Pay & Deductions: Employer Legal Duties

Ensuring workers are paid correctly is one of the core legal duties for any employer. UK legislation sets out strict requirements on pay accuracy, minimum pay entitlements, itemised payslips, statutory sick pay rights and the limited circumstances where deductions from wages are permissible. Employers must also understand how to handle final pay when employment ends, how to pay for overtime and mandatory training, and how bonuses, commission, expenses, tips and workplace pensions fit within broader payroll compliance. A failure in any of these areas can expose the employer to unlawful deduction claims, enforcement penalties or wider workforce relations issues.

What this article is about:
This guide provides HR professionals and business owners with a comprehensive and practical explanation of the legal rules governing pay and deductions in the UK. It explains the minimum standards all employers must meet, highlights risk areas that commonly lead to disputes or claims and sets out how to manage payroll processes in a compliant and consistent manner. Each section examines a specific aspect of pay law, from minimum wage obligations and sick pay through to bonuses, tips and pension contributions, helping employers establish robust systems and policies that protect both the organisation and its workforce. Where rights differ as between employees and workers, this is highlighted in the relevant sections so employers can apply the correct standard.

The remainder of this article explores the full range of employer responsibilities relating to pay. It begins with minimum wage law, moves through statutory entitlements and contractual arrangements and concludes with more complex areas such as bonus schemes, commission structures and workplace pension duties. Throughout, the focus is on clarity, legal accuracy and actionable guidance that supports effective HR practice.

Section A: National Minimum Wage

Employers must ensure that every worker is paid at least the applicable National Minimum Wage (NMW) or National Living Wage (NLW) rate for every hour worked. This requirement applies regardless of the employer’s financial position, industry norms or internal payroll practices. Because minimum wage compliance is assessed on a pay-period basis, even small errors can take workers below the legal threshold, exposing the employer to arrears, penalties and reputational enforcement action.

The NMW framework sets different rates according to the worker’s age and status. Employers must be clear about which rate applies and when changes take effect, particularly where a worker moves into a new age band during a pay reference period. The rules also extend to apprentices, who have a separate rate structure and complex criteria governing when they become entitled to the higher NMW rates.

Accurate minimum wage calculations depend on correctly identifying what counts as “working time” and what can legitimately be excluded. For many employers this is where risk arises. Waiting time, mandatory training, time spent travelling between assignments and time on call may all count as working time depending on the circumstances. Employers must record working hours reliably and ensure payroll systems reflect the actual time worked rather than contracted hours alone. Employers must also keep adequate pay and hours records for at least the statutory minimum period and, in practice, should retain them for up to six years to align with limitation periods for wage claims. Where there is a dispute about underpayment, the burden of proof in practice rests with the employer to show, through records, that the correct NMW or NLW has been paid.

Deductions from pay can also affect NMW compliance. Some deductions are permitted without pushing pay below the minimum wage, while others must be disregarded or count negatively. Deductions for items that are “for the employer’s own use or benefit”, such as uniforms, tools or administration charges, will reduce pay for minimum wage purposes and can inadvertently breach the rules. The accommodation offset presents a further area of complexity where employers provide living accommodation to workers, as the offset amount is capped and updated annually, usually in April, alongside changes to NMW and NLW rates.

Where errors occur, the employer must promptly correct underpayments, calculate arrears based on the current applicable NMW or NLW rates rather than the historic rate in force when the underpayment arose and understand that HMRC’s enforcement regime carries significant penalties. Compliance reviews can also result in public naming for breaches, which can cause reputational damage even where underpayments were inadvertent. HMRC has wide powers to require repayment of arrears, issue penalty notices and pursue enforcement proceedings where employers fail to regularise their position.

Section Summary
National Minimum Wage compliance requires employers to apply the correct rate, record working hours accurately, understand which deductions affect minimum wage calculations and identify time that qualifies as working time. Even small payroll mistakes can result in legal breaches, with financial and reputational consequences. Robust systems, comprehensive record keeping and close monitoring of rates and working hours are essential to maintain compliance and to demonstrate that the employer has met its obligations if challenged.

You can read more about the National Minimum wage here >>

Section B: Sick Pay

Sick pay entitlement is a key statutory protection that employers must administer correctly to avoid unlawful deduction claims, discrimination risks and disputes about absence management. Statutory Sick Pay (SSP) provides a minimum level of income for eligible employees—note that SSP applies only to those classed as employees for SSP purposes, not all workers—who are unable to work due to illness, and sits alongside any contractual sick pay provisions an employer may offer under the terms of employment.

SSP eligibility depends on meeting several statutory conditions. The employee must earn average weekly earnings at or above the Lower Earnings Limit, must have been absent from work for at least four consecutive qualifying days (forming a Period of Incapacity for Work) and must not have exhausted their SSP entitlement, which is capped at 28 weeks. SSP is not payable for the first three waiting days of absence unless linked periods of incapacity apply. Employers must also verify incapacity through appropriate evidence, which may include self-certification for the first seven days and medical fit notes thereafter. Payroll teams must ensure SSP is triggered on the correct day, that entitlement continues only for eligible absence periods and that statutory maximums are not exceeded.

Many employers provide enhanced or contractual sick pay, offering higher rates or extended periods of paid absence. These schemes must be clearly defined in employment contracts or related policy documents and applied consistently to avoid discrimination or breach of contract. Where both contractual pay and SSP apply, the employer must calculate how the payments interact to ensure the employee is not paid less than statutory minimums. Employers should also communicate clearly how sick pay affects holiday entitlement, as statutory holiday continues to accrue during sickness absence.

Accurate payroll processing is critical. SSP is paid through the employer’s payroll and is subject to PAYE and National Insurance in the same way as normal wages. Employers cannot usually claim reimbursement for SSP. Incorrect calculations or delays can lead to allegations of unlawful deduction from wages, and errors identified during HMRC reviews may result in compliance action. Employers must also ensure that workers who are not employees, and therefore not eligible for SSP, are informed clearly of their entitlement position to avoid misunderstandings.

Managing sick pay also requires coordination between HR and payroll. Employers must keep accurate absence records, follow internal notification procedures and ensure decisions about evidence, pay entitlement and return-to-work expectations are fair, consistent and legally compliant. Poor communication or inconsistent application of rules can lead to claims of unfair treatment or disability discrimination where long-term health conditions are involved.

Section Summary
Sick pay compliance relies on correctly assessing eligibility, administering SSP through payroll, coordinating contractual and statutory entitlements and ensuring consistent application of evidence, notification rules and understanding insurance protections. Employers must maintain clear records, communicate expectations effectively and ensure their sick pay arrangements meet statutory standards and contractual obligations. Understanding the distinction between employee and worker status is essential to avoid misapplication of SSP rules.

You can read more about Statutory Sick Pay here >>

Section C: Payslips & Pay Statements

Providing accurate, itemised payslips is a statutory obligation for employers. Payslips give workers a clear breakdown of how their pay has been calculated and what deductions have been made. Failure to issue payslips, or issuing payslips that are incomplete or inaccurate, exposes an employer to unlawful deduction claims and potential tribunal orders to rectify the omission for all affected workers.

Under the Employment Rights Act 1996, employers must provide an itemised pay statement on or before the date the worker is paid. This entitlement applies to all employees and workers, including those on zero-hours contracts and agency workers paid directly by the employer. However, where agency workers are supplied and paid by an agency rather than the hirer, the agency—not the end user—is responsible for issuing the payslip. Contractors and genuinely self-employed individuals do not have a right to a payslip unless contractually agreed.

A legally compliant payslip must show gross pay, the amount and purpose of each deduction, net pay and, where pay varies by the number of hours worked, the number of hours for which the worker is being paid. Employers must ensure that payslips reflect the true position of earnings, deductions and hours; pension contributions, national insurance contributions, relying solely on automated payroll outputs without checking accuracy can create errors that constitute unlawful deductions.

Payslips may be provided electronically or in hard copy. Digital payslips are widely used but must remain accessible to workers, including those who leave employment. Employers must ensure systems allow workers to download or view their payslips without unreasonable barriers.

When workers raise concerns about their payslip or believe a mistake has been made, employers must investigate quickly, correct any underpayment and issue an amended statement where necessary. Rectifying errors promptly can reduce the risk of claims. While employment tribunals cannot award compensation for payslip failures alone, they can make a declaration and may increase compensation where the failure is linked to an unlawful deduction claim.

Good practice also includes ensuring that HR and payroll functions work together. Changes to hours, overtime, holiday pay, bonuses, absence or deductions must be communicated accurately and on time. Clear internal processes reduce inconsistencies and support compliance across the wider payroll system.

Section Summary
Employers must issue itemised payslips on or before payday, detailing gross pay, deductions, net pay, pensions and variable hours. Accurate, accessible payslips support transparency and reduce legal risk. Prompt correction of errors, strong coordination between HR and payroll and robust record keeping are essential to maintaining compliance. Where responsibility for payslip provision lies with an agency, employers must ensure appropriate contractual and operational arrangements are in place.

You can read our extensive guide to Payslips here >>

Section D: When Wages Are Not Paid

Failure to pay wages correctly or on time is a serious breach of employment law. Workers are entitled to receive the full amount they are owed on the date their pay is due. When this does not happen, the employer risks unlawful deduction from wages claims, breach of contract allegations and significant disruption to workforce relations. Payroll delays can occur for many reasons, including administrative error, incorrect timesheet processing, system failures or misinterpretation of contractual entitlements, but the legal position remains the same: wages must be paid accurately and without undue delay.

Under the Employment Rights Act 1996, both employees and workers may bring claims where wages are withheld, underpaid or paid late. This includes non-payment of overtime, bonuses, commission, holiday pay or sick pay where these form part of the worker’s contractual or statutory entitlements. A single incorrect payment can lead to a claim, and repeated failures can increase exposure considerably. Employers must take prompt steps to investigate any report of missing or incorrect wages, establish the cause and issue corrective payments without waiting for the next payroll cycle where possible.

When resolving underpayments, employers must calculate the shortfall precisely, including any consequential payments such as recalculated holiday pay or pension contributions. If minimum wage applies, arrears must be repaid at the current NMW or NLW rate, as required by HMRC enforcement policy. Clear communication with the worker is essential, both to maintain trust and to demonstrate that the employer is addressing the issue transparently. Where delays were caused by systemic issues, employers should review internal processes to prevent recurrence. Persistent payroll inaccuracies may also indicate deficiencies in HR–payroll integration, workforce scheduling or the management of variable hours.

Workers may also claim interest on unpaid wages and, in some cases, additional sums where the failure to pay has caused financial loss. Where non-payment relates to discriminatory treatment—such as withholding pay because a worker took maternity leave or exercised a statutory right—additional legal remedies may apply. Employers must therefore ensure that all decisions relating to pay are evidence-based, consistent and compliant with equality and employment legislation.

In more complex disputes, such as those involving commission schemes or bonus structures, the employer must review the contractual terms carefully. Pay disputes often arise where eligibility criteria, performance conditions or calculation methods have been applied incorrectly or inconsistently. A clear contractual framework and detailed audit trails reduce the risk of challenge and support the employer’s position if a claim is brought. For breach of contract claims, employees (but not workers) may claim damages in an employment tribunal only where employment has ended, otherwise such claims must be brought in the civil courts.

Section Summary
Wages must be paid in full and on time. Any failure exposes employers to unlawful deduction claims, breach-of-contract disputes and potential equality law risks. Prompt investigation, corrective payments and strong communication are essential in resolving issues, while robust internal systems help prevent future payroll failures. Employers must also ensure compliance with minimum wage arrears rules, under which HMRC requires repayment at current rates and has wide enforcement powers.

You can read more about Failing to Pay Employees here >>

Section E: Deductions From Pay

Employers are only permitted to make deductions from a worker’s pay in strictly limited circumstances. Any deduction made outside these legal boundaries risks constituting an unlawful deduction from wages under the Employment Rights Act 1996. Even where deductions are made in good faith, failing to follow the correct statutory or contractual basis can expose the employer to claims and enforcement action.

A deduction will be lawful only if it falls within one of three categories: deductions required or authorised by legislation, deductions authorised by the worker’s contract of employment or deductions to which the worker has given explicit, written consent. Statutory deductions include Income Tax, National Insurance, student loan repayments and court orders. Employers must apply these deductions accurately and ensure payroll systems are up to date with current thresholds and legislative changes.

Contractual deductions must be clearly set out in the employment contract or a document referred to within it. Common examples include deductions for overpaid wages, repayment of season ticket loans or deductions for benefits provided by the employer. Overpayments may generally be recovered without the worker’s consent because the law recognises that money paid by mistake is recoverable; however, recovery must still be reasonable and must not breach other statutory protections. Broad or vague contractual provisions are not sufficient, and any clause permitting deductions must be specific, transparent and brought to the worker’s attention before it can be enforced.

Deductions based on worker consent require written agreement, usually for specific purposes such as the purchase of equipment, voluntary benefit schemes or salary sacrifice arrangements. Consent must be freely given and cannot be implied. Employers must ensure the worker understands the purpose and amount of the deduction and that consent remains valid over time. Even where a deduction is contractually authorised or consented to, it may still be prohibited if it would reduce pay below the National Minimum Wage where the deduction is for the employer’s own benefit, such as for uniforms or tools.

Some deductions create additional legal risks. Deductions for items “for the employer’s own use or benefit”—including uniforms, tools, required travel, or administrative charges—reduce pay for minimum wage purposes and can inadvertently cause breaches. Similarly, attempts to recover training costs or impose financial penalties must be handled with caution. Cost recovery clauses must be reasonable, proportionate and compliant with contract and consumer law principles; they must not operate as disguised disciplinary sanctions.

Employers must also consider the timing of deductions. Unless expressly agreed, deductions should be made from the next available payment rather than spread across multiple pay periods. Where an employee leaves employment owing money to the employer, the contractual basis for any final deductions must be clear and strictly followed. Employers must also ensure that deductions made from final pay do not reduce pay below statutory minimum wage thresholds where deductions relate to items for the employer’s benefit.

Section Summary
Deductions from pay are lawful only where they are authorised by statute, clearly set out in the worker’s contract or supported by the worker’s written consent. Employers must ensure deductions are transparent, specific and reasonable and must understand their interaction with minimum wage rules. Clear contractual drafting, accurate payroll processes and cautious use of cost recovery arrangements are essential to avoid unlawful deduction claims.

You can read more about Deductions from Pay here >>

Section F: Final Pay When Employment Ends

When employment ends, employers must ensure that the final payment issued to the worker is complete, accurate and made on time. Final pay is often scrutinised more closely than routine payroll because it brings together multiple entitlements, adjustments and deductions within a single payment. Any omission or miscalculation can lead to unlawful deduction claims, breach of contract allegations and strained post-employment relationships.

Final pay typically includes outstanding basic pay, overtime, commission or bonuses that have already been earned, untaken statutory holiday pay and any contractual notice pay. Where the worker is serving notice, employers must pay for all hours worked up to the termination date. Where the employer pays in lieu of notice (PILON), the payment must reflect the full value of the notice period as required by the contract or statutory minimum notice entitlements. PILON should ideally be provided for contractually to avoid arguments that payment without working notice breaches the contract.

Holiday pay calculations are a common source of error. Employers must pay for all untaken statutory holiday accrued up to the worker’s last day of employment. For workers with variable pay, holiday pay must reflect average earnings rather than basic pay alone. This includes regular overtime, commission and other payments that form part of normal remuneration. Since the introduction of the statutory 52-week reference period, employers must use the most recent 52 paid weeks to calculate holiday pay for irregular hours and part-year workers. Employers must ensure accurate record keeping throughout employment to avoid incorrect calculations at termination.

Where a worker owes money to the employer at the end of employment, such as for outstanding loans, salary advances or unreturned equipment, any deductions from final pay must have a clear contractual or statutory basis. Employers must not withhold final pay to secure return of property unless the contract expressly allows it. Even where a deduction is lawfully permitted, the employer must consider its interaction with minimum wage rules: deductions for the employer’s own benefit must not reduce pay below the statutory minimum for the final pay reference period.

Timing is critical. Final pay should be made on the usual payday unless the contract states otherwise. Delays can exacerbate disputes and increase the likelihood of claims. Employers should also provide an itemised payslip with the final payment, showing all earnings and deductions, to ensure transparency and compliance with payslip regulations.

If there are ongoing disputes about entitlements at the point of termination—such as disagreements over bonus eligibility, commission calculations, repayment of training costs or holiday pay accrual—employers must handle these carefully. Clear contractual wording, well-documented performance conditions and robust payroll records will help avoid or resolve such disputes. In breach of contract cases, employees may claim damages via tribunal only if their employment has ended; otherwise claims must be brought in the civil courts.

Section Summary
When offboarding – final pay must be accurate, timely and complete. Employers must correctly calculate outstanding wages, accrued holiday using the statutory 52-week reference period where applicable, notice pay and any contractual entitlements, while ensuring any deductions are lawful and properly documented. A structured, transparent approach reduces legal risk and supports a clean and compliant employee exit.

You can read more about Final Pay when Employment Ends here >> 

Section G: Pay for Working Extra Hours

Employers must ensure that workers are paid correctly for any additional hours they work beyond their normal contractual arrangements. This area of pay law requires careful handling because it intersects with contractual terms, working time rules and National Minimum Wage compliance. Errors often arise where employers rely on informal arrangements for overtime, fail to record extra hours accurately or misunderstand how pay interacts with statutory rest requirements.

The employment contract is the starting point. Some roles include contractual overtime provisions that specify rates of pay, conditions for eligibility and whether overtime must be authorised in advance. Other contracts may be silent on overtime, in which case workers are generally entitled to their normal hourly rate for any additional hours worked. In all cases, employers should maintain clear procedures for approving and recording extra hours to avoid disputes.

National Minimum Wage considerations are critical. Even where a worker is paid a salary rather than an hourly rate, the employer must ensure that the worker’s total pay, when divided by the actual hours worked in a pay reference period including overtime, does not fall below the applicable minimum wage rate. Employers who expect staff to work regular or substantial unpaid additional hours—common in some sectors—face significant compliance risks if those hours reduce average pay below statutory thresholds. HMRC can require repayment of arrears at the current NMW rate and impose penalties.

Employers must also consider the impact of extra hours on working time and rest entitlements under the Working Time Regulations 1998. The Regulations require minimum rest breaks, daily rest and weekly rest periods, and cap weekly working hours on an average basis. Any opt-out from the 48-hour average working week must be voluntary, in writing and capable of withdrawal. Employers must also keep accurate records of working time to demonstrate compliance if challenged by regulators.

Determining whether additional time counts as working time can be fact-specific. Time spent waiting, on call or interrupted during rest breaks may count as working time where the worker is required to remain available or under the employer’s control. Conversely, genuinely free rest time, where the worker is not required to remain available, will not normally count. Employers should assess working patterns carefully to avoid inadvertent breaches of working time or minimum wage law.

Where workers perform additional hours as part of flexible working arrangements, shift cover, emergencies or increased demand, the employer must apply consistent and transparent pay rules. Time off in lieu (TOIL) may be offered instead of payment, but only where the arrangement is agreed in advance and the worker’s contract or policy framework allows it. TOIL must also be recorded accurately to ensure workers receive the full time owed.

Disputes over unpaid extra hours often stem from inadequate timekeeping systems, unclear managerial expectations or failure to enforce procedures for authorising overtime. Employers should ensure that line managers understand the contractual and legal framework, that time records are accurate and that workers know how to report discrepancies.

Section Summary
Pay for extra hours must align with contractual terms, minimum wage rules and working time requirements. Employers must ensure additional hours are recorded accurately, authorised transparently and paid consistently. Clear policies, reliable timekeeping and strong line manager guidance are essential to avoid disputes and legal breaches. Employers must also be vigilant in assessing whether on-call time or interrupted breaks constitute working time for legal purposes.

You can read our extensive guide to Overtime here >>

Section H: Pay for Mandatory Training

Mandatory training is treated as working time for pay purposes. If an employer requires a worker to attend training—whether for induction, regulatory compliance, skills development, health and safety or role-specific competence—the worker must be paid for the time spent completing that training. This applies regardless of whether the training takes place during normal working hours, outside usual shifts or on a day the worker would not ordinarily work.

The key legal principle is that where training is a requirement of the job, the employer cannot expect the worker to complete it without pay. This includes mandatory e-learning modules, professional updates required by the employer and training needed to maintain licences or certifications necessary for the role. Mandatory training also includes courses required by regulators—such as SIA licensing modules, food safety certifications or the care certificate framework—which must always be treated as paid working time. Even where the worker volunteers for development opportunities, if the training is required to meet job performance or safety standards, it generally counts as working time.

Minimum wage compliance is a central consideration. Employers must ensure that payment for mandatory training is included when assessing whether the worker’s total pay meets the National Minimum Wage or National Living Wage threshold for the relevant pay reference period. If the worker completes unpaid training during that period, the employer may inadvertently breach minimum wage rules. This risk is particularly high for junior staff, apprentices, part-time workers or those with irregular hours.

Training time must be recorded accurately. Employers should keep clear records of attendance, duration and whether the training was completed in person or online. Where training is asynchronous—for example, e-learning completed at the worker’s convenience—the expected completion time should be stated clearly, and pay arrangements must reflect the time reasonably required to complete the tasks. Instructing workers to complete mandatory e-learning “in their own time” without pay is a common compliance failure and can trigger minimum wage breaches.

Where training is optional and genuinely voluntary, the employer may not be required to pay for it. However, the distinction between optional and mandatory training must be transparent. If the employer later relies on the training to assess performance, competence or continued employment, tribunals may treat the training as mandatory, with pay obligations applying retrospectively.

Employers should also consider indirect costs associated with training. If a worker incurs expenses to attend mandatory training—such as travel, accommodation or materials—the employer must ensure that reimbursements or deductions do not reduce pay below minimum wage levels. Where training is off-site or scheduled outside the worker’s normal working pattern, employers should communicate arrangements clearly to avoid misunderstandings about entitlement to pay or expenses.

Section Summary
Mandatory training counts as working time and must be paid. Employers must record training hours accurately, ensure minimum wage compliance and distinguish clearly between voluntary and required training. Transparent communication, accurate record keeping and consistent payroll treatment reduce the risk of unlawful deduction claims and minimum wage breaches.

You can read our extensive guide to Mandatory Training here >>

Section I: Pay Rises

Pay rises are an integral part of workforce management and remuneration strategy. Whether driven by market conditions, internal pay frameworks or statutory requirements, employers must implement pay increases lawfully, transparently and in line with contractual obligations. A well-structured approach reduces the risk of disputes, maintains fairness and supports employee engagement.

The starting point for determining pay rise obligations is the employment contract. Some contracts include explicit provisions for annual reviews or scheduled increases, while others simply state that pay will be reviewed periodically without guaranteeing an uplift. A contractual right to a pay rise must be honoured, and failure to do so can amount to breach of contract. Where the contract states that pay will be reviewed annually but does not guarantee an increase, employers must ensure that a genuine review takes place and that the outcome is communicated appropriately. Any contractual change to pay must be confirmed in writing in accordance with section 4 of the Employment Rights Act 1996, which requires employers to notify employees of changes to written terms.

Pay rises may also be required to meet statutory minimum wage changes. Employers must ensure that pay rates meet or exceed the relevant National Minimum Wage or National Living Wage thresholds following any rate increases introduced in April each year. Failure to adjust pay in line with statutory updates risks immediate non-compliance and potential HMRC enforcement.

When awarding discretionary pay rises, employers must ensure that decisions are fair, evidence-based and consistent with equality legislation. Pay rise processes must not discriminate on the grounds of protected characteristics such as age, sex, disability, race or maternity status. Employers should maintain clear records of how decisions are made, the criteria applied and any supporting performance or market data. This is particularly important where part-time workers or those with flexible working arrangements—groups disproportionately represented by women—may otherwise experience indirect discrimination. Always consider alternatives to pay rises.

Communication is a key part of pay rise management. Workers should receive written confirmation of any change to their pay, including the effective date and the new rate. Employers must also update payroll systems promptly to ensure the revised pay is reflected accurately in the next pay period. Delays or errors in implementing pay rises can result in underpayments and potential unlawful deduction claims.

Employers should also consider the broader pay structure. Pay rises may affect pension contributions, overtime rates, salary-linked benefits and holiday pay calculations. HR and payroll teams must coordinate to ensure all downstream pay elements are updated correctly and consistently.

Section Summary
Pay rises must be implemented in accordance with contractual terms, statutory requirements and equality law. Employers must ensure decisions are fair, transparent and properly documented, and that payroll systems are updated promptly. Clear communication, thorough record keeping and consistent processes help maintain legal compliance and workforce trust.

You can read our extensive guide to Pay Rises here >>

Section J: Bonuses

Bonus schemes and arrangements must be structured and administered with precision to avoid contractual disputes, discrimination risks and unlawful deduction claims. Bonuses can play a significant role in performance management, recruitment and retention, but their legal complexity means employers must define eligibility, calculation and payment rules clearly from the outset.

Bonuses fall broadly into two categories: contractual and discretionary. Contractual bonuses arise where the employment contract or bonus scheme explicitly guarantees a payment when specified conditions are met. Once the worker satisfies those conditions, the employer must pay the bonus in full and on time. Any failure to do so may amount to breach of contract and an unlawful deduction from wages.

Discretionary bonuses, by contrast, allow the employer to decide whether a bonus is awarded, the amount payable and the criteria applied. Even with broad discretion, employers must exercise that discretion rationally, consistently and without discrimination. Decisions must be based on objective, evidence-backed considerations rather than subjective or arbitrary reasoning. Where discretionary bonuses are paid regularly or form an established pattern, tribunals may consider them part of the worker’s normal remuneration, with implications for holiday pay and potential claims if payments cease without justification.

Bonus schemes must set out clear eligibility criteria. Common issues arise where employment ends before the bonus payment date, where workers are on long-term sick leave or maternity leave, or where performance metrics are disputed. Unless the scheme states otherwise, tribunals often interpret ambiguous clauses in favour of the worker. Employers must therefore ensure eligibility rules, performance measures, clawback provisions and payment timing are unambiguous and consistently applied.

Clawback provisions must be carefully drafted and must comply with the Unfair Contract Terms Act 1977. Clawback based on misconduct, regulatory breaches, or customer cancellations must be reasonable, proportionate and clearly communicated. Clawback provisions that operate as penalties or are overly punitive may be unenforceable.

Bonuses form part of normal remuneration for certain workers, particularly where payments are regular or linked to performance. This can affect holiday pay, as case law requires holiday pay to reflect “normal” earnings rather than basic pay alone. Employers must establish whether a bonus should be included in holiday pay calculations and ensure payroll processes reflect this.

Tax and National Insurance must be applied correctly to all bonus payments, including one-off awards and non-cash bonuses. Employers must also consider the interaction between bonuses and pension contributions, especially where contributions are calculated as a percentage of qualifying earnings.

Clear communication avoids misunderstandings. Workers should receive written confirmation of bonus outcomes, the calculation method used and the timing of payment. Employers should retain detailed documentation supporting decisions, particularly for discretionary schemes, to manage audit and dispute risk.

Section Summary
Bonuses must be grounded in clear contractual or policy frameworks and administered consistently. Employers must distinguish between contractual and discretionary schemes, apply eligibility and performance criteria transparently, draft clawback provisions lawfully and account for holiday pay considerations. Accurate payroll treatment, robust documentation and strong communication significantly reduce legal and operational risks.

You can read our extensive guide to Bonuses here >>

Section K: Commission

Commission arrangements link pay to performance and are common in sales, customer service and revenue-generating roles. Because commission often forms a significant part of a worker’s income, employers must ensure schemes are drafted clearly, administered consistently and aligned with contractual and statutory obligations. Ambiguity in commission rules is one of the most frequent causes of pay disputes, particularly when employment ends or targets change.

The employment contract or commission policy must set out the basis on which commission is earned. This includes defining the performance metrics, when commission becomes due, how it is calculated and whether it is subject to approval or verification steps. A central distinction is between commission that is earned and commission that is payable. A worker may earn commission when they complete a sale or achieve a target, but the employer may specify that payment is made only once additional conditions are satisfied, such as receipt of customer payment or expiry of a returns period. Without clear drafting, employers may struggle to defend disputes about unpaid or withheld commission.

Commission may also form part of “normal remuneration” for holiday pay purposes if it is sufficiently regular or predictable. Recent case law requires that workers receive holiday pay based on their normal earnings, not just basic pay. Employers must therefore assess whether commission forms part of that normal pattern and, if so, incorporate it into holiday pay calculations. Failure to do so may lead to unlawful deduction claims and arrears stretching back over multiple holiday years.

Disputes commonly arise when employment ends. Workers may claim entitlement to commission earned before termination but not yet processed or paid. Employers must rely on the contractual terms to determine whether commission is due post-termination. Schemes should specify whether the worker must be employed on the payment date, whether pro-rata payments apply and how ongoing pipeline sales or recurring revenue are handled. Where the scheme is silent or unclear, tribunals often interpret provisions in favour of the worker. Employers must also ensure compliance with the Part-time Workers Regulations and the Fixed-Term Employees Regulations, which require that workers in non-standard contracts are not treated less favourably without objective justification.

Commission structures must also comply with minimum wage laws. If a worker receives a low basic salary with the expectation that commission will make up the difference, the employer must still ensure the worker receives at least the National Minimum Wage or National Living Wage for every pay reference period. Commission cannot be relied upon to make up shortfalls retrospectively. Employers must monitor pay levels carefully, particularly in months with low sales activity.

Employers should document all commission calculations, taxes, approvals, adjustments and clawbacks. Clawback provisions must be clearly justified and proportionate, particularly where clawback is tied to returns, cancellations or compliance failures. Provisions that operate as penalties or are overly broad may be unenforceable. Transparent documentation helps ensure compliance and reduces disputes.

Section Summary
Commission schemes must be clearly drafted, consistently applied and aligned with minimum wage rules, holiday pay requirements and contractual obligations. Employers must define when commission is earned and payable, ensure fair treatment of part-time and fixed-term workers, address entitlement on termination and maintain accurate records. Transparent communication and robust contractual wording significantly reduce the risk of disputes.

You can read our extensive guide to Commission here >>

Section L: Expenses

Expenses arise when workers incur costs in the performance of their duties. Employers must manage expense reimbursement within a clear legal and contractual framework to ensure payments are accurate, compliant and fair. Although there is no general statutory duty to reimburse all work-related expenses, employers must not make deductions or impose expense practices that breach minimum wage law, create unlawful deductions or discriminate between workers without objective justification.

A compliant expenses framework begins with a clear, written expenses policy. This should specify which expenses will be reimbursed, the approval process, evidence requirements and any limits or restrictions. Typical reimbursable expenses include business travel (other than normal commuting), accommodation, subsistence, professional fees, equipment required for the job and training-related costs. Travel between home and an employee’s usual place of work is considered normal commuting and is not a business expense under HMRC rules, meaning it is not reimbursable tax-free. Employers must ensure workers understand these distinctions to avoid confusion and tax liabilities.

If the employer requires the worker to incur the cost as a condition of performing their duties, withholding reimbursement may amount to an unlawful deduction or a breach of contract, depending on the terms. Where unreimbursed expenses are for the employer’s own benefit—such as required uniforms, tools or travel between work assignments—these costs may reduce pay for minimum wage purposes. Employers must ensure that any such expenses are reimbursed promptly to avoid inadvertent breaches of minimum wage law.

Employers must also apply tax rules correctly. Many reimbursed expenses are non-taxable where they are incurred wholly, exclusively and necessarily for work. However, failing to follow HMRC rules—such as reimbursing flat-rate allowances without evidence—can create tax liabilities for both worker and employer. Payroll and finance teams must collaborate closely to ensure accurate classification, processing and record keeping.

Disputes over expenses often arise where policies are unclear, inconsistently applied or not updated to reflect evolving work arrangements, such as hybrid or remote working. Employers must communicate expense entitlement clearly, particularly where homeworking allowances, equipment reimbursements or travel rules shift under new working patterns. Managers should be trained to apply expense rules consistently, as ad hoc or subjective approvals increase the risk of grievances or discrimination claims.

Where expenses are deducted from pay—for example, where an advance has been overpaid or a company credit card has been misused—these deductions must comply with lawful deduction rules. Unless deductions are required by statute or clearly authorised by contract, the employer will require the worker’s written consent. Even with consent, deductions must not reduce pay below the minimum wage where expenses relate to costs for the employer’s benefit. Employers also need to consider self-employed expenses for workers or freelancers.

Section Summary
Expenses must be managed through clear policies, lawful deduction practices and accurate reimbursement processes. Employers must ensure expense practices comply with minimum wage law, tax rules and contractual obligations, while applying policies consistently and transparently. Strong record keeping, clear communication and proper tax treatment significantly reduce the risk of disputes.

You can read our extensive guide to Expenses here >>

Section M: Tips & Service Charges

Tips, gratuities and service charges are governed by a specific legislative framework that places clear duties on employers. The Employment (Allocation of Tips) Act 2023, commonly known as the Tipping Act 2023, requires that all qualifying tips over which the employer has control or significant influence are passed on to workers in full and distributed fairly and transparently. Employers must also comply with the statutory Code of Practice, which provides detailed guidance on what constitutes fair allocation. The Code is legally admissible in tribunal proceedings and must be followed unless there is a sound justification for departing from it.

Under the Tipping Act, employers must not make deductions from tips except for statutory deductions such as tax. This means employers cannot retain any proportion of tips to cover administrative costs, breakages, walkouts or card processing fees. Any tips paid into a tronc system must also be distributed according to fair, objective and transparent criteria. Troncmasters are responsible for administering tip distribution independently of the employer, but employers still have duties to ensure the arrangements comply with the law.

Fairness in distribution is a central requirement. Employers must ensure that tips are allocated based on clear and consistent principles, such as hours worked, role, performance or contribution to the customer experience, rather than subjective or discriminatory factors. The statutory Code of Practice requires employers to consult workers or their representatives on tipping policies and to document how tips are shared. Any changes to allocation methods must be communicated and justified transparently.

The Act requires employers to have a written tipping policy available to workers. This policy must explain how qualifying tips are collected, allocated and paid. Employers must also maintain records of tips received and distributed for at least three years. Workers have the right to request information about tipping records, and employers must respond within four weeks. Failure to comply may result in employment tribunal claims and compensation orders, including compensation for unfair allocation.

The Act covers a wide range of tipping scenarios, including cash tips, card payments, app-based payments and service charges added to the bill. The key factor is whether the employer controls or significantly influences the distribution. Voluntary tips handed directly from customers to workers fall outside the Act, but employers must still ensure their treatment does not breach contractual or minimum wage rules.

Employers must also consider the interaction between tips and other pay elements. Tips do not count towards National Minimum Wage calculations, so employers cannot rely on tip income to meet statutory minimum pay rates. Payroll systems must ensure that tips are processed correctly for tax purposes, as most tips are taxable even if they are not processed through payroll. The Act also requires that all qualifying tips be paid to workers no later than the end of the month following the month in which the customer paid them.

Section Summary
The Tipping Act 2023 requires employers to pass on all qualifying tips in full, distribute them fairly, follow the statutory Code of Practice and maintain robust policies and records. Employers must ensure tip arrangements comply with transparency requirements, minimum wage rules and tax obligations. Clear procedures, fair allocation methods and accurate record keeping are essential to reduce legal and operational risks.

You can read our extensive guide to Tips & Service Charges here >>

Section N: Workplace Pensions

Workplace pensions form a core part of the UK’s statutory employment framework. Under the automatic enrolment regime introduced by the Pensions Act 2008, employers must assess their workforce, automatically enrol eligible jobholders into a qualifying pension scheme and make mandatory pension contributions. Compliance is closely monitored by The Pensions Regulator, and failure to meet these duties can result in substantial fines, enforcement notices and reputational harm.

Automatic enrolment requires employers to identify “eligible jobholders”, typically workers aged between 22 and state pension age who earn above the annual earnings trigger for auto enrolment. These workers must be enrolled into a qualifying pension scheme without requiring them to opt in. Employers must also provide statutory written information about enrolment, contributions and worker rights, including the right to opt out within the prescribed opt-out window. HR and payroll teams must work together to ensure assessments are conducted accurately and on an ongoing basis, particularly where workers’ earnings fluctuate or age thresholds are crossed mid-year.

Employers must contribute at least the statutory minimum contribution rate, currently based on qualifying earnings. Qualifying earnings, which form the basis for minimum pension contributions, are reviewed annually by the government and employers must ensure payroll systems reflect the updated bands. Workers must also contribute a minimum amount, which payroll must deduct and process correctly. Errors in contribution calculations—such as misapplying qualifying earnings bands, failing to update rates or missing contribution periods—can result in arrears that the employer must correct at its own cost. Employers who offer pension schemes with different contribution structures must ensure these arrangements meet the “qualifying scheme” criteria.

Workers who do not meet the eligibility criteria still have important pension rights. Non-eligible jobholders may choose to opt in to the scheme, in which case the employer must make contributions. Entitled workers may join the scheme voluntarily, although employers are not required to contribute for this group. Employers must respond promptly and lawfully to opt-in and join requests, and must ensure that no worker is encouraged or induced to opt out or cease membership of a qualifying scheme—such inducements constitute an offence under the Pensions Act.

Re-enrolment is a statutory duty that applies every three years. Employers must assess their workforce again, re-enrol qualifying workers who have previously opted out and complete a re-declaration of compliance with The Pensions Regulator. Missing these duties exposes the employer to enforcement action and financial penalties. Employers must also maintain accurate, up-to-date records of assessments, enrolment notices, opt-out forms, contribution schedules and re-enrolment activities. Where workers validly opt out during the opt-out period, employers must refund contributions within one month.

When employment ends, pension contributions must be calculated correctly as part of final pay. Payroll teams must ensure contributions are made for all qualifying earnings up to the final day of employment. Employers should also provide information to the worker about their pension rights post-employment, such as how to access or transfer their pension pot. Salary sacrifice arrangements require particular caution; contributions under such arrangements must never reduce a worker’s cash pay below the National Minimum Wage or National Living Wage.

Hybrid working, variable-hour arrangements and multiple pay components—such as bonuses or overtime—can complicate qualifying earnings calculations. Employers must ensure payroll systems correctly categorise earnings and apply deductions. Coordination between HR, payroll and pension providers is essential to avoid compliance gaps, contribution errors and potential enforcement action.

Section Summary
Workplace pension compliance requires accurate worker assessments, correct contribution calculations, timely enrolment communications and adherence to re-enrolment cycles. Employers must maintain clear records, avoid unlawful inducements, meet opt-out refund obligations and ensure salary sacrifice arrangements do not breach minimum wage rules. Consistent monitoring, strong internal controls and careful administration reduce the risk of enforcement action and support ongoing statutory compliance.

You can read our extensive guide to Workplace Pensions here >>

FAQs

1. What should an employer do if they realise a worker has been underpaid?
The employer must investigate the error immediately, calculate the full shortfall and make a corrective payment without waiting for the next payroll cycle where possible. A revised payslip should be issued and internal processes reviewed to prevent recurrence. Where the underpayment breaches minimum wage law, arrears must be repaid at the current NMW or NLW rate. Failure to correct underpayment promptly may give rise to unlawful deduction claims.

2. Do all workers have the right to an itemised payslip?
Yes. All employees and workers are entitled to itemised payslips showing gross pay, deductions, net pay and variable hours where relevant. Only genuinely self-employed contractors fall outside this requirement. Agency workers paid by an agency receive their payslip from the agency rather than the end user.

3. Can an employer deduct money for uniforms, equipment or training costs?
Only if the deduction is authorised by statute, clearly set out in the employment contract or supported by the worker’s written consent. Even if lawful, such deductions may reduce pay for minimum wage purposes where the item is for the employer’s benefit, and employers must ensure that workers still receive at least the minimum wage for the pay period. Recovery of overpayments does not require consent but must be reasonable.

4. Is an employer required to pay for mandatory training completed outside normal hours?
Yes. Mandatory training counts as working time, and employers must pay workers for the time spent completing it. This applies even if the training occurs on a non-working day or outside usual shift patterns. Failing to pay for mandatory e-learning is a common minimum wage breach.

5. How should bonuses and commission be treated for holiday pay?
Where bonuses or commission form part of a worker’s normal remuneration and occur with sufficient regularity, they must be reflected in holiday pay calculations. Employers must ensure payroll processes incorporate these elements into average earnings assessments using the statutory reference periods where required.

6. What happens if employment ends before a bonus or commission is paid?
This depends on the scheme rules. Contracts should specify whether the worker must be employed on the payment date and whether pro-rata payments apply. If the scheme is silent or ambiguous, tribunals may interpret provisions in favour of the worker.

7. Must employers reimburse all expenses?
Not all expenses must be reimbursed, but employers must not impose expense practices that amount to unlawful deductions or reduce pay below minimum wage thresholds. Expenses required for the performance of duties should be reimbursed promptly and treated correctly for tax purposes.

8. Do tips count towards the minimum wage?
No. Tips, gratuities and service charges do not count towards minimum wage calculations. Employers must ensure basic pay meets statutory minimums even where workers receive substantial tips.

9. What pension duties apply to small employers?
All employers, regardless of size, must comply with automatic enrolment duties. This includes assessing eligibility, enrolling qualifying workers, paying minimum contributions, avoiding unlawful inducements and completing re-enrolment every three years.

10. Can workers bring claims for late or missing wage payments?
Yes. Workers may bring unlawful deduction claims where wages are withheld, underpaid or delayed. Employees may also bring breach of contract claims if employment has ended. Persistent failures may also give rise to constructive dismissal claims depending on the circumstances.

Conclusion

Pay compliance is one of the most fundamental employer responsibilities under UK employment law. Workers must receive accurate pay on time, itemised payslips, correct statutory entitlements and fair treatment in areas such as bonuses, commission, expenses and pensions. Employers must understand the different rights that apply to employees and workers, ensure deductions are lawful and maintain systems that prevent payroll errors and resolve issues quickly when they arise.

In practice, this means establishing strong contracts, clear policies and robust payroll processes. Employers must stay alert to statutory requirements such as minimum wage rates, statutory sick pay rules, tipping legislation and automatic enrolment duties. They must also monitor how variable earnings—such as overtime, commission and bonuses—affect holiday pay calculations and ensure that deductions or expense practices do not push pay below legal thresholds.

Good communication and transparency are essential. Workers should understand how their pay is calculated, how schemes like bonuses or commission operate and what to expect when employment ends. Clear records, consistent application of policies and coordination between HR and payroll significantly reduce the risk of disputes or claims.

Ultimately, effective pay management is not only a legal requirement but a key factor in maintaining trust, engagement and operational stability. Employers who invest in compliant, well-structured pay systems protect both their organisation and their workforce while ensuring alignment with the UK’s employment law framework.

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