Deductions and underpayments

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 contributions);

• a term in the contract allows them to do so and they have notified the worker in writing; or

• they have the written consent of the worker, which must have been given before the deduction is made (section 13, ERA 96).

A signed authorisation form for union subscriptions will amount to written consent, so this would be 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 (unless it is an overpayment or other exception discussed below). This includes shortfalls in wages and late payment. If a worker does not receive the total amount of wages owed to them on any occasion, this will be an unlawful deduction.

However, if the real issue is whether the worker is contractually entitled to the payment at all, the Court of Appeal has held that the worker should bring a claim for breach of contract and not a claim for unlawful deduction of wages (Coors Brewers Ltd v Adcock & others [2007] EWCA Civ 19). In practice, it may be appropriate to claim under both headings, and to let the tribunal decide. However, note that a claim for breach of contract can only be brought in the employment tribunal once the employment has ended (see Chapter 3: Other remedies). While still employed, a claim for breach of the employment contract can only be brought in the civil courts.

Note also that if you bring a contract claim in the employment tribunal, the employer may counter-claim for breach of contract, for any amounts it claims are owed by you. By contrast, if you limit your claim to a statutory claim for the unlawful deduction of wages, your employer will not be allowed to introduce a counter-claim into your employment tribunal proceedings.

A claim for unlawful deduction from wages must be made within three months of the date the last payment should have been made or, if there is a series of deductions (for example, a month-on-month failure to pay the minimum wage), within three months of the last in the series.

Wages include fees, shift allowance, bonuses, commission, holiday pay, guarantee pay, sick pay and maternity pay. Notice pay cannot be claimed as an unlawful deduction, unless 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 equivalent of the notice pay as damages for wrongful dismissal in breach of the employment contract (Delaney v Staples [1992] IRLR 191).

Expenses are specifically excluded from the scope of an unlawful deduction of wages claim (section 27 Part II ERA 96). (See Quantas Cabin Crew (UK) Limited v Lopez [2012] UKEAT/0106/12/SM).

“Wages” does not include pension contributions (Somerset County Council v Chambers ([2013] UKEAT 0417/12/2504).

Even where an employee has breached the employment contract (for example, by leaving without giving enough contractual notice), there is no automatic right to deduct pay. Any deductions made without authority from a final pay packet are unlawful. That authority can be contained in a term of the employment contract, or previously agreed by the worker in writing. Either way, the agreement must be before the deduction is made.

Deducting money from an employee’s final pay packet because they have taken more holiday than they have accrued is an unlawful deduction from wages unless there is a written agreement that allows the employer to do this (usually a term of the employment contract).

Part II of the ERA 96 can be used to challenge unilateral contract changes that result in a reduction in pay. For example, in Kerr v Sweater Shop ([1996] IRLR 424), the EAT held that a change in the calculation of holiday pay communicated to workers by way of a general notice only, did not comply with the law. The resulting pay reduction was therefore 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 the employer has a contractual right to impose a particular change, the resulting deduction is likely to be lawful. In Hussman Manufacturing v Weir ([1998] IRLR 288), the employee’s shift was changed and as a result his pay was reduced. His claim that this was an unlawful deduction of wages failed because the employer was able to rely on an express contractual term permitting shift changes. This is because under Part II ERA 96, a deduction can be made where it has been authorised in advance by a “relevant provision in the contract”. (See also Bateman v Asda ([2010] UKEAT/0221/09), discussed in Chapter 3: Contract changes ).

Deductions for other reasons, including dishonesty, poor work or misconduct, can also only be made if the worker has agreed in advance in writing to the deduction. Any agreement must be specific and clear, and it must have been made before any incident giving rise to a deduction.