Deductions from pay
01 July 2019
This article was featured in the July/August 2019 issue of the magazine.
Samantha Mann MAAT MCIPPdip, CIPP senior policy and research officer, discusses the legalities
When I think about the subject of deductions from pay, several words spring to mind: statutory, contractual, voluntary and unlawful. Different words that relate to different situations, but all have the common theme, reducing the gross pay – whether to calculate net pay or indeed for some other compliance reason.
Over the years deductions from pay have been the subject of many disputes in courts and tribunals, between employer and employee. Legislation provides for specific protection to individuals against:
unauthorised deductions being made from their wages, which includes a non-payment of wages, and
having to make payments (other than by deductions) to their employer.
This protection was originally provided by the Wages Act 1986 but is now consolidated within the Employment Rights Act 1996 (‘the Act’).
The Act also gives employees and, since April 2019, all workers the right to receive an itemised pay statement at or before the time at which any payment of wages or salary is made. Certain basic information relating to deductions must be shown in the statement which includes the amount of any variable and any fixed deductions from the gross amount and the purposes for which they are made. Where a fixed deduction is being made it is sufficient to show only a total figure of the fixed deductions, so long as an individual breakdown is provided at least every twelve months and whenever a change occurs.
...right to receive an itemised pay statement at or before the time at which any payment of wages or salary is made
The Act sets out the rights of employees not to suffer unlawful deductions from wages. If a deduction that is within the scope of the legislation is made without authorisation the employee can make a complaint to an employment tribunal that there has been an unlawful deduction from his or her wages. Unlawful deduction claims made to employment tribunal provide a consistent reason for claims being made.
The Act also prescribes similar rights in respect of payments that the employee makes or is required to make to his or her employer outside of the payroll, as well as additional requirements in respect of deductions made where the employee is in retail employment in respect of cash or stock shortages. However, the rights in respect of payments the employee makes (or is required to make) to his or her employer are relevant because they mean that an employer cannot avoid the law on deductions from pay simply by persuading/coercing the employee into making such payments rather than treating them as deductions.
Section 13 of the Act provides that: ‘Where the total amount of wages paid on any occasion by the employer to an employee is less than the total amount of the wages properly payable on that occasion (after deductions), the amount of the deficiency is treated as a deduction made by the employer.’ A deduction occurs whenever the employee is not paid what he or she should be paid on that particular payday. For example, a failure to pay the correct higher rate of pay because the document authorising the increase was not received in payroll by the cut-off date may mean that the employee suffers a ‘deduction’.
Employment tribunals will consider claims that there has been an unlawful deduction arising out of an error of computation. Any attempt made by an employer to argue that the tribunal has no jurisdiction to consider such a claim on the grounds that the ‘deduction’ was an ‘error of computation’, will be rejected.
Section 13 also provides that: ‘An employer shall not make a deduction from wages of a worker employed by him unless: the deduction is required or authorised to be made by virtue of a statutory provision or a relevant provision of the worker’s contract, or the worker has previously signified in writing his agreement or consent to the making of the deduction.’
Statutory provision – Where the employer is required by a statutory provision to deduct and pay over to a public authority amounts determined by that authority as being due to it from the employee, it must be made in accordance with the relevant determination of that authority.
Deductions that have to be made under a statutory provision include items such as pay as you earn income tax, National Insurance contributions, student loans and attachment of earnings deduction orders. More recently this list also includes automatic enrolment workplace pensions.
Relevant provision – Details of what might constitute a relevant provision must be provided in writing with a copy being given to the employee before the deduction has been made. Deductions that fall within the scope of a relevant provision include those made for:
poor quality work
damage or loss of company property, including till or stock shortfalls (limited to 10% of gross pay where working in retail)
use of company property/assets, including personal telephone calls.
Any variations made to the contract must also be notified by the employer to the employee in writing before the deduction can be made.
Deductions that require an employee’s consent, more commonly referred to as ‘voluntary deductions’, will require the employee’s consent to be made in writing. The consent signifies the employee’s agreement which provides the authorisation, so long as no deduction is being made before written agreement/consent is signed by the employee.
However, it is not always enough for an employer to obtain agreement/consent, as has been shown in case law. For example, an agreement may state that overpayment of salary will be repaid, but unless it also states when or from what, then the employer may still not be entitled to make a deduction. In this type of case, an employee may leave a company owing money but still take all his or her final pay.
Should this situation arise it is always wise to obtain written authorisation in advance of such an event, ideally by including a relevant provision in the contract of employment.
Certain deductions are placed outside the scope of the Act. Such deductions are those made in respect of:
overpayments of wages or expenses incurred by the employee in carrying out his employment, and
the employee’s participation in a strike or industrial action.
This does not mean of itself that such deductions are legal, only that the employee cannot bring a claim, under the Act, to an employment tribunal that he or she suffered an unlawful deduction from wages.
...obtain written authorisation in advance of such an event, ideally by including a relevant provision in the contract of employment
Any worker who considers that he or she has suffered an unlawful deduction from wages (or has been required to make an unlawful payment) can make a complaint to an employment tribunal. This applies regardless of the worker’s length of service. Such complaints must be made within three months of the date that the wages were last due to be paid on; and so long as a gap of no more than three months exists between underpayments, the claim can go back for up to two years.
Any deduction from an employee’s pay that is subsequently deemed to be unlawful will result in the employer having to repay the amount deducted. Furthermore, having repaid the unlawful deduction, the employer then has no right to seek recovery of it by any other means.
Before applying to an employment tribunal the Advisor, Conciliation and Arbitration Service (ACAS) should be notified. ACAS may offer the opportunity of taking part in an early conciliation service which might remove the need to apply to a tribunal.
On a final note, deductions from pay that are not statutory cannot take pay below the rate of the national minimum wage (NMW), the exception being a daily amount allowed for the provision of living accommodation. Common errors made by employers will see pay being brought below the NMW because of salary sacrifice reductions; yet even with an employee’s consent these are not allowed if they reduce gross pay to below the NMW.
Another commonly encountered NMW deduction error is the fee that is allowed to be deducted by employers for the administration of a court order. This is not a statutory deduction, only the court order itself fulfils that definition. The deduction is made purely for the benefit of the employer and as such can only be made so long as pay remains at or above the NMW.