There is a key piece of legislation that governs what employers can deduct from employees wages legally.
The Employment Rights Act 1996 legislation prevents employers from making deductions from wages other than in certain defined circumstances. There are three specific situations where lawful deductions can be made. These are:
- Where the law requires deductions to be made, e.g. income tax, National Insurance contributions, attachment of earnings orders, student loan deductions,
- Where your employment contract makes specific provision for a deduction,
- Where you and your employer have agreed in writing to the deduction before the situation arises that would require the deduction to be made.
These situations have two things in common:
- The employee knows in advance that a deduction may be made in certain circumstances, and
- Authority for the deduction and the circumstances under which it may be made are set out in writing.
Information about each of the different kinds of deductions is provided below. And, at the end, suggestions are made about what you can do if you think your employer has acted unlawfully or unreasonably.
The first deductions that an employer may make from gross pay – assuming the employee has previously authorised the deductions in writing – are one or more of the following:
- Pension contributions, if you are a member of an occupational pension scheme
- Charity contributions, under an approved payroll giving scheme
- Purchases of partnership shares, under a Share Incentive Plan.
Then, an employer must calculate the income tax and National Insurance contributions (NICs) that are due on your earnings for the pay period. These deductions are permitted because they are required by law.
From what is left of your earnings after tax and NICs have been deducted, your employer must, if relevant to the employee, make the following deductions that are also required by law:
- An amount that is due under an attachment of earnings order (court order), and an administrative charge for making the deduction,
- A student loan deduction.
Voluntary regular deductions
Any further voluntary deductions may be regular, i.e. deducted every time the employee is paid, or one-off. In either case, to be lawful, any such deductions must be authorised by a provision of the employment contract or by a document that the employee has signed in advance.
Common examples of regular deductions are:
- Contributions towards a benefit, e.g. private medical insurance, meals.
- Payments towards the purchase of clothing or equipment,
- Stock or till shortages,
- Trade union deductions,
- Contributions to a personal pension scheme,
- Social club membership fees,
- Hospital fund Contributions,
- Loan repayments, including advances of wages,
- Payment for private use of a company car or van,
Under separate trade union legislation, it is unlawful for an employer to make a deduction of an amount that would be a contribution to a trade union’s political fund if the member has instructed the employer in writing not to make the deduction.
Deductions in retail employment
There are special rules that apply to deductions for stock deficiencies and till shortages in retail employment. The rules do not prohibit such deductions where there is provision in the employment contract for them to be made. Rather, the rules regulate the arrangement, requiring proper notice to be given of the amounts to be deducted and limiting the amount of the deductions.
One-off deductions may be voluntary or compulsory and are often linked to termination of employment. Again, they are only lawful if they are defined in the employment contract or if the employee has given your signed agreement to them. Examples are:
- A charge for damaging company property, e.g. damage to a company car that was caused by your neglect,
- A charge for non-return of company property, e.g. clothing or tools, on termination of employment,
- Failure to work your contractual period of notice, e.g. a week’s pay deducted from your termination payments,
- Recovery of an advance of expenses,
- Recovery of holiday pay that has been paid in excess of your entitlement, e.g. you were entitled to two week’s paid holiday up to the date of leaving but you have actually taken three week’s paid holiday.
But note that deductions that are punitive in nature are only likely to be lawful if the amount of the penalty is a reasonable reflection of the actual loss to the employer. For example, if they should have given four week’s notice to leave their job and they only gave two week’s notice, and the employer deducted two weeks’ pay from their termination pay, that may not be lawful if the employer’s monetary loss caused by the employee leaving early was less than two week’s pay.
The employer is also considered to have made a deduction from wages if the employee is paid less than they are entitled to be paid under their contract. However, such a deduction would not be treated as unlawful if the underpayment was due only to an error made by the employer in calculating your gross pay.
The employment legislation also defines a number of kinds of deductions that fall outside of the statutory restrictions on deductions. The employer may make any of the following deductions without authorisation under the employment contract or without written permission in advance:
- The employer has made an overpayment of wages or business expenses to you, for any reason, and wishes to recover the overpayment,
- The employer is entitled to deduct a sum of money from your wages under the provision of disciplinary proceedings that operate under a statutory provision, e.g. in the fire service or police force,
- The employer is required under a statutory provision to deduct monies due to a public authority, e.g. a Council Tax Attachment of Earnings Order,
- The employee has authorised your employer in writing to deduct amounts from your wages to be paid to a third party, where the third party instructs the employer how much to deduct,
- The employee has been involved in a strike or other industrial action and your employer decides not to pay you because of your involvement,
- The employee has authorised your employer in writing to deduct money from your wages that is due to your employer under an order of a court or tribunal.
There are other issues involved if the employer wishes to recover an overpayment of wages or expenses.
Making a complaint
Before making a complaint, check carefully whether or not your employer is entitled to make the deduction that you are concerned about. In particular, you should look to see if there is a provision in your terms and conditions of employment that allows your employer to make the deduction. Such a provision might appear in:
- The “written statement of employment particulars” (commonly known as your “contract”). You should have been given this shortly after starting your job,
- A staff handbook,
- A collective agreement made between your employer and a trade union.
If there is a specific written contractual provision that allows your employer to make the deduction, the deduction is lawful.
If the employee still believes that a deduction was unlawful, unless it is one of the exempt deductions listed above, they are entitled to make a complaint to an employment tribunal. Before making a complaint, they should endeavor to resolve the problem by following the stages of the employer’s grievance procedure, including making an appeal if your employer does not accept their grievance. If you have not followed the relevant stages of the grievance procedure, the employment tribunal may take that into consideration when determining the amount of any award.
A complaint to an employment tribunal must be made within three months of the date that the deduction was made or within three months of the last of a series of deductions, unless it was not reasonably practicable for it to be made within that period of time. The employee does not have to have worked for the employer for a minimum period of time, and they do not have to be under a certain age. An employment tribunal may not award more than the amount of the deduction(s), although future changes in the legislation will allow tribunals to award compensation for any financial loss the employee may have incurred as a result of the unlawful deduction.
If the employee is aggrieved about a deduction that is one of the exempt deductions listed above, they cannot make a complaint to an employment tribunal. A tribunal will refuse to hear any case that is brought for one of the exempt deductions, even if the complaint is not against the fact of the deduction but, for example, against the manner in which the deduction was handled.
The only recourse in the case of an exempt deduction is to sue the employer in the civil courts, e.g. the small claims court. You should take proper advice before taking such action, e.g. by visiting your local Citizen’s Advice Bureau (CAB). Information about the advice services offered by CAB or at ACAS