three months of the last in the series. Under new rules from 6 May 2014, no claim can be issued in the tribunal without an Early Conciliation Certificate supplied by Acas. Acas must be contacted within the normal three-month time limit for bringing the claim. For information on Acas early conciliation, see Chapter 1.

Wages include fees, shift allowance, bonuses, commission, holiday pay, guarantee pay, sick pay, maternity pay and notice pay, but only if the notice has been worked and the wages remain unpaid. If an employer ends the contract without notice or notice pay, the correct course is to claim the notice pay as damages for wrongful dismissal in breach of the employment contract (Delaney v Staples [1992] IRLR 191).

Unpaid expenses cannot be recovered as an unlawful deduction of wages. Instead, a contract claim must be brought (section 27 Part II ERA 96, Quantas Cabin Crew (UK) Limited v Lopez [2012] UKEAT/0106/12/SM).

Wages for this purpose do not include pension contributions (Somerset County Council v Chambers [2013] UKEAT 0417/12/2504).

For an employer to rely on an express contract term agreeing to deductions, the employment contract or statement of employment particulars containing the term should have been signed by the employee to confirm their written agreement. The same goes for any other kind of written agreement allowing deductions from wages, for example, a training agreement. If there is no evidence of the employee’s prior written consent, this is a good starting point from which to resist a contested deduction.

Even if an employee has breached the employment contract, for example, by leaving without giving full contractual notice, there is no automatic right to deduct pay. Any deductions made without authority from a final pay packet are unlawful. For example:

Deducting money from an employee’s final pay packet because they have taken more holiday than they have built up is an unlawful deduction from wages, unless a written agreement, made in advance, allows this. The written agreement is usually an express term of the employment contract.

Deductions for other reasons, including dishonesty, poor work or misconduct can also only be made if the worker has given their advance written agreement. Any agreement must be specific and clear. It must spell out not just that the money is owed, but also that it can be deducted from wages:

It may sometimes be possible to attack a deductions clause by arguing that it is a “penalty”. A penalty is a contract term intended to deter or punish the employee rather than to compensate the employer. Penalty clauses are unenforceable. A contract term that is a genuine attempt to pre-estimate the employer’s loss will not be a penalty. A contract term that uses a time-based sliding scale to calculate how much should be paid back, so that the debt diminishes over time, will be very hard to attack as a penalty.

For example, say an employee enters into a contract under which external training costs are fully recoverable if the employee leaves within six months of receiving the training, recoverable as to 50% if the employee leaves within 12 months, and not recoverable at all if the employee leaves within 18 months. This agreement is an attempt to balance the cost to the employer of funding the training, against the 18 months of benefit to the employer as a result of having a better trained employee. Tribunals must look at the position at the time the contract was entered into, not the time of the dispute, to assess whether a deductions clause was a genuine pre-estimate of loss. If there is an “extravagant or unconscionable gulf” between the amount that can be deducted and the realistic amount of any loss, the term is likely to be an unenforceable penalty (Cleeve Link Limited v Bryla [2013] UKEAT 0440/12/0810).

The ban on unlawful deduction of wages (Part II ERA 96) can also be used to challenge unilateral contract changes (i.e. contract changes without consent) resulting in a reduction in pay. For example, in Kerr v Sweater Shop [1996] IRLR 424, the EAT held that a unilateral change in the calculation of holiday pay, communicated to workers by means of a general notice, did not comply with the law and the resulting pay reduction was unlawful. Similarly, in International Packaging Corporation v Balfour [2003] IRLR 11, a unilateral cut in working hours led to an unlawful deduction. In Bruce v Wiggins Teape [1994] IRLR 536, the law was used to reinstate an overtime rate that the employer had scrapped unilaterally. And in Saavedra v Aceground [1995] IRLR 198, the ERA 96 was used to reclaim a share of tips that the employer had unilaterally reduced.

Where an employer has a contractual right to impose a change to pay, the resulting deduction of wages is likely to be lawful. For example, in Hussman Manufacturing v Weir [1998] IRLR 288, the employee’s shift was changed, leading to a consequential pay cut. This was not an unlawful deduction of wages because the contract contained an express contract term permitting shift changes. Under Part II ERA 96, a deduction can be made where it has been authorised in advance by a “relevant provision in the contract”.

In Bateman v Asda Stores [2010] UKEAT/0221/09, Asda was allowed to rely on a term in the staff handbook allowing it to make contract changes “to reflect the changing needs of the business” to introduce a new pay structure and to impose it on existing staff.

There is more information about the use of express contract terms to make unilateral changes to terms and conditions in the LRD booklet Contracts of Employment 2013 (www.lrdpublications.org.uk/publications.php?pub=BK&iss=1685).