An unlawful deduction of wages occurs when an employee has either been unpaid or has been underpaid their wages by their employer for some reason. There must have been an actual deduction of wages, not just a threat or proposal to deduct money, for it to be classed as an unlawful deduction.
The Employment Rights Act 1996 (ERA 1996) protects any unauthorised deductions being taken from employee and worker’s wages.
Legal Deductions to wages
There are three circumstances where it is legal for an employer to deduct money from an employee’s wages. These are:
- The deduction is a legal requirement such as tax and national insurance.
- The employees’ contract of employment contains the provision to deduct monies owed to the company.
- The employee has given their written consent to have the deduction made.
Other exceptions for deduction of wages, which cannot be brought to the employment tribunal are:
- Payments that are made to a third party, i.e. A pension scheme.
- Deductions made due to the employee taking part in strike action.
- Deductions due to any overpayment of wages or employees’ expenses.
- Deductions due to court orders or a tribunal order for an employee.
What is classed as wages and what is not classed as wages?
The Employment Rights Act 1996 sets out the definition of wages; wages are sums of money that are payable to employees in relation to their contract of employment. These payments include:
- Holiday pay, Bonuses, Commission, or other payments relating to an employee’s employment.
- Any overtime pay.
- Statutory payments including, Statutory Sick Pay, Statutory Maternity Pay, Statutory Adoption Pay, Statutory Paternity Pay and Statutory Parental Leave Pay.
- Payments for a period placed on Garden Leave.
- Payments made during a period of suspension.
- Commission payments after an employee’s employment has been terminated.
- Monies payable for reinstatement or reengagement by the Employment Tribunal.
- Benefits received as part of your contract of employment, as long as they have a monetary value.
Non wages include:
- An advance of any wages to the employee made under a loan agreement with the company.
- Payments for any expenses owed to the employee.
- Redundancy payments.
- Non-contractual Pay in Lieu of Notice.
- Employer Pension Contributions.
What happens if an employee is overpaid?
If an employer has overpaid an employee, the employer has the right to claim back the money. If this happens the employer must contact the employee and explain the overpayment. It is best to write to the employee and to explain in full the amount that they have been overpaid by.
Usually if the overpayment is a small amount, it will normally be recovered in the employees next pay, or the employee could agree to pay the amount back via bank transfer if they wished to.
If an overpayment happened over a period of time or was a while ago then it is best for the employer and employee to agree how the money is to be paid back. Both parties can agree to paying a set amount back per month over so many months, depending on the employee’s personal circumstances.
What happens if an employee does not agree to a deduction?
If an employee does not agree with a deduction to their wages, they must discuss this with their Manager or the HR/Payroll department, to understand why the deduction was made.
If an employee has had an unlawful deduction of wages made by their employer, they can submit a claim with the Employment Tribunal.
Any claims must be made within three months from the date of payment that contained the deduction.
Employees can look to recover any unlawful deductions made over a period of two years, unless the claim is relating to statutory payments, such as statutory maternity pay or statutory sick pay.
In some cases, a breach of contract claims for non-payment of holiday pay, or non-payment of contractual sick pay, or non-payment of wages can all be classed as unlawful deduction of wages.
Frequently asked questions
Can my employer deduct money from my wages?
Employers can deduct money from your wages for the following reasons:
- It is required by law, i.e. tax or national insurance deductions
- Deductions are authorised in your terms and conditions of employment
- You consented in writing to the deduction
What if I do not agree to the deduction?
You must talk to your employer asap to resolve the issue and to understand why the deduction has been made.
Who do I talk to if I think I have wrongly been deducted pay?
Talk to your manager or HR department if you feel you have had pay deducted wrongly, if you still feel this could be an unlawful deduction of wages, then you can contact ACAS.
Do I have to sign to agree to a deduction?
You must give written consent for any deductions to be made to your wages if these are not legally required deductions such as tax and national insurance, unless the deductions are from an overpayment of wages. Any overpayments of wages can be recovered by your employer, however they need to have told you about the overpayment and when they will recover this. There may be a clause in your terms and conditions of employment relating to overpayment of wages.
If you would like further guidance or support on this matter or require advice on other people management matters please contact Clover HR on 0121 516 0299 or email us at email@example.com
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