Failure to Pay Employees: Employer Guide

Failure to pay employees correctly or on time is a serious breach of UK employment law. Every worker has the right to receive the full amount they are owed on the date their pay is due. When this obligation is not met, employers face legal exposure, disruption to workplace relations and a rapid loss of trust across the workforce. Even where errors are accidental, non-payment or late payment of wages can amount to an unlawful deduction and may, in serious cases, contribute to a fundamental breach of contract.

What this article is about
This article provides a comprehensive guide for business owners and HR professionals on the legal framework governing wage payments, the risks associated with incorrect or late pay and the practical steps organisations should take to ensure compliance. It explains the statutory and contractual rules that apply to wage payments, including how unlawful deduction from wages claims, series-of-deduction claims and constructive dismissal risk can arise. It outlines the common causes of payroll failures and examines the legal claims that employees may bring when they are not paid properly, with particular focus on holiday pay, minimum wage compliance and statutory payments. It also gives detailed guidance on how employers can prevent pay failures and respond effectively when issues arise.

The obligation to pay wages is central to the employment relationship. Failure to meet this obligation exposes employers not only to unlawful deduction from wages claims but also to allegations of breach of contract and, in more serious cases, constructive dismissal where non-payment undermines the implied term of mutual trust and confidence. A single serious failure to pay wages on time or a pattern of repeated errors can both be treated as fundamental breaches of contract, depending on the circumstances.

A payroll failure may stem from administrative oversight, human error, IT problems, misinterpretation of contractual entitlements or disputes over hours worked. In some cases, cashflow issues within the business may be a contributing factor. Regardless of the cause, the employer remains legally accountable for ensuring that employees are paid the correct amount at the correct time. The law does not excuse non-payment because of internal error or financial difficulty, and repeated administrative or systems failures may point to a wider systemic problem that is highly relevant to constructive dismissal and regulatory risk.

This article sets out the core rights workers have in relation to their pay and the duties employers must uphold. It highlights the processes employees may use to challenge non-payment and the potential financial liabilities employers may face, including arrears, interest and awards in unfair dismissal cases. It then provides practical strategies to minimise payroll risk, ensure compliance with holiday pay and National Minimum Wage rules and support robust governance within HR and payroll functions, recognising that pay errors often expose deeper weaknesses in organisational controls.

Section A: Legal Right to Be Paid Correctly and On Time

Employers in the UK are under a clear statutory and contractual duty to pay employees accurately and on time. This section explains the legal foundations of that obligation, the types of payments that qualify as “wages”, what constitutes a failure to pay and the circumstances in which non-payment becomes unlawful. It also outlines how statutory entitlements interact with contractual terms and the relevance of pay reference periods when assessing compliance. The responsibility always sits with the employer, and neither administrative error nor financial difficulty removes that legal duty.

1. Contractual pay obligations and the Employment Rights Act 1996

Every employee and worker has a contractual right to receive the remuneration set out in their employment contract. This includes not only basic pay but also overtime, bonuses, commission and any other elements expressly or impliedly agreed.

Under section 13 of the Employment Rights Act 1996 (ERA 1996), employers must not make deductions from wages unless:

• the deduction is required or authorised by legislation
• the deduction is permitted by the worker’s contract
• the worker has provided prior written consent

Failing to pay the full amount of contractual wages is treated as making an unlawful deduction. The employer bears the burden of demonstrating that any deduction or non-payment was authorised. Late payment will also qualify as an unlawful deduction where wages were contractually due on a specific date, or where a pay date has been established through consistent custom and practice.

2. What counts as “wages”

For the purpose of unlawful deduction claims, “wages” has a broad statutory meaning. It includes:

• basic salary or hourly pay
• overtime pay
• commission and performance-related pay
• holiday pay
• statutory payments such as SSP, maternity pay, paternity pay and adoption pay where entitlement exists
• contractual bonuses or formula-based bonus schemes
• notice pay
• any sums the employer is contractually obliged to pay

This wide definition ensures that most forms of remuneration are protected. Payments that are genuinely discretionary, where the employer retains full discretion whether to award them, may fall outside the definition. Employers must be cautious in asserting that an element of pay is discretionary, as tribunals will closely examine evidence of past practice and contractual wording.

3. What constitutes a “failure to pay”

A failure to pay occurs where the employer:

• does not pay the full amount owed
• pays the correct amount but after the contractual or customary pay date
• incorrectly calculates hours, overtime or other entitlements
• withholds wages pending a dispute or investigation
• omits statutory payments to which the worker is entitled

Even a short delay may amount to an unlawful deduction if the employee is contractually entitled to payment on a specific date. Tribunals assess entitlement by considering both written agreements and established pay practices. The employer’s intention is irrelevant: accidental failure to pay is still unlawful.

4. When late payment becomes an unlawful deduction

Late payment is treated as an unlawful deduction where wages were due on a particular date and were not paid on that date. If the employment contract is silent on timing, tribunals look to custom and practice to identify an implied pay date. Once established, any deviation from that schedule may qualify as a deduction.

A single failure may be enough to establish a breach, depending on its seriousness. Tribunals also examine whether repeated administrative or payroll failures point to systemic issues, which may strengthen claims of breach of trust and confidence.

5. Interaction with statutory rights (holiday pay, minimum wage, sick pay)

Contractual pay obligations run alongside statutory rights. If a worker is not paid correctly, several statutory protections may be breached at the same time.

Holiday pay must reflect “normal remuneration”, which includes regular overtime, allowances and commission where these are intrinsically linked to the job role. Underpayment of holiday pay can generate unlawful deduction claims and, following case law developments, may form part of a series of deductions extending back further than previously allowed.

Minimum wage compliance is assessed for each pay reference period. Late payment or underpayment may reduce average hourly pay below the National Minimum Wage (NMW), triggering liability for arrears and penalties. This can occur even where the error is corrected later, if the correction falls outside the reference period.

Statutory payments such as Statutory Sick Pay or family leave payments (SMP, SPP, SAP) must be made in accordance with statutory rules. Failure to pay maternity or other family-related statutory pay may also give rise to discrimination claims, particularly pregnancy and maternity discrimination.

6. Pay reference periods and statutory deadlines

Pay reference periods define the time frame over which NMW compliance is calculated. They usually match the employee’s regular pay cycle, such as weekly or monthly. Any late payment, omission or underpayment within that period may push average hourly pay below the statutory minimum.

Other statutory entitlements, such as maternity or paternity pay, must also be paid on legislated schedules. Incorrect timing or calculation of these payments can amount to breach of statutory duty and may attract tribunal or HMRC enforcement.

Section A Summary
Employers have strict and enforceable duties relating to wage payment. The statutory protections under the ERA 1996 work in tandem with contractual rights to ensure workers receive their full pay on the correct date. Even minor delays or errors can amount to unlawful deductions, and systemic issues increase the risk of constructive dismissal claims. Understanding what qualifies as wages, how statutory entitlements interact and how pay reference periods operate is essential to maintaining compliance.

Section B: Common Reasons for Pay Failures and Legal Risk

Payroll failures can occur in any organisation, regardless of size or sector. Many causes stem from operational pressures, misunderstandings or technology limitations rather than intentional wrongdoing. However, UK employment law does not distinguish between deliberate and accidental non-payment. If employees are not paid accurately and on time, the employer is legally responsible. This section outlines the most common causes of pay failures and the extent to which each exposes the organisation to legal risk. Repeated errors may also indicate a systemic problem, which tribunals consider relevant when assessing trust and confidence.

1. Administrative and payroll processing errors

Administrative error is one of the most frequent causes of late or incorrect payment. Mistakes may arise during:

• manual data entry
• processing of payroll spreadsheets
• transferring information between HR and payroll systems
• applying pay rates, deductions or allowances

Even a minor input error can result in significant wage underpayment. In law, administrative mistake is not a defence. If the contractual pay date is missed or the employee receives less than their entitlement, the employer has made an unlawful deduction. Each error must be treated as a legal compliance risk, and failure to correct errors quickly may affect future claims, especially where employees allege a breakdown in trust and confidence.

2. Timesheet disputes and misreported hours

Organisations that rely on timesheets, clock-in systems or variable hours face particular risks. Common problems include:

• delays in approving timesheets
• disputes over hours worked
• failure to capture overtime
• inaccurate rostering or shift records

A dispute over hours worked does not give an employer the right to withhold pay. Employers must take reasonable steps to verify an employee’s account of their hours and pay what is reasonably believed to be owed by the pay date, making adjustments later if necessary. Withholding pay pending investigation is likely to amount to an unlawful deduction unless expressly authorised by the employment contract.

3. Misinterpreting contractual entitlements

Incorrect pay frequently results from a misunderstanding of contractual terms. Examples include:

• misapplying overtime rates
• failing to include regular overtime or commission in holiday pay calculations
• misunderstanding bonus provisions
• overlooking allowances or enhancements
• applying incorrect notice pay calculations

Where ambiguity exists, tribunals generally interpret the contract in favour of the worker. This places a significant burden on employers to ensure payroll and HR teams understand all pay-related provisions. Misinterpretation is not a lawful excuse for underpayment. Employers should also note that underpayment of holiday pay may form part of a series of deductions, particularly following the UK Supreme Court decision in Agnew v PSNI, which removed the previous two-month gap rule originally derived from Bear Scotland v Fulton.

4. Cashflow problems and insolvency risk

Some employers delay or withhold pay because of cashflow difficulties or financial instability. This is a serious and high-risk scenario. Financial difficulty is not a lawful defence to non-payment. Employers remain obliged to pay wages in full and on time. Withholding pay exposes the organisation to unlawful deduction claims, breach of contract allegations and constructive dismissal claims where trust and confidence is undermined.

If the business becomes insolvent, employees may claim certain unpaid sums from the National Insurance Fund, but these payments are capped. Directors may also face personal consequences in limited circumstances, such as allegations of wrongful or fraudulent trading. Under section 121 ERA 1996, directors may also incur criminal liability if they fail to provide required information to the Secretary of State regarding employee claims during insolvency processes.

5. IT or payroll system failures

Payroll software, HR platforms and integrated scheduling systems are essential to modern payroll administration, but they also introduce risk. Failures may arise due to:

• software updates disrupting calculations
• failed data imports
• compatibility issues between systems
• outages or errors within outsourced payroll providers

Responsibility for accurate and timely payment remains with the employer, even where payroll is outsourced. Technical failures that delay or reduce pay qualify as unlawful deductions unless corrected immediately. Employers should maintain disaster recovery payroll processes to ensure continuity if systems fail.

6. HR and management procedural failings

Operational weaknesses often contribute to systemic payroll errors, such as:

• slow communication between HR, payroll and line managers
• unclear approval processes for overtime or shift changes
• delays in updating employee information
• failure to record sickness absence or statutory pay entitlements
• inconsistent application of policies

Poor governance increases both legal and operational risk. Repeat errors may demonstrate a failure to maintain adequate systems and processes, strengthening an employee’s argument that trust and confidence has been damaged. Where systemic risk is identified, employers must carry out a root cause review and strengthen controls as part of their compliance framework.

Section B Summary
Payroll failures may arise from a wide range of internal or external causes, but none reduce the employer’s legal responsibility to pay wages accurately and on time. Administrative mistakes, contractual misunderstandings, IT failures and cashflow issues all carry the same legal consequences. Persistently poor payroll practice also increases the risk of constructive dismissal allegations and regulatory enforcement. Addressing weaknesses in systems, processes and communication is essential for reducing employer liability.

Section C: Claims and Liabilities for Failing to Pay Employees

When wages are not paid correctly or on time, employees have access to several legal remedies under UK employment law. Employers may face unlawful deduction claims, breach of contract allegations and, in serious cases, constructive dismissal claims. This section explains the main legal claims employees may bring, recent case law developments, time limits, potential compensation and how liability is treated when an employer becomes insolvent. Payroll failures frequently affect multiple statutory rights simultaneously, which can significantly increase an employer’s overall exposure.

1. Unlawful deduction from wages under the Employment Rights Act 1996

The most common claim arising from non-payment is an unlawful deduction from wages claim under section 13 of the Employment Rights Act 1996 (ERA 1996).

A deduction is unlawful where the employer:

• pays less than the amount owed
• pays late
• withholds wages entirely
• makes a deduction not authorised by law, contract or written consent

The employee does not need to show intent or financial hardship; the tribunal simply assesses whether the wages were contractually due and whether they were paid. Where multiple underpayments occur, employees may bring a series of deductions claim. Following the Supreme Court decision in Agnew v PSNI (2023), the previous “two-month gap rule” from Bear Scotland v Fulton no longer applies. This means employees may be able to link deductions over a much longer period, increasing potential liability.

2. Breach of contract and constructive dismissal risk

Failure to pay wages is a breach of an express contractual term. Depending on its seriousness, a single instance of non-payment may constitute a fundamental breach of contract. Repeated failures, or failures that severely impact the employee, increase this risk.

An employee may resign and claim constructive unfair dismissal where non-payment undermines trust and confidence. Key risk indicators include:

• persistent payroll errors
• withholding pay during a dispute or investigation without contractual authority
• irregular wage payments due to cashflow issues
• deliberate or reckless delay in processing pay

Constructive dismissal claims carry potentially high compensation, including notice pay, loss of earnings and, where linked to discrimination, injury to feelings.

3. Tribunal time limits for claims

Time limits in wage claims are strict:

• Unlawful deduction claims: three months minus one day from the date of the last deduction.
• Constructive dismissal: three months minus one day from the effective date of termination.
• Breach of contract (tribunal): available only once employment has ended and must be brought within three months minus one day of termination.

All claimants must go through ACAS Early Conciliation before issuing a claim. This process pauses (“stops the clock”) the time limit. Breach of contract claims in the employment tribunal are subject to a £25,000 cap; higher-value claims must be brought in the civil courts.

4. Claims involving statutory payments

Incorrect or late payment of statutory entitlements exposes employers to additional risk. Key areas include:

• Holiday pay: Underpayment may form part of a series of deductions and must be calculated using normal remuneration, including regular overtime and commission.
• Statutory Sick Pay (SSP): Disputes over SSP entitlement fall to HMRC to determine, though non-payment may still contribute to breach of contract claims.
• Statutory Maternity, Paternity and Adoption Pay: Incorrect refusal or underpayment can trigger claims of pregnancy or maternity discrimination in addition to wage claims.
• Notice pay: Failure to pay statutory or contractual notice pay may lead to both unlawful deduction and breach of contract claims.

These statutory rights operate independently of contractual obligations, so an employer may face several overlapping claims arising from a single payroll failure.

5. Remedies and compensation

Available remedies vary by claim type but may include:

• repayment of wages owed
• compensation for financial loss
• interest on unpaid sums (more common in breach of contract claims)
• compensation for constructive dismissal, including future loss
• injury to feelings where discrimination is involved

Where a series of deductions is established, tribunals may award arrears for the entire series, subject to statutory limits and case law. Financial consequences can escalate quickly, particularly where holiday pay and minimum wage compliance are affected.

6. Penalties and enforcement action

Employers may face enforcement through:

• HMRC NMW investigations, which can impose arrears and penalties of up to 200% of the underpayment
• naming and shaming for significant NMW breaches
• civil penalties for failing to pay statutory payments correctly
• compliance scrutiny if the employer holds a sponsor licence

Regulatory concerns are particularly acute where payroll failures indicate systemic governance issues. Sponsor licence holders risk enforcement action if wage non-compliance impacts sponsored workers, as accurate pay is central to maintaining sponsorship duties.

7. Liability when a business is insolvent or closes

If an employer becomes insolvent, employees may claim certain unpaid amounts from the National Insurance Fund, including:

• up to eight weeks’ unpaid wages
• statutory notice pay
• holiday pay
• redundancy pay

These payments are subject to statutory caps. Directors may be held personally liable only in limited circumstances, such as wrongful or fraudulent trading. In addition, under section 121 ERA 1996, directors may face criminal liability if they fail to provide required information to the Secretary of State about employee claims during insolvency proceedings.

Section C Summary
Failure to pay employees correctly exposes employers to unlawful deductions claims, breach of contract allegations, constructive dismissal risk and statutory enforcement. The removal of the two-month gap rule for series-of-deduction claims significantly increases potential liability. Time limits are strict, and compensation can be substantial. Insolvency does not eliminate wage obligations and may create additional risks for directors. Payroll failures frequently affect multiple areas of compliance, so employers must act quickly to resolve issues and reinforce governance systems.

Section D: Employer Actions to Prevent and Resolve Pay Failures

Proactive management of payroll operations is essential for avoiding the legal, operational and reputational risks associated with wage non-payment. Employers must adopt clear processes, maintain strong internal controls and respond rapidly when errors occur. This section provides practical steps to prevent pay failures, manage them effectively and maintain compliance with contractual and statutory obligations. Effective governance is critical, as repeated or serious payroll errors can indicate systemic failings relevant to constructive dismissal and regulatory scrutiny.

1. Immediate steps when a payroll error occurs

Once a payroll error is identified, employers must act without delay. Immediate steps include:

• verifying the error and identifying its cause
• calculating the correct amount owed
• arranging urgent payment, ideally on the same day
• issuing a clear explanation to the employee
• recording all actions taken and any corrective process required

Swift corrective action can significantly reduce legal risk. Delays increase the likelihood of unlawful deduction claims and may undermine trust and confidence in the employment relationship. A rapid and well-documented response also demonstrates that the employer is meeting its obligations responsibly.

2. Communicating transparently with affected staff

Employers must ensure open and timely communication when errors occur. Transparency can prevent disputes from escalating. Employers should:

• inform employees of issues as soon as they are identified
• set out realistic timelines for correction
• provide a clear explanation of the cause and how it is being addressed
• maintain regular updates until the matter is resolved

Poor communication often drives grievances and tribunal claims. A transparent approach demonstrates good faith and reduces the risk of employees alleging a breakdown in trust and confidence.

3. Urgent payment and correction processes

Employers must have a mechanism for making immediate corrective payments. This may include:

• same-day bank transfers
• manual payroll calculations
• emergency payment authorisation processes
• out-of-hours payment procedures

The existence of a monthly payroll cycle does not justify delaying corrective payments. If wages are owed, employers are legally required to pay them immediately. A robust emergency pay process significantly mitigates the risk of deduction claims.

4. Payroll accuracy controls and audits

Strong internal controls are central to preventing wage errors. Employers should implement:

• routine payroll audits
• regular reconciliation of HR, time-recording and payroll data
• spot checks on variable pay elements such as overtime and commission
• segregation of duties within payroll operations
• regular review of payroll system updates and configuration

These measures help identify discrepancies early and prevent systemic failures. Payroll controls also improve defensibility if claims arise by demonstrating that the employer has taken reasonable steps to minimise risk.

5. Contract and policy reviews

Many payroll errors result from unclear or outdated contractual terms or internal policies. Employers should regularly review:

• employment contracts
• overtime and shift-working policies
• variable pay structures
• bonus and commission schemes
• absence and statutory payment procedures

Policies must reflect current legislation and internal practices. Any contractual ambiguity typically works against the employer in litigation, so clarity is essential. HR and payroll teams must also be fully trained on how contractual entitlements translate into payroll practice.

6. Handling disputes and grievances

Where employees dispute their pay, employers must follow a fair and prompt grievance process. Key steps include:

• acknowledging concerns immediately
• conducting a timely and impartial investigation
• providing clear written outcomes
• correcting any underpayment without delay

Employers should never withhold wages pending the outcome of a disciplinary or performance investigation unless expressly allowed by the contract. Doing so risks unlawful deduction claims and potential constructive dismissal allegations.

7. Supporting line managers and HR teams

Payroll accuracy depends heavily on effective coordination between managers, HR and payroll teams. Employers should ensure that:

• managers understand their responsibility for validating hours, overtime and allowances
• HR teams have adequate resources to provide oversight
• payroll deadlines are clear and consistently met
• managers receive training on contractual pay entitlements and statutory obligations

Strong collaboration across departments prevents many root causes of payroll failure. Where issues recur, training and process reinforcement may be required.

8. When to seek legal advice

Legal advice may be necessary where:

• a significant underpayment has occurred
• multiple employees are affected
• claims of constructive dismissal are likely
• statutory payments have been incorrectly calculated or withheld
• financial pressure threatens the organisation’s ability to pay wages

Early legal intervention can help employers manage risk, resolve disputes quickly and prevent claims escalating. It can also assist with reviewing contracts, policies and payroll governance systems to protect future compliance.

Section D Summary
Robust payroll governance is essential to prevent unlawful deductions and related claims. Employers must take immediate action when errors occur, communicate openly with workers and maintain strong operational controls. Clear contractual terms, well-trained managers and effective dispute resolution processes help minimise legal and operational risks. In complex or high-risk situations, timely legal advice strengthens compliance and reduces exposure.

Frequently Asked Questions (FAQs)

What counts as an unlawful deduction from wages?

An unlawful deduction occurs when an employer pays an employee less than they are owed, pays them late, withholds wages entirely or makes any deduction that is not authorised by law, the employment contract or the employee’s prior written consent. Even accidental underpayments qualify. The key question is whether the wages were contractually due and whether they were paid accurately and on time.

Can an employee refuse to work if they are not paid?

Employees may, in some circumstances, be entitled to refuse to work where non-payment constitutes a fundamental breach of contract. A serious or repeated failure to pay may justify resignation and a constructive dismissal claim. Employees refusing work due to non-payment may be protected from detriment or dismissal if the refusal is directly linked to the employer’s breach. Employers should resolve pay issues immediately to avoid escalation.

How quickly must payroll errors be corrected?

Although there is no statutory deadline, employers are expected to correct payroll errors immediately. Same-day payment is best practice once the error is identified. Delays increase legal exposure and may encourage grievances or tribunal claims. Employers must not wait for the next payroll cycle to remedy an error.

What if the business cannot afford to pay wages?

Financial difficulty does not remove the obligation to pay wages. Employers who cannot meet payroll face significant risks, including unlawful deduction claims, breach of contract and constructive dismissal. Cashflow issues are not a legal defence. If insolvency becomes likely, employees may be able to claim some unpaid wages from the National Insurance Fund, though these payments are capped. Directors may face personal liability in cases of wrongful or fraudulent trading.

Are directors personally liable for unpaid wages?

Directors are not normally personally liable for unpaid wages. However, liability may arise where there is wrongful or fraudulent trading, or where directors fail to comply with statutory duties under insolvency law. Under section 121 ERA 1996, directors may also face criminal liability if they fail to provide required information to the Secretary of State in relation to employee wage claims during insolvency proceedings.

Can an employee claim interest on unpaid wages?

Tribunals may award interest in certain cases, particularly where sums have been outstanding for a substantial period. Courts hearing breach of contract claims routinely apply statutory interest. Interest is not automatic in all tribunal claims for unlawful deductions, but may be awarded depending on the circumstances of the case.

How does late payment affect holiday pay, overtime or variable pay?

Late or incorrect payment of any pay element can amount to an unlawful deduction. Underpayment of holiday pay is particularly high risk, as holiday pay must reflect normal remuneration, including regular overtime and commission. Underpayment may also form part of a series of deductions following Agnew v PSNI. Errors in variable pay calculations may also cause National Minimum Wage breaches if average pay in the reference period is reduced below statutory thresholds.

Conclusion

Accurate and timely payment of wages is an essential legal obligation for UK employers and a cornerstone of a stable and trusted employment relationship. When employees are not paid correctly or on time, the consequences are immediate and far-reaching. Even a single payroll error can amount to an unlawful deduction from wages, while repeated or serious failures may expose the organisation to breach of contract and constructive dismissal claims. Statutory obligations relating to holiday pay, minimum wage compliance and family-related pay add further layers of risk.

For business owners and HR professionals, preventing pay failures requires more than operational efficiency. Employers must embed strong payroll governance, maintain effective communication between HR, payroll and management teams and ensure that contractual and statutory pay rules are clearly understood and consistently applied. Quick corrective action and transparent communication with workers are essential when errors occur, as delays significantly heighten legal and reputational exposure.

This guide has outlined the legal framework governing wage payments, the types of claims that arise from non-payment, the remedies available to employees and the practical strategies employers can use to strengthen their compliance position. By adopting rigorous payroll controls, reinforcing training and maintaining open communication, employers can reduce legal risk, improve workforce relations and uphold the integrity of the employment relationship.

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