Deductions from wages – what employers need to know

Tyler Ross, Solicitor

Employers often face a situation when an employee is due to leave, or has already left, the business whilst owing money. Examples include overpaying an employee’s wages, employees having taken holiday in excess of their accrued entitlement and where an employer has loaned an employee money. In such circumstances, employers may have little recourse to recover the money other than by commencing legal proceedings, which can be costly and time-consuming whilst offering no guarantee of recovery, even if the claim succeeds.

To guarantee the recovery of at least some of the money owed, employers may consider making a deduction from the employee’s final wages. However, this approach is not without risk, as the law only permits deductions from wages in circumstances where:

1. the employment contract allows for the deduction;
2. the employee has given their prior written consent to the deduction; or
3. the deduction is required or authorised by statute.

Contractual provision allowing the deduction

This is what employers rely on most when deducting money from an employee’s wages. It is common for a contract to include a clause along the lines of:

“the company is entitled to deduct from your pay any money which you may owe the company from time to time”.

On the surface, it appears that this clause satisfies the requirement for the deduction to be permitted by an employee’s contract. However, employers should rely on a generic deductions clause with caution. This is because an Employment Tribunal will often interpret ambiguous clauses in favour of an employee. We therefore recommend that deductions clauses are drafted as specifically as possible to reduce the risk that the deduction is held to be unlawful.

What if a Tribunal decides that the deduction is unlawful?

First, a Tribunal must declare that the deduction was unlawful and must also order the employer to repay the employee the amount that was deducted.

A Tribunal could also order that an employer compensates the employee for any losses they suffer because of the deduction. For example, if an employee had to take a loan out because the unlawful deduction meant they could not make ends meet, then an employer may have to repay any interest that the employee incurred on that loan.

Employers should also be aware that, if an Employment Tribunal decides that the deduction was unlawful, they cannot attempt to recover that money later in another way, for example by bringing civil proceedings in the County Court. An employer therefore need to be certain that the deduction is lawful or otherwise risk not getting another bite at the cherry to recover the money it is owed by an employee.

What employers should be doing

1. Consider in what circumstances they have found themselves in where an employee owes the business money.
2. Review template contracts – do they specifically allow the company to make deductions from wages in common scenarios where employees owes the business money?
3. If not, we recommend updating your contracts to future-proof your business against an unlawful deduction from wages claim.

At Kuits, we have a dedicated team that supports employers with updating contracts and during employment tribunal proceedings.

If you require a contract review, advice on making a deduction from an employee’s wages, or representation on an employment tribunal claim, please contact our employment team on 0161 832 3434, or at [email protected].