Deductions from Wages – What’s Not Okay

There are a few things that we expect to see on our payslip: our NI number; our NET pay; and our tax deductions. But what happens when an employee finds a deduction on their payslip that they didn’t expect – and when do employers have the right to make additional deductions from wages? 

A recent news report from The BBC brought this issue to light when, in August 2019, a Goldex Investments Ltd Costa Coffee franchise in Essex was accused of making ‘unfair’ deductions from its employees’ wages for till discrepancies and running costs. Meanwhile, other employees had £200 of their wages deducted for ‘training costs’. 

So what is a fair deduction, and what is unlawful? 

Employers must ensure that all of their employees receive their full pay but, in certain circumstances, it’s possible to claim some money back. The Employment Rights Act 1996 outlines that it’s only possible to make a wage deduction if it’s a ‘relevant provision’ within the employment contract. Employees are able to sign a consent form allowing you to do so, but it has to be before any deductions are made. 

If an employee is late, penalising them depends on the nature of their lateness. E.g. if an employee is contracted to work eight hours, but turns up an hour late, it’s appropriate to refuse to pay them for the full shift. In other incidences, however, such as salaried employees who are consistently late, it is more appropriate to address issues of ongoing lateness with a written warning or meeting, rather than taking it out of their pay packet. 

There are three cases where you can deduct wages: 

• British law says you can
  This includes tax, National Insurance contributions or if the employee is making student loan repayments. 

• If it’s clarified in the contract
  If it’s written into your employees’ contracts, then you are able to make deductions for ‘relevant provisions’. You’ll need to explain this to the employee beforehand, as well as ensuring that they have access to a written version to refer to. 

• Prior consent
  The same as it being clarified in the contract, you can agree with your staff member a deduction, but you would need to have this sent to them in writing to ensure everything remains on the right side of the law. 

What about a payroll accident? 

Accidents happen – sometimes they’re small scale, sometimes they cause a small crisis. So, where do you stand if you accidentally overpay an employee? It’s an irritating situation for everyone, they think they’ve had an incredible payday – and you have to go and let them know that actually, they can’t go on a spending spree just yet, because you kind of need that money back. As awkward as it is, it needs to be put right. Luckily, this is an exemption to the above three points. 

The recovery of overpayments is not the same as an unlawful deduction of wages, and therefore there’s no risk of an Employment Tribunal when you go to claim these back. You don’t need a staff member’s consent to begin reclaiming these payments. However, it’s best practice (and polite) to let them know, either in writing or through a formal meeting. 

It’s important to respect how the recovery of overpayments may affect your employee’s financial situation, so it may be best to set up a scheme for monthly repayments, so as not to land them in any financial difficulty through no fault of their own. 

How to avoid unlawful deductions 

An unlawful deduction doesn’t necessarily mean that you’ve intentionally thieved employees’ hard-earned cash as an act of malice – it can be a simple misunderstanding. Nevertheless, it could still land you in an Employment Tribunal. 

An employee’s wage includes Holiday Pay and commission pay, and other unauthorised deductions include unpaid bonuses, and any holidays that aren’t taken. Therefore, it’s paramount to make sure that when you pay your staff, they’re receiving their full Holiday Pay and commission entitlement, getting their bonus and that they have complied with your holiday policy before their allowance renews. 

It’s also important to note that salary delays are also cause for Employment Tribunal. You cannot pay an employee a day late (or more) – even if it’s because of a bank holiday or a weekend. 

If you want to brush up on your payroll legislation knowledge, and ensure that you’re on the right side of the law in 2020, take a look at our Guide to Payroll Compliance, available to download for free!