I wonder... are you unintentionally committing unlawful deductions from wages?

Wage deductions are a routine aspect of payroll administration in any business. These typically include income tax, National Insurance contributions, pension payments, and occasionally other authorised deductions, such as the repayment of training costs. However, sometimes an employer may make a deduction without realising it is unlawful. When this happens, they may face a tribunal claim and will be required to repay the full amount.

In this article, we will explore the boundaries between lawful and unlawful wage deductions, highlight common pitfalls, and outline practical steps to help avoid costly mistakes.

What Is Considered a ‘Wage’ in the Context of Deductions?

In the context of unlawful deductions from wages, “wages” are defined as “any sums payable to the worker in connection with his employment.” This includes the following:

• Salary;
• statutory payments such as sick pay;
• holiday pay; and
• bonuses and commission.

Lawful vs Unlawful Deductions?

The Employment Rights Act 1996 sets out provisions that protect workers from unauthorised deductions from their wages.

Deductions from pay are unlawful unless they are properly authorised in one of three ways:

1. By law, such as deductions for tax and National Insurance contributions;
2. by a specific agreement, signed in advance of incurring the debt - for example, a training agreement that provides for deductions if employment terminates within a set period; or
3. by the contract of employment.

If a deduction does not fall under any of the above categories, it is likely to be unlawful.

Common Examples of Unlawful Deductions

There are several examples of unlawful deductions that employers may be making without even realising. Common examples include:

• Holiday pay –Where a worker regularly earns additional pay elements such as commission, overtime, or other allowances, these may need to be factored in to holiday pay. Failing to include these elements could result in the employer unintentionally making an unlawful deduction from wages.
• Failing to pay the agreed wage – If an employer has agreed to provide paid overtime but the worker’s salary does not reflect the additional payment, this may be considered an unlawful deduction from wages.
• Withholding wage – While less common, some employers may attempt to use wage deductions to encourage workers to complete mandatory training or comply with procedures such as clocking in and out. However, withholding wages in these circumstances may be considered an unlawful deduction.
• Repayment of training costs without a valid agreement in place – Many businesses offer optional training or require workers to complete mandatory training. While it is possible for an employer to recover the cost of training if a worker leaves within a certain timeframe, this must be agreed in advance of the training.
• Pay falling below the National Minimum Wage (NMW) – Employers need to ensure that they pay employees at least the correct NMW for each employee’s age, and that they keep up to date with annual increases to the NMW. If an employer requires employees to perform additional tasks outside of their normal working hours without additional pay (for example, attend training), the employer need to be sure that the additional hours don’t result in the employee’s pay falling below NMW.

Risks and Consequences

If an employer commits an unlawful deduction from wages, the typical penalty is that they will be ordered to repay the amount deducted. There is no additional compensation for distress or inconvenience.

If an employer has regularly failed to include overtime or commission in holiday pay calculations, the Tribunal may order repayment of all underpaid amounts over a period of time - potentially going back several months or even years. This could result in a substantial financial liability for the business.

When a worker notices a mistake on their payslip, they should raise it with their employer to allow them the opportunity to explain the reason for the deduction or correct any error. However, if such errors occur frequently, even if they are promptly resolved, they can undermine the worker’s trust and confidence in the employer. Over time, this may reduce overall job satisfaction and could potentially lead to a decline in productivity.

How to Avoid Unlawful Deductions

There are several ways to reduce the risk of unlawful deductions from wages occurring. These include:

• Clear contracts – Including a clear deductions clause in the contract of employment provides the employer with the contractual authority to make deductions for money owed.
• Anticipating potential deductions – When an employer invests money in a worker, for example by paying for a training course, the employer should anticipate whether they wish to recover these costs if the worker leaves within a specified time frame. By foreseeing this, the employer can provide the worker with a clear repayment agreement before the expenditure takes place. This means that when it comes to deducting such costs in the future, the employer can rely on the agreement signed in advance. This approach ensures transparency for all parties and helps prevent unintentional unlawful deductions from wages.
• Transparent payroll process – Payslips should be easy to understand. Any deductions made should be clearly itemised and visible on the payslip. If a worker cannot see what has been deducted, or if the figures do not add up, this can undermine their trust in the employer and may lead to unnecessary disputes.
• Regularly review documentation – By periodically reviewing contracts of employment and repayment agreements, employers can ensure that their current practices are accurately reflected and remain legally compliant.
• Seek legal advice – By seeking legal advice, employers can ensure that any planned deductions are compliant with current employment law.

Conclusion

In conclusion, by remaining proactive, transparent, and well-informed, employers can avoid making unlawful deductions and the potential consequences that follow.

Further Advice

If you have any queries on deductions from wages or any other employment-related matters, our Peace of Mind Team is here to provide expert guidance. Our Document Audit Team can also assist in drafting relevant workplace policies.

Contact our Employment Team by emailing employment@warnergoodman.co.uk or calling 023 8063 9311.

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