Legal

Is it lawful for employers to make wage deductions?

5 Mar 2021 By Paida Dube

Paida Dube outlines the circumstances in which organisations are allowed to deduct costs from an employee’s salary

The law provides workers with specific protections from unlawful wage deductions. In addition to the legal risks, employers should also consider the impact of wage deductions on workforce relations and morale. People talk, and any anxiety about wages can leave workers feeling unsettled and demoralised, particularly in today's uncertain climate.

Given the current financial difficulties facing many employers, are there any circumstances where it is lawful to make wage deductions?

The law on wage deductions

The Employment Rights Act 1996 (ERA) protects workers from unauthorised deductions from pay, covering both underpayment and non-payment of wages. 

The definition of wages is set out in section 27 of the ERA and includes “any sums payable to the worker in connection with their employment”. 

Taking money from wages without consent or contractual provision can result in a claim for unlawful deduction of wages, even if the individual has been employed for less than two years.

Lawful deductions

By law, an employer may be allowed to deduct from wages where: 

  • The deduction is required or authorised by statute; or
  • There is specific provision in the worker’s contract; or
  • The worker has given prior written consent to the deduction.

Other exemptions may also apply beyond the remit of the employment tribunal, such as deductions due to court order or reimbursement of overpaid wages.

Employers struggling financially may therefore be able to make a lawful deduction if the worker gave written consent to the deduction before the trigger event occurred, or if the deduction is required or authorised by a deduction clause in the worker’s contract. The worker must have been aware of this clause and its meaning, and must have agreed to it in advance of the event required to trigger the deduction. 

Final salary deductions

If an employee is leaving the organisation, the employer may see this as an opportunity to be alleviated not just of the employment costs, but also to recover previous outlays such as training or immigration fees.

Employers should only deduct money for immigration fees and training courses if this was agreed in the contract or in writing beforehand. For example, that the individual must pay back a percentage of fees on a sliding scale if they leave the organisation within a certain period of time.

Where there is no such clause, proposed deductions should be legitimate and agreed in advance to allow for an agreement to be reached and concerns to be addressed.

Employers should exercise caution pursuing a deduction as an 'exit penalty'. Pressuring the employee into accepting the deduction in exchange for the P45 and reference, may lead to a claim to recover the deduction.

Wage deduction clauses – best practice

Wage deductions should be covered in the employment contract and referenced in the relevant policies in the employee handbook. Specific deductions clauses should state what can and cannot be recouped and how repayment will be triggered and made. 

This will create clarity and a reference point for both parties in the event a dispute arises as to whether a deduction is lawful or not.

The April 2020 changes relating to written statements of employment particulars specifically require details of mandatory training to be provided in contracts, and this includes any fees and contributions the employee will be required to make and when these should be made. 

The quality of the drafting of the deductions clause will be critical. Does the clause cover the specific costs or fees you are looking to recoup? For example, in the case of immigration fees, is the clause limited to initial immigration applications or are renewal fees also included?

The clauses should also cover circumstances where deductions would not be required, such as when employment is terminated due to a breach by the employer or voluntary redundancy.

If the employer missed the opportunity to insert a deduction clause, they can move to issue a contract variation letter, outlining the nature of the variation and requesting the employee review and provide a signed copy of the variation letter. Any variation to the employment contract must be agreed and the employee must be aware of what they are agreeing to.  

Inserting a deductions clause will in most cases be viewed as a detrimental variation, which the employer has to make explicitly clear to the individual and invite discussion to address any questions. 

Paida Dube is an employment law solicitor at DavidsonMorris

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