Employers are only permitted to deduct or withhold pay in certain circumstances. To ensure you are acting lawfully and not exposing the organisation to legal claims, it is important to understand the rules and legal risks of making change to someone’s pay.
Can an employer withhold pay?
The fundamental terms of any contract of employment are that the employee provides the services and the employer pays for those services. This means that it will be extremely rare for an employer to justify withholding pay altogether. Equally, there are only limited scenarios in which an employer will be permitted to make lawful deductions from an employee’s pay.
If the employer is not allowed to lawfully withhold pay in the circumstances in question, this will be classed as an unlawful deduction of wages. This is where an individual has either been unpaid or underpaid their wages for a particular pay period. In this case, the employee may be able to bring a claim for unlawful deduction of wages.
In practice, in many ‘withholding pay’ scenarios, these will usually amount to nothing more than an administrative error which can be easily rectified by the employer. If staff have not been paid the amount they were expecting, they should always be encouraged to raise this with payroll first before taking any legal action. In this way, the employer can be given the opportunity to correct any mistake without recourse to tribunal proceedings.
In some cases, however, it may be that any deduction has not been made in error, but rather has been made intentionally by the employer because there is lawful basis to do so. In these circumstances, once an explanation has been provided to the individual concerned as to why a deduction has been made, this will again often resolve the matter quickly and easily.
What is the law on withholding pay?
The law on withholding pay is governed by the provisions of Part II of the Employment Rights Act 1996 (ERA): ‘Protection of wages’. The ERA protects all workers from having unauthorised deductions made from their pay, including late payment of wages. There is also no qualifying service requirement, where this right arises from day one of employment, or as soon as any work has been performed for which payment contractually falls due.
Under the ERA, where the total amount of wages paid on any occasion by an employer to a worker is less than the total amount of the wages properly payable for the period in question, after any lawful deductions have been made, the amount of the deficiency shall be treated as an unlawful deduction for which a claim can be made to the employment tribunal.
Provided the tribunal is satisfied that there is no lawful basis for the employer to withhold pay or make the deduction complained of — and the complaint is made within 3 months of the date of payment of the wages from which the deduction was made, or the last deduction in a series of deductions, or it was not reasonably practicable for a complaint to be presented within this timeframe — the tribunal will make a declaration to this effect. The employer will also be ordered to pay the worker what is owed, and may even be ordered to pay such additional amount as considered appropriate in all the circumstances to compensate that individual for any financial loss sustained which is attributable to the matter complained of.
In the context of unlawful deductions, a worker can claim up to 2 years back pay, provided there is not a gap of 3 or more months between deductions. However, before a worker can bring a claim for unlawful deduction of wages, an actual deduction must have been made. A claim cannot be pursued purely on the basis that the employer has threatened to deduct their pay. Still, should an employer threaten to unlawfully deduct money from an employee’s pay or not to pay them at all, that threat could amount to an anticipatory breach of contract, in response to which the employee may feel forced to resign and claim constructive dismissal.
When can an employer withhold pay?
By law, an employer is not allowed to make deductions from a worker’s pay unless the deduction is either required or authorised to be made by virtue of a statutory provision or a relevant provision of the worker’s contract, express or implied, or the worker has previously agreed in writing to the making of the deduction. The ERA goes on to list the various statutory excepted deductions to which these three situations apply, together with some other exceptions to the protection offered by the unlawful deductions regime.
This essentially means that a deduction cannot be made by an employer, unless:
- it is for income tax, National Insurance contributions or student loan repayments
- there is a statutory payment due to a public authority
- it is as a result of a court order, for example, an attachment of earnings order where the worker owes someone money following a county court judgment or for unpaid maintenance
- it is made to satisfy a court or tribunal order for payment from a worker to an employer
- the worker has agreed in writing beforehand, for example, they might have agreed to pay back a travel season ticket loan or part of any training costs if they leave
- the employment contract specifically allows a certain deduction to be made, for example, where an individual works in retail, such as a shop or restaurant, and the contract makes them liable for any shortfall in the till
- the individual has missed work due to taking part in a strike or other industrial action
- there has been an earlier overpayment of either wages or work-related expenses by mistake.
However, even where a deduction can be lawfully made by the employer, the deduction cannot normally reduce a worker’s pay below the National Minimum Wage (NMW), even if they agree to this. This will be the case, except if the deduction is for:
- tax or National Insurance contributions
- something a worker has done and their employment contract states that they are liable for it, for example, any shortfall in the till, although the employer cannot take more than 10% from a worker’s gross pay each pay period to cover any such shortfalls
- repayment of a loan or an advance of wages
- repayment of an accidental overpayment of wages
- buying shares or share options in the business
- accommodation provided by the employer, although no other company benefits, such as childcare vouchers or a car, can be taken into account when calculating NMW
- the worker’s own use, for example, union subscriptions or pension contributions.
How long can an employer withhold pay for?
Where an employer is legally entitled to make deductions from a worker’s pay packet, for example, because they have been overpaid or there is a court order in place, strictly speaking, the employer can continue to make deductions until the debt is paid or the order discharged.
However, when it comes to overpayments, steps should always be taken to reach an agreement with the worker as to how the money will be paid back. This could be by way of an agreed payment plan, to be deducted from the worker’s wages directly or, alternatively, payment via bank transfer. If, for example, any overpayments have gone on for a long period of time, it is important for an employer to be flexible and fair in recouping this money, where it should not all be deducted from the worker’s pay at once if agreement cannot be reached. Equally, the employer must clearly explain the overpayment situation before making any deductions.
Where the employer of a retail worker makes a deduction because of a cash shortage, this must usually be made within 12 months from the date when the employer established the existence of the shortage or, if earlier, when they ought reasonably to have done so.
Can an employer withhold pay for mistakes?
Even though there are a number of scenarios in which an employer can legally withhold pay, these do not normally allow deductions for anything related to performance or conduct. Deductions for mistakes, unless a worker has an incentive-based contract, will usually be unlawful. This means that if a worker makes a mistake at work, or underperforms in some way, the employer should not normally be able to make a deduction to penalise the worker or to cover any financial loss arising out of an error or omission made by that person.
However, there are limited circumstances in which an employer can lawfully withhold pay for a mistake, for example, where the worker’s contract of employment specifically makes them liable, such as damage to a work’s vehicle caused by reckless driving. The provisions of the ERA also specifically allow for deductions from a worker’s wages where there are cash shortages in retail employment at a rate of 10% per pay period.
In most cases, where deductions cannot lawfully be made, the employer should instead consider a disciplinary process if mistakes have caused significant issues for the company.
Can an employer withhold holiday or sick pay?
There are various scenarios in which an individual is entitled to be paid, even if they have been absent from work. For example, all workers are entitled to 5.6 weeks’ paid statutory leave, and to statutory sick pay, if they meet the qualifying requirements.
Equally, the definition of ‘wages’ under the ERA for the purpose of protection from unlawful deduction of wages is very wide, including any sums payable to a person in connection with their employment, such as holiday pay and statutory sick pay. This means that an employer will not be permitted to withhold these types of pay in circumstances where that pay falls due.
Can an employer withhold pay if a worker quits without notice?
If a worker leaves their job without working the relevant notice period, technically speaking, the worker will be in breach of their employment contract. However, even though the employer is not legally obligated to pay the worker for any days that they did not work, the employer cannot withhold pay for work that has already been performed.
This means that the employer must still pay the worker what is owed to them on their effective date of termination, including any outstanding holiday and sick pay, and cannot penalise the worker for quitting without notice.
By failing to work their notice period, the employer may have a claim against the worker for any financial loss arising out of their breach of contract, such as the cost of an urgent temporary replacement, but the existence of this right does not entitle the employer to deduct these costs from the worker’s final pay. The employer would instead need to issue a claim against the worker through the civil courts to be able to recoup this money.
Can an employer withhold pay after terminating employment?
Even if a worker is dismissed without notice for gross misconduct, the employer must still pay them any outstanding wages up until their final day of employment. If a worker is dismissed with notice, and their contract entitles them to pay in lieu, the employer must pay that person up to their effective date of termination. This is the last day on which they were employed under their contract, the date their dismissal takes effect, even if they did not work this.
The employer should also ensure that they provide an itemised payslip showing a clear calculation of the worker’s final pay, including any deductions made. On termination of employment, this could include things like repayment of training costs if this has been agreed within the employment contract or otherwise in writing. Other lawful deductions could include deductions from a retail worker for any cash shortages, where the employer is permitted to deduct the full amount owed on termination. It is only where the worker continues in employment that the employer can deduct just 10% at a time.
However, unless any deductions are legally allowed, any failure to pay the employee what they are owed, or even to adequately explain any lawful deductions, could easily expose the employer to a claim for unlawful deduction of wages once the worker has left.
DavidsonMorris’ employment law experts advise employers on all aspects of workforce management, including issues and disputes relating to pay. Through our fixed fee employment advice service, Triple A, employers gain access to unlimited legal expertise on workplace employment law issues. For advice on a pay issue, or to find out more about Triple A, contact us.
Withholding pay FAQs
Is it illegal for employers to withhold pay UK?
It is not always illegal to withhold pay, where lawful deductions can be made if required by law, for example, under attachment of earnings orders, or where workers have previously agreed to this, such as repayment of travel season tickets.
Can an employer withhold salary?
An employer can occasionally withhold salary, typically where the deduction is required or authorised by virtue of a statutory provision or a provision of the worker’s contract, or the worker has previously agreed to this in writing.
What can I do if my employer refuses to pay UK?
If an employer refuses to pay a worker, where payment is lawfully due, that worker can lodge a complaint before the employment tribunal for an unlawful deduction of wages.
What are the three reasons an employer can withhold wages?
All workers are protected from unlawful deductions of wages under the Employment Rights Act 1996, unless deductions are required or authorised by statute, permitted by a provision of the employment contract or prior consent has been given by the worker.
Last updated: 30 June 2022