Unlawful deductions from wages (“UDW”) are commonplace and yet it’s an area of HR that many businesses get wrong. Businesses often then leave themselves open to Tribunal claims from their staff for the deductions from wages that they make.

Businesses can be liable for unlawful deductions claims even in circumstances where they had a legitimate reason to make the deduction. Except in cases of mistake, deductions from wages by a business are only permitted in one of these three instances (Article 45 Employment Rights (NI) Order 1996):

1. required by law. The scope of this is limited but is most commonly seen in the deductions for income tax and national insurance contributions;
2. authorised by the contract of employment; or
3. the staff have given the business their prior written consent to make deductions. This prior written consent cannot be the contract of employment and therefore this instance is rarely relied on.

The most effective way to ensure that any deductions you make are lawful, is to ensure that your contract of employment expressly deals with the matter it. This article will look at what you can and cannot deduct from your staff and, if you do need to make deductions, how to do so safely.

Who and what is protected?

Both employees and workers[1] are protected from any unlawful deductions from wages. There is no minimum required length of service to bring a claim – this is a day 1 right for all workers. What constitutes ‘wages’ has been discussed in numerous cases over the years but the most common examples of ‘wages’ include:

• salary;
• bonus (in certain circumstances),
• commission,
• holiday pay,
• tips (in certain circumstances),
• statutory sick pay; and
• statutory maternity, paternity, adoption and shared parental pay.

There are also a number of payments that do not amount to ‘wages’ and these include: expenses payments and advances of wages under a loan agreement between the worker and the employer.

To succeed in an UDW claim, a worker must show that the wages were properly payable. For wages to be properly payable, the worker must have a legal entitlement to the wages. The legal entitlement does not have to be an express contractual provision; it can be, for example, an implied term as a result of custom and practice.

It’s worth noting that a late payment of wages still amounts to an UDW.

Special rules for retail workers

Retail workers have additional protections in circumstances where deductions are made from their wages because of either cash shortages or stock deficiencies. There are a number of particular rules for deductions from retail workers; this article addresses the key things for businesses to remember.

When a deduction of wages is made by the business in these circumstances, the deduction cannot be more than 10% of the pay that worker is due to receive on that particular pay day, irrespective of the size of the cash shortage or stock deficiency. If the worker remains employed, the rest of the cost of the cash shortage or stock deficiency can be recouped by the business over the course of several pay days, provided the employer continues to comply with the 10% rule. Note however, the 10% rule does not apply to a worker’s final pay day. So, if a worker’s employment ends before the total sum has been fully recouped, the business is entitled to deduct the entire sum owed in one go, or the remainder if partly recouped, from the worker’s final pay. If the final pay has already been paid, the business can recoup the sums owed from any payment in lieu of notice (if applicable).

Bringing a claim

Workers can bring UDW claims while they are still employed (unlike claims for breach of contract). Employees can use UDW claims to enforce their right to national minimum wage. They must bring the claim within three months of the date of the deduction or the last in a series of deductions. This is important as it may allow an employee to make claims going back for a considerable period of time. The current law in Northern Ireland is that a correct payment in a string of incorrect payments will not necessarily break the series of deductions (Chief Constable of the Police Service of Northern Ireland and another v Agnew and others).

Next steps for your business

Having the ability to recoup or deduct monies owed by a worker to your business is key and a failure to do so in the correct way may mean that not only do you risk losing the right to recover the monies at all, but you may also face an unhappy workforce and Tribunal claims. The first thing to do is to check your contracts. Make sure that there is an express written clause in your contract which permits the business to make deductions from your staff. An example of such wording is: “We shall be entitled to deduct from your pay or other payments due to you any money which you may owe to the Company at any time”. While you are only required to have an express clause in your employment contract, it is best practice to give an employee advance notice if you plan on making any deductions. Please note that, in the case of retail workers, the inclusion of this wording in your contracts does not allow you to circumvent the 10% rule.