Deductions and underpayments 




Under section 13, 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); 




• one or more written terms of the employment contract, a copy of which was given to the worker before the deduction is made, allow the deduction; 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.




Where pay is deducted without consent, the worker can bring a tribunal claim for unlawful deduction from wages. 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 page 103. 




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. 




Where there have been successive unlawful deductions of wages, only two years of back-pay can be claimed in the tribunal, no matter how long the employer has been continuously underpaying wages (Deduction from Wages (Limitation) Regulations 2014). These regulations do not prevent full recovery of some unpaid statutory payments, such as statutory sick pay, statutory maternity or adoption pay, or statutory guarantee pay. A contract claim in the small claims court is not subject to this two-year restriction. Six years of pay arrears can be recovered in the small claims court.




No tribunal claim for unlawful deduction of wages can be issued without an Acas EC Certificate. For more information, see Chapter 14. 




“Wages” include fees, shift allowance, bonuses, commission, holiday pay, guarantee pay, sick pay (including statutory sick pay), maternity, adoption and shared parental pay and notice pay, but only if the notice has been worked. If the employer wrongly ends the contract without notice or notice pay, the unpaid notice pay must be claimed as a breach of contract, in the form of 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(2)(b), ERA 96). 




“Wages” do not include pension contributions by an employer to an external pension provider (Somerset County Council v Chambers [2013] UKEAT 0417/12/2504). 




Even if an employee has breached the employment contract, for example, leaving without giving full contractual notice, the employer has no automatic right to deduct pay. Any deductions 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. This agreement is usually a written term of the 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: 




The law 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.




Where the employment contract includes a written contract term that permits the employer to make a unilateral change to contract terms, a resulting deduction of wages is likely to be lawful, as long as the term is very clear and the employer does not enforce it unreasonably. 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 included an express written term permitting the employer to make unilateral shift changes. Under section 13(1)(a), ERA 96, a deduction from pay is allowed where it has been authorised in advance by a “relevant provision in the contract”. For information on how courts and tribunals approach express terms of this type, see Chapter 3, page 74.


Employment tribunals can decide claims for the unlawful deduction of wages even if this requires them to interpret complex contractual terms, or to imply additional terms (Tyne & Wear Passenger Transport Executive t/a Nexus v Anderson [2018] UKEAT 0151/16/1501). See also Chapter 3, page 75: Implied terms.


Sometimes a written contract term that permits deductions from wages can be challenged as a penalty. This is the legal name for a contract term intended to deter or punish an employee instead of compensating the employer. Penalty clauses are unlawful and cannot be enforced. A clause will be a penalty if it imposes a detriment on the worker wholly disproportionate to any legitimate interest of the employer in having the contract performed (Cavendish Square Holding B.V. v Talal el Makdessi [2015] UKSC 67, Cleeve Link Limited v Bryla [2013] UKEAT 0440/12/0810). 


A contract term that represents a genuine attempt to pre-estimate the loss if the employee were to break the contract is unlikely to be a penalty. An example might be a contract term that uses a sliding scale to work out what proportion of training costs should be paid back, so that the debt reduces over the course of the employment, since both parties benefit over time from the training. 


When deciding whether a term is a penalty, the amount of loss the employer actually suffered (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).