Beware the pitfalls when deducting money from employees’ pay

Employers often get caught out by thinking that just because a worker owes them money they can simply take it off the next pay package. The law on protection of wages is not as straight forward as many employers might assume. Emma Thompson, employment law expert with Thackray Williams, goes through common pitfalls and how to ensure that you do not end up having to pay back the money to the worker.

Basic principles

The starting point is that you cannot pay a worker less than they are entitled to, other than in specific circumstances. These circumstances arise if you deduct money where:

• the law requires it, for example income tax or an attachment of earnings order for maintenance payments;
• the contract allows it, for instance paying a proportion of training costs if the employee leaves shortly after completing the training;
• the worker agrees in writing before the deduction is made; or
• it is to correct an earlier overpayment, such as arising from a computation error or to recover payment of a fraudulent expenses claim.

Problems can arise in the following circumstances.

If the contract does not allow for the deduction

Even if you are recovering an overpayment, make sure that your contracts contain clauses allowing you to make a deduction in these circumstances. If not, the employee may have a breach of contract claim against you.

Make sure that the contract wording is sufficiently precise. If you are taking a risk, such as by paying for an employee’s training and you want to recover the costs if they fail or do not complete the course, we recommend entering a bespoke agreement with the employee. This should set out the specific circumstances and include the employee’s consent to deductions. We can prepare a suitable agreement for you.

If your workers do not turn up to work, you may be entitled to dock pay but the law is not totally straightforward. If you wish to dock pay for lateness or unauthorised absences, include this in the contract. If you do not pay company sick pay, employees on sick leave will not be entitled to statutory sick pay unless they meet the eligibility criteria and notifying requirements under the statutory sick pay rules. This area of law should be handled carefully.

If the contract is inaccurate

If the error is made because the contract is inaccurate, you will not be able to lawfully deduct pay to recover. If the employee has a windfall, for example because the contract says they work full time and they are paid accordingly, but they only work part time, there is no right to deduct from pay to recover the overpayment. If you discover a situation like this, we can advise you on other ways to recover.

If pay falls below the minimum wage due to a salary sacrifice scheme

Even if the employee wishes to sign up to deductions under a salary sacrifice scheme, such as Bike to Work or childcare vouchers, you have to ensure that they still receive the National Minimum Wage (NMW). If their pay falls below the NMW, after the deduction under the salary sacrifice scheme has been made, you will be in breach of NMW rules.

If your business is in retail

Additional provisions apply to protect retail workers against deductions made in respect of stock deficiencies or cash shortages. No single deduction can exceed one-tenth of the worker’s gross pay for that particular pay day. This limit does not apply to the final contractual payment when the worker leaves.

Pay statements

When deducting pay, make sure this is recorded in the itemised pay statements. Since April 2019, workers as well as employees have been entitled to a pay statement which shows deductions from pay.

Potential tribunal claim

Workers may be able to bring an employment tribunal claim for historical deductions from pay if these form a series of deductions, as well as claiming for a deduction within the last three months.