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Deductions and underpayments
[ch 4: pages 91-94]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 contract term, agreed before the deduction is made, allows the deduction and the employer has notified the worker in writing; or
• with 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 this protection, explained on pages 94-95.
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 Deduction from Wages (Limitation) Regulations 2014, where there have been successive unlawful deductions of wages, only two years of back-pay can be claimed in the employment tribunal, no matter how long the employer has been continuously under-paying wages. These new regulations apply to almost all types of wage claim. The only exceptions are statutory payments such as SSP, statutory maternity pay, statutory adoption pay or statutory guarantee payments.
The new regulations do not apply to tribunal claims presented before 1 July 2015.
The new regulations were enacted in response to a victory secured by general union Unite confirming that holiday pay must include regular overtime — the case of Bear Scotland discussed on page 106. The regulations were rushed into law without consultation and have an effect far wider than the Bear Scotland ruling.
No claim for unlawful deduction of wages can be issued in the tribunal without an Acas Early Conciliation Certificate. For information on Acas Early Conciliation, see Chapter 13.
All tribunal claims carry a fee. The issue fee for a claim for unlawful deduction of wages is £160 (2015), followed by a hearing fee of £230 (2015) if the claim does not settle. The fee is the same regardless how much is claimed. If more than one claim is made, for example, a claim for unlawful deduction of wages and unfair dismissal, only the larger of the two fees must be paid. Some low-paid workers will qualify for remission (i.e. full or partial fee waiver). See Chapter 13 for information on fees and remission.
“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. If the employer wrongly ends the contract without either notice or notice pay, the right course is to claim the notice pay as damages for wrongful dismissal (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 in this context do not include pension contributions by an employer to a pension provider on behalf of an employee (Somerset County Council v Chambers [2013] UKEAT 0417/12/2504).
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:
Ms Chambers and others walked out without notice following a dispute. Their final pay packets had shortfalls said by the employer to offset claims for damages for breach of contract. The EAT stated that these amounted to deductions and were unlawful.
Chiltern House v Chambers [1990] IRLR 88
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. This agreement is usually a term of the written employment contract.
Deductions for reasons such as dishonesty, poor work, negligent damage to property or misconduct, can also only be made with the worker’s advance written consent. 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 the employee’s wages. For example:
An employee had signed a letter agreeing to repay training costs if he left employment, but a tribunal said this did not constitute authority to deduct because although it was clear that the employee agreed to repay the training costs, it was not clear that the repayment would be via a deduction from wages.
Potter v Hunt Contracts [1992] IRLR 108
www.bailii.org/uk/cases/UKEAT/1991/428_89_2011.html
An employer persuaded his employee to sign a form agreeing to future deductions in respect of previous stock shortfalls. This did not make the deduction lawful.
Discount Tobacco v Williamson [1993] IRLR 327
Where contract terms contain an express contractual right to make a unilateral change, a 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 itself contained an express contract term allowing shift changes. Under Part II ERA 96, a deduction from pay is allowed where it has been authorised in advance by a “relevant provision in the contract”. An express flexibility term can be a “relevant” contractual provision.
For more information on express flexibility terms see Chapter 3, pages 68 and 79.
It is sometimes possible to resist a written contract term that allows deductions from wages by arguing that it is a penalty. A penalty is the legal name for a contract term that is intended to deter or punish an employee instead of compensating the employer. Penalty clauses are unlawful and cannot be enforced. A contract term that represents a genuine attempt to pre-estimate the employer’s loss if an employee breaks the contract is not a penalty. Typically, any contract term that uses a sliding scale to work out how much should be paid back, so that the debt reduces over the course of the employment, is unlikely to be a penalty.
Here is a good recent example of a contract term permitting a deduction from wages that was unsuccessfully challenged as a penalty:
Ms Li was a well-paid engineer working on a specialist engineering project. Her employment contract required one month’s notice. If she left without working her notice, her employer could deduct “a sum equal in value to the salary payable for the shortfall in the period of notice”. Li left without giving any notice, part-way through an important project. Her employer quickly recruited an expensive agency worker to complete the task. Li then offered to work her notice but it was too late. The agency worker had already been booked. Li’s employer deducted a month’s salary from her termination payment.
Li issued a tribunal claim, arguing that the term allowing the deduction was a penalty. No, said the EAT, it was a genuine pre-estimate of the potential losses the employer could suffer if Li gave short notice and had to be replaced urgently. It was significant that the contract term only allowed the employer to deduct a sum equal to the amount of the short notice she gave, rather than a fixed amount, so that the more notice Li gave, the less could be deducted. A term that allowed the employer to deduct the same amount regardless of how much notice she worked might have been an unlawful penalty.
Li v First Marine Solutions Limited UKEATS/0045/13/B1
When deciding whether a term is a penalty, the amount of loss the employer actually suffers (if any) is irrelevant. This is because like any other contract term, the tribunal must examine what the parties intended when they made the contract — not once it was broken (see Chapter 3).
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 a penalty (Cleeve Link Limited v Bryla [2013] UKEAT 0440/12/0810).
The ban on unlawful deductions of wages (Part II 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 ruled that a unilateral change to 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, this law was used to reinstate an overtime rate that the employer had scrapped unilaterally. And in Saavedra v Aceground [1995] IRLR 198, it was used to reclaim a share of tips that the employer had unilaterally reduced.