At Advo, we frequently respond to and provide advice to businesses on questions related to deductions form wages when an employee is leaving a Company. There have been some occasions when the first time that an employer knows that there was an deduction, that the ex-employee felt there was an unlawful deduction, is when they receive a claim that has been submitted to the Employment Tribunal.

In light of this, we would like to remind employers that this is a contentious area, and it is important to ensure that care is taken and that any deductions can be regarded as lawful.

There is a legal obligation to provide employees with documented evidence, i.e.., a payslip, illustrating a breakdown of what has been paid and what has been deducted.  This document provides clarity on net – “take home” – pay and provides the employee with an opportunity to raise any pay disputes.

Under the Employment Rights Act (1996), an employer can only make a deduction from someone’s wages for specific reasons.  Some of these reasons being required by law, e.g. Statutory deductions such as Tax and NI or court ordered deductions from wages.  Deductions can also be made where an overpayment has been paid to an employee in error, e.g., an employee has been paid full pay when Statutory Sick Pay is due etc.

Other deductions from wages that are permitted under the law are where there are specific and clear clauses in the employee contract. For example, if it is specified in the contracts, in service industries such as 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.

An employer can also deduct money for training costs from their employee’s wages if it’s specified and agreed in the contract or in writing such as a training agreement before such training is undertaken and damage to company cars etc., can also be recouped if this is clearly defined in a pre- agreed and signed document.

Deductions must not take someone’s pay below the National Minimum or Living Wage , unless the deduction is for a statutory deduction such as Tax, NI, or pension etc, contained within a signed written agreement such as a training document or loan, an overpayment or something stated within the employee contract, such as deduction for till shortages etc.

The importance of the terms of contract and any other written agreement is especially important when an employee leaves. Employees can only recoup statutory amounts and any overtaken annual leave but any accrued and unused annual leave must be paid to an employee in their final wage.

A number of disputes arise where employees are in roles that attract commission or have bonus schemes. Some employers choose to withhold payments for commission or bonus’ should an employee resign and be within their notice period. However, in order for this to be legally compliant there must be a clearly defined clause in the employee contact, or a separate document, which has been signed by the employee that clearly defines this.

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, which is why it is so important that correct documentation is in place for any such deductions.

If an employee raises any complaints or grievances in regard to deductions from wages which cannot be resolved internally, 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 and they can also still be employed while making their claim.

There are so many areas in which an unlawful deduction could be made and to avoid any fork of litigation, it is important that all documentation clearly details any deduction and more importantly, that it can be shown that the employee was fully aware of such deductions.

If you believe that there may be ambiguous clauses regarding deductions in your documentation or there are no such clauses at all, the HR team at Advo would be happy to assist you.

Article written by Louise Herring. Advo HR Consultant