Employers make many deductions from employees' pay, from tax and National Insurance contributions through to deductions for union subscriptions and repayment of loans. There is, however, a general legal rule set out in the Employment Rights Act 1996, that an employer is not entitled to make a deduction from a worker's pay unless certain conditions are met. The rule specifies which workers and sums are protected (see 'Scope of protection' below), which deductions are covered (see 'Which deductions?' below) and the conditions that must be met for a deduction to be lawful (lawful deductions ). Payments from workers to employers are regulated in the same way.
It is important to note at the outset that, for the purposes of this rule, a deduction can include a shortfall in, or a complete failure to pay, any sum that is due to the worker.
This protection is not limited to employees. It also applies to workers who contract with a company to perform any work personally, provided that they are not dealing with the company as part of a profession or business undertaking that they are running. Therefore many casual workers, self-employed labourers and homeworkers will be protected, even if they are not employees.
The legislation regulates not only deductions from a worker's wages or salary, but also deductions from many other payments, including bonuses, commission, holiday pay, statutory sick pay, statutory paternity pay, statutory adoption pay and statutory maternity pay. Even deductions from non-contractual bonuses are covered. Benefits in kind are included only if they have a fixed monetary value and can be exchanged for money, goods or services, such as luncheon vouchers. Shortfalls in a loan or an advance of wages, a payment of expenses or a redundancy payment are not, however, covered.
What is a deduction?
An employer is viewed as having made a deduction from a worker's pay if it has paid the worker less than what was properly payable under the worker's contract. So the legislation covers shortfalls and complete non-payments as well as deductions that an employer is making for a specific purpose such as the repayment of a loan. It could apply, for example, where an employer has unilaterally reduced a worker's pay. It could also apply where an employer has failed to pay a bonus or any other payment that is due to the worker, even if this was because the employer misunderstood the worker's contractual rights. However, a shortfall that is due to a mathematical error of calculation by the employer is not viewed as a deduction.
Deductions to recover overpayments of wages or expenses are not covered by this legislation. It would nevertheless be advisable for a company that intends to recover an overpayment by deducting it from a worker's pay to agree a timetable for repayment with the worker and not to deduct more than a reasonable proportion from each pay packet. If it did not do so, the employer could face an allegation that it was acting in breach of its implied obligation not to act in a way that destroyed the trust and confidence between itself and the employee ( Employer's implied obligations ).
If a company decides to ask a worker to repay an overpayment, rather than make a deduction from his or her pay, the worker may have a defence to that claim. But the defence would apply only if the worker had no reason to believe that he or she was not entitled to the original payment and the worker had changed his or her position on the basis of the payment by, for example, taking on additional financial commitments.
Deductions that are made from a worker's pay because the worker has taken part in industrial action are not covered by this legislation. It could not, therefore, be used to challenge an employer that decided not to pay a worker for any days when he or she was not ready and willing to work. The worker could nevertheless sue the employer for breach of contract if the employer made an excessive deduction from the worker's pay in these circumstances. An employee's entitlement to pay during industrial action is explained in more detail in other sections of this Guide (contractual issues).
A company may have agreed with a trade union that it will deduct members' subscriptions from their wages or salary and pay them over to the union. This is usually referred to as a 'check off' arrangement. Provided the worker has agreed in writing to the arrangement, deductions made under it are outside the scope of this legislation. They are, however, regulated by separate legislation on 'check off' (legal regulation of check off ).
It is lawful for an employer to make a deduction from wages if one of these conditions is met:
- The deduction is required or authorised by legislation. This covers deductions for tax and National Insurance contributions and attachment of earnings orders made by courts.
- The deduction is required or authorised by a term of the worker's contract. The term may be express or implied, oral or in writing, but the employer must have given the employee a copy or a written explanation of the term before the deduction is made.
- The worker has agreed in writing to the deduction before it is made, and the deduction relates to an event that has not yet occurred.
If a company wants to make a deduction but the worker's contract does not currently authorise it to do so, it may decide to introduce a new term into the worker's contract or ask for the worker's agreement to the deduction. But any new term or consent cannot validly authorise a deduction that relates to anything that happened before the new term was introduced or the worker gave his or her consent. For example, if an employee crashes a company vehicle and is only then asked to agree in writing to the cost of repairs being deducted from his or her wages, the deductions will be unlawful. It is also important to remember that the introduction of a new contract term requires the employee's consent (contractual changes ).
In the light of this, it is advisable for a company to include in its contracts of employment from the outset a term authorising any deductions that it envisages making from its employees' pay. In order to be effective, the term should clearly state the payment from which the deduction may be made, such as, for example, basic pay and commission. It should also set out what the deductions may relate to, such as recovery of loss or damage caused by the employee's failure to take proper care in carrying out his or her job duties. Alternatively, an employer may choose to obtain an employee's specific written consent to deductions, provided these relate to events that are yet to happen. For example, an employee could be asked to agree in writing to the repayment of a season ticket loan through deductions from his or her basic pay, at the time when the loan is first agreed but before it is made.
Recovery of training costs
Some employers include terms in their employment contracts allowing them to recover training costs in certain circumstances, often where the employee leaves the company within a certain period after completing the training. These terms are likely to be legally valid provided the amount to be recovered is a genuine estimate of the loss caused to the company by the employee's departure. The amount should not, therefore, exceed the costs that the employer has incurred in providing the training. It should also reduce over time, to take into account the service that the employee has provided after receiving the training and before leaving the company. Further advice on using this type of clause can be obtained from your Association.
There are various other deductions that an employer may be required to make from an employee's wages by law. (These do not fall foul of the legislation on deductions from pay because they are either viewed as authorised or they are expressly excluded from that legislation (scope of protection ).) They include:
- Income tax: Employers are responsible for deducting income tax from employees' pay and accounting for it to HM Revenue & Customs, under the Pay As You Earn system. The Revenue sends employers detailed information on the system each year.
- National Insurance contributions: Employers are also required to deduct National Insurance contributions from employees' pay. The annual information pack sent to employers by HM Revenue & Customs includes information about this.
- Employees' contributions to a stakeholder pension scheme (stakeholder pensions).
- Attachment of earnings orders, earnings arrestments and deduction from earnings orders: Employers may be required to deduct money from employees' pay under an order from a court, a local authority or the Child Support Agency. These orders are made to recover judgments relating to debts, fines, council tax arrears and maintenance payments from an employee's pay. When an order is sent to an employer it will usually be accompanied by information on the employer's obligations and rights. The employer must, for example, notify the employee of the deductions it is making, and must let the relevant body know if the employee leaves. Employers are entitled to deduct an extra £1 from the employee's wages along with each deduction, to offset the cost of administering the order.
- Repayment of student loans: Employers may be required to make deductions from the pay of employees who have a student loan to repay. Employers will know that they need to make these deductions if they receive a 'start notification' from the Inland Revenue or if a new employee has a 'Y' marked in the Student Loan box on his or her P45. Repayments are based on the employee's income. Further information on collection of student loans is available from HM Revenue & Customs ( Student loans ).