Employees are protected by law from unauthorised payments being taken from their pay. If an employee can show that an employer has unlawfully taken money out of their wages, they may be able to take legal action to recoup the money.
However, if you as an employer believe you are owed money from an employee – perhaps due to a payroll error or where there is an agreement to pay back specific costs – what are your options to get that money back?
In this guide for employers, we explain the law on unlawful deduction of wages and what this means in practice if you are trying to resolve a pay dispute.
What is unlawful deduction of wages?
The Employment Rights Act 1996 (ERA) protects workers from unauthorised deductions from pay. The rules on unlawful deduction of wages relate to underpayment or non-payment of an employee’s wage or salary without their permission or consent.
“Wages” are defined in section 27 ERA to include “any sums payable to the worker in connection with their employment”.
Whether a deduction from wages is lawful or permissible will depend on the specific circumstances and the employment contract terms and conditions. There are generally circumstances where an employer can make lawful deductions from pay, but they have to make the employee aware that the deductions will be made. Examples of permissible deductions could include:
- Deductions required by law such as income tax, student loan repayments and those ordered by court
- Pre-agreed deductions such as repayment for uniform or travel
- Repayment of overpaid wages
- Time off work for strike or industrial action
- In retail, bars and restaurants, employers can lawfully deduct from wages to cover damaged stock or mistakes and shortfalls in till money, provided no more than 10% of pay is taken before tax on each payday the deduction is made, and that the employer has taken the money within 12 months of noticing the shortage, that there is a written agreement to this effect and the employee is given details in writing of the deduction on each pay day money is deducted.
Where there is contractual provision allowing deduction of wages, the worker must have been aware of any such clause and its meaning, and must have agreed to it in advance of the event required to trigger the deduction.
Common examples of lawful deductions could include:
Employers have the right to claim back overpayments from workers. You can usually claim up to two years’ of overpayments.
You should should notify the employee as soon as you discover the error to agree repayment arrangements.
If the mistake was a one-off, you could propose a deduction from their next pay or you could look for the employee to agree to pay it straight back directly.
In instances where multiple overpayments were made, or the overpayment was not recent, you are expected to act reasonably and fairly in claiming the money back, which could include using a payment plan.
In rare circumstances, if the employee can show the overpayment was not their fault and that they were led to believe by their employer that they were entitled to the extra money, which they had then in good faith spent (i.e. ‘changed their position’), they may be able to seek to keep some or all of the money.
Final salary deductions
If an employee leaves the organisation, the employer may be able to recoup past expenses such as training fees, travel loans or immigration fees provided this is specified in the contract or in writing beforehand. For instance, if the person leaves the organisation before a specific amount of time has passed, they must pay back a portion of costs on a sliding scale.
In the absence of such a clause, any deductions should be appropriate and agreed upon in advance so that any issues may be resolved and an agreement can be achieved.
Employers should use caution when pressing a person to take a deduction as a “exit penalty” in return for a P45 and reference since the person may later file a claim to recover the deduction.
What counts as ‘wages’ in an unlawful deduction claim?
Wages can include a broad range of payments that relate to the employment, but there are also specific exclusions.
Wages would ordinarily include:
- Statutory payments eg maternity pay
- Holiday pay
- Bonuses & commissions
Note that for bonuses, the amount should be quantifiable and not discretionary otherwise the worker may have to make a claim for breach of contract under a different legal procedure.
Expenses, pension scheme payments or redundancy payments for example would not qualify under an unlawful deduction from wage claim.
The worker may also be able to claim for pay discrepancies relating to other types of entitlements under different legal procedures. For example, failure to pay full notice entitlement could give rise to a claim for wrongful dismissal as a breach of contract for unpaid notice, rather than unfair deduction from wages.
Resolving pay discrepancies
All workers should receive a payslip which sets out clearly their gross and take-home pay and how their pay has been calculated, including any amounts and reasons for variable and fixed deductions.
If an employee believes their wage is less than expected, they should bring this to the employer’s attention quickly. This would usually mean having a discussion with their line manager, or HR or payroll. They should explain their query and allow you to look into the figures. Common areas of discrepancy include:
- Any discrepancies in bonus or commission payments against the expected amount
- The rate of pay – is this per their contract or applicable statutory minimum level?
- If they have been paid any sick pay, parental or maternity leave or holiday pay correctly
- Any deductions made and whether these match up to any obligations the employee has, such as repayment of a travel loan
- Any discrepancies in the number of hours they have been paid for and the number of hours they have actually worked eg overtime
After investigating, you should explain your findings to the employee.
If there is an error, you should act quickly to resolve and agree how the shortfall will be paid. Usually you should not expect the employee to wait til their next pay day to be paid what they are owed, but this would be acceptable if the employee agrees to it.
If you consider the pay level to have been correct, you should explain why and provide supporting evidence. For example, this may require you to refer the employee to a relevant contract term if the deduction is allowable under their contract or has been agreed beforehand, or to clarify if the deduction relates to income tax.
If the pay discrepancy cannot be not resolved
In most cases, discrepancies are usually misunderstandings and providing a clear explanation will resolve the matter without issue or dispute.
However, if you cannot come to an agreement with the employee and they are insisting the deduction is unlawful, they can raise an internal grievance in the first instance for the matter to be formally investigated, or they may consider bringing a claim for unlawful deduction of wages.
Unlawful deduction of wages claims
If the matter cannot be resolved informally or through an internal complaints or grievance procedure, the employee may be eligible to bring a claim in the employment tribunal for unlawful deductions from wages. They do not have to have any minimum service requirement, this is a ‘day one’ employment right. They can also still be employed while making their claim.
The claim, however, has to be started within three months less one day of the date when the payment was due, or the date of the last payment if there are a number of payments due.
The employee can seek a declaration, payment or repayment of the unlawfully deducted amount and in some circumstances, unlawful deduction of wages compensation for further financial loss. They can only recover monies from the two-year period preceding the claim.
It is not possible to claim for all types of payment as wages. This includes expenses or redundancy payments.
The types of wage disputes that can be claimed for include holiday pay, sick pay and bonuses where they have either not been paid or there have been deductions from full earnings and entitlement where the employee claims the employer had no right to make a deduction.
The employee will have to evidence the unlawful nature of the deduction. They could rely on documents such as emails or signed contracts, payslips, timesheets and bank statements.
Claim for redundancy pay
If an employee believes they are owed redundancy pay, they may be able to bring a claim for the payment owed if they can show:
- They were employed by the organisation for at least 2 continuous years,
- They have been dismissed due to a genuine redundancy situation, and
- They had refused any offer of alternative employment with the employer on reasonable grounds.
Other issues relating to the redundancy may give rise to other legal actions such as unfair dismissal if they believe the selection process was unfair.
Best practice advice for employers
Wage deductions should be expressly addressed in the employment contract and included in the applicable employee handbook and policies. In the event of a disagreement over whether a deduction is lawful or not, this will provide both parties with clarity and a point of reference.
Deductions provisions should be specific about what may and cannot be recovered and how payback will be triggered. The deductions clause’s quality of wording will be crucial. Clauses that are too vague or broad risk being unenforceable. Does the provision cover the particular expenses or fees you hope to recover? For example, in relation to visa fees, is the term just applicable to initial immigration petitions, as in the case of immigration fees, or does it also apply to renewal payments?
Deduction provisions should also cover situations where they wouldn’t be necessary, as when an employee is let go voluntarily.
Under the requirement to provide all workers with a written statements of employment particulars at the start of their employment, employers should ensure that this includes details of any training, including any fees and payments the employee will need to make and when these should be made.
If you looking to add a deductions clause, any change to the employment contract must be agreed and the employee must understand what they are signing. In most circumstances, adding a deductions provision would be seen as a negative change, which the employer must make clear to the worker and encourage discussion to resolve any misunderstandings.You should consult with affected employees to seek their consent. If you obtain the employee’s agreement, you should draft a contract variation letter, detailing the nature of the variation and requesting the employee examine and give a signed copy of the variation letter.
DavidsonMorris can help if you have any concerns about unauthorised deductions or non-payment of wages. Contact our employment lawyers for advice.
Unlawful deduction of wages FAQs
What is an unlawful deduction of wages?
Employees are protected from unauthorised deductions being taken from their pay or wages without their consent or knowledge.
Can an employer deduct money from your wages without consent?
Employers cannot lawfully make deductions from an employee's wages without their consent unless it is required or allowed by law.
How far back can an employer claim overpayment?
Employers can claim up to 2 years of overpayments provided there is no gap of 3 months or more between deductions.
Last updated: 9 September 2022