Whether you’re an experienced HR professional or an employer who is single-handedly dealing with employment law issues that arise in your organisation, you may have questions in relation to deductions from wages and your rights and liabilities. In this guide we’ll help you identify what 'wages' are, exceptions to what wages may be classed as under the law, and measures to put into place to reduce the risk of a claim being brought against you.
What constitutes an unlawful deduction from wages under the Employment Rights Act?
An unlawful deduction from wages under the Employment Rights Act 1996 (ERA 1996) is when an employer does not pay or underpays a member of staff. Any non-payment or underpayment is unlawful unless certain exceptions apply (as explained in When can you lawfully deduct wages from employees? below).
If an employer, without contractual authority or individual or collective consent, reduces a worker’s wages then this would normally amount to a deduction. Even if an employer makes an unlawful deduction but increases another element of the worker's remuneration, meaning no overall reduction in pay, there will still be an unlawful deduction from wages.
A threatened deduction is not sufficient to amount to an unlawful deduction, the deduction must actually be made, for a claim for unlawful deductions from wages to be successfully brought by an employee.
What is the definition of 'wages' under the law?
What does and does not fall under the definition of 'wages' is set out in section 27 of the Employment Rights Act 1996. Wages means 'any sums payable to the worker in connection with his employment' including the following:
- Any fee, bonus, commission, holiday pay or other payment referable to the worker's employment, whether payable under their contract, or otherwise.
- Any payment in the nature of a non-contractual bonus which is, for any reason, made to a worker by their employer. The amount of the payment is treated as wages and as payable to the worker as such on the day on which the payment is made.
- Statutory payments such as Sick Pay, Statutory Maternity Pay, Statutory Paternity Pay and Statutory Adoption Pay and Shared Parental Pay.
- Statutory Guarantee Payments when laid off for up to 5 'workless days' in a three-month period.
- Payments which fall under Part VI of the ERA 1996 (such as, time off to look for work or to arrange training, taking time off for antenatal care, adoption appointments or to perform duties in respect of pensions, trade union activities or as an employee representative in a collective redundancy or TUPE transfer).
What is not classified as 'wages'?
'Wages' does not include the following:
- Advance of wages or payments under a loan agreement between the employer and worker.
- Payments in respect of employment related expenses incurred by the worker.
- Allowance or gratuity relating to a worker’s retirement or compensation for loss of office.
- A payment related to the worker’s redundancy.
- A payment to a worker which does not relate to their capacity as a worker.
- Any payment or benefit in kind which has a monetary value (apart from any voucher, stamp or similar document which is of a fixed value expressed in monetary terms and which is capable of being exchanged for money, goods or services or any combination of two or more of those things).
There has been uncertainty on whether some payments are included, such as payments in lieu of notice, employer's pension contributions, commission payments, bonuses, service charges and tips, statutory holiday pay, rest breaks and deferred wages. The below clarifies what does and does not amount to wages.
PILON and garden leave
Non contractual PILON payments do not amount to wages. However, the provisions regarding unlawful deductions from wages do apply to payments in respect of time spent on garden leave, as these payments are seen as advance payments of wages under a contract of employment.
Employer’s pension contributions
Employer's pension contributions are not 'wages'. 'Wages' means any sums payable to the worker in connection with his employment, it does not mean contributions paid to a pension provider on the employee’s behalf.
Commission which becomes payable after termination of employment has been held to constitute 'wages' as it is connected to the worker’s work, even though it is payable after.
Non contractual bonus payments are wages and discretionary bonuses depend on the nature of the bonus scheme and the employee's claim. An employee must have a quantified amount to claim for. Even if it has not been paid, if the bonus amount has been rewarded, that is sufficient.
Whilst discretion to award a bonus cannot be exercised on a whim, until the discretion is exercised in favour of granting a bonus, no bonus is payable.
If a payment is not quantifiable, an employees' remedy is a claim for breach of contract in the county court, not a claim for unlawful deductions in the employment tribunal.
For more information on bonuses see our article: How are bonuses taxed in the UK?
Tips, service charges and gratuities
These can sometimes count as 'wages' and so a deduction from staff tips is generally unlawful but will be lawful if it is required by law or permitted by a contractual provision or prior written consent. In the October 2019 Queen's Speech, the government proposed a bill to make it a legal requirement for all tips and service charges to be passed to staff, and for tips collected by employers to be distributed on a fair and transparent basis.
Deferred wages still amount to wages and become 'properly payable' on termination of employment, but deferred consideration on the sale of shares does not amount to wages.
Statutory holiday pay
Holiday which forms part of a worker’s statutory entitlement under the Working Time Regulations 1998 is included in the definition of 'wages'.
When can you lawfully deduct wages from employees?
There are some limited circumstances when deductions from an employee’s wages are legally justified, where:
The deduction is required or authorised by statute.
For example, payroll statutory deductions for income tax or National Insurance Contributions. Deductions made under the Attachment of Earnings Act 1971 for debts which have been enforced through the courts and Statutory payments due to a public authority (such as HM Revenue and Customs) can also be deducted as long as the employer deducts the amount the authority instructs.
The deduction is required or authorised by a provision in the worker's contract. If this is set out in a written contract which has been given to the worker, or is an express or implied term that the employee knows exists and has been notified to the employee in writing before the deduction is made, an employee’s wages can be reduced to pay back an employer, but penalty clauses are not enforceable. The employer should be able to prove prior agreement to the clause and that the event leading to the deduction as set out in the employment contract, has in fact occurred.
The worker has given their prior written consent to the deduction.
This can include by email, but the consent must be given before the event that leads to the deduction, not just before the deduction is made.
To reimburse an employer if an overpayment has been made or to repay a debt to a third party.
Employers can reclaim wages which have been overpaid. The employer should try to get the employee’s agreement to this being paid back from wage payments, but the employee’s agreement is not necessary, as protection from unlawful deductions from wages under the ERA 1996 do not apply to the recovery of overpayments.
The employer should at least advise the employee of the proposal to repay from wages, how much is to be repaid and should attempt to agree a repayment timeframe if this might unnecessarily disadvantage an employee.
An overpayment in respect of expenses incurred by the worker in carrying out their employment can also be deducted lawfully from an employee’s wages, for example if an advance on a car allowance payment is made by an employer which turns out to cost less than initially thought.
Debts payable to third parties might include pension scheme or trade union contributions due either because of a clause in an employment contract or other prior written agreement or consent of the employee.
To reimburse an employer where an employee takes part in a strike or other industrial action.
If an employer has made payment and then an employee has not worked for that same period due to taking part in a strike, wages can be reduced to take into account time paid for and not worked.
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If in doubt about how to draft these types of agreement or how to handle these types of situation without falling foul of employment law, contact our specialist employment solicitors.
How to protect yourself from an unlawful deduction of wages claim
In order to best reduce the chances of facing unlawful deduction from wages claims from employees, there are steps that employers can take. For example:
Drafting provisions into the employment contract
If an employer plans to make deductions from an employee’s wages consistently under certain limited and considered circumstances, it would be a wise idea to draft this into the employee’s contract, for the employee to be provided with a copy and preferably sign their agreement to the same before any deductions are made to the employee’s wages.
Getting consent for advance payments
If there is a specific occasion where money is given to an employee in advance it is advisable, before making the payment, to require the employee to sign a form giving their written consent to the conditions of payment and the specific circumstances in which deductions can be made from sums due to the employee. This might include where an employee is paid an enhanced sum to return to work after maternity leave and then she subsequently does not return. It is critical that even if there is an agreement in place, that there is not a discriminatory element to the deduction.
Also, where the employer enters into a loan agreement with an employee, it should ensure that it complies with any requirements of the Consumer Credit Act 1974, unless the agreement is exempt. You must ensure that it provides an employee with a statement of the deductions complying with the relevant legislation.
Keep lines of communication open
If there is not a previous written agreement to a deduction, an employer would be well advised to see if they can discuss the deduction with the employee before making the same and try and get their written agreement to this.
Have a clear and accessible grievance policy and encourage employees to make informal complaints to their managers or HR in the first instance. This means that any issues relating to non-payments or underpayments can be investigated before more formal action is taken by an employee.