Deduction from wages

The time, form and method (e.g. cash, cheque or credit transfer) of how you pay an employee's wages will be determined by the terms and conditions of their contract. If you depart from the payment arrangements that you've agreed to in it, they may be entitled to make a claim for breach of contract if they've suffered financial loss as a result.

In addition, employees are protected by legislation from unauthorised (unlawful) deductions from their wages (including complete non-payment of wages).

Meaning of 'wages'

Wages are sums payable to an employee by their employer for performing their job under the terms of their employment contract. They include:

• Salary, bonuses, commission or other payments in connection with their job
• Statutory payments such as holiday pay, Statutory Sick Pay and Statutory Maternity Pay
• Luncheon vouchers, gift tokens and other vouchers of a fixed monetary value that can be exchanged for money, goods or services

Certain other types of payment do not count as wages such as:

• Loans or advances of wages
• Payments of expenses incurred in employment
• Pension and redundancy payments
• Lump sums on retirement or in compensation for loss of office
• Payments in kind, other than vouchers or tokens that can be exchanged and are of fixed monetary value
• Tips and other gratuities paid directly to the worker by a third party

There are rules regarding tips that apply to all workers (i.e. employees, agency staff and zero-hours workers, but not self-employed people). Employers in England, Wales and Scotland must:

• Ensure that 100% of all customer tips, including those paid by credit card, are distributed to staff without any deductions. It will be unlawful to deduct bank or administrative charges from tips.
• Make full payment no later than the end of the month in which the tip was paid by the customer.
• Have a written policy on distribution of tips to staff and follow a Statutory Code of Practice.

Meaning of 'deductions'

Where an employer makes a deliberate decision not to pay part or all of an employee's wages in accordance with their contract, then this counts as a deduction.

Disputes as to whether or not the employer has correctly calculated the gross amount of wages due is a matter to be settled under the law of contract in the civil courts or alternatively, if the employment has ended, in the employment tribunals.

When is a deduction lawful?

You may make a deduction from an employee's wages if the payment is:

• Required or authorised by legislation (such as income tax or National Insurance contributions)
• Authorised by the employee's contract
• Agreed to in writing by the employee before it is made

Exceptions

The conditions set out above do not have to be met where a deduction is made or a payment received:

• To recover an earlier overpayment of wages or expenses by the employer to the employee
• As a result of disciplinary proceedings provided for in legislation (for example, police disciplinary proceedings)
• A consequence of the employee taking part in a strike or other industrial action
• To satisfy a court order or a tribunal decision - provided in the case of a deduction that the employee has given their prior written agreement to it

In addition, where a deduction is made under an arrangement agreed to by the employee in writing for the employer to pay to a third party amounts notified by that third party, the deduction is always lawful under the legislation on unlawful deductions if the employer deducts the amount that has been notified.

Where a deduction is made because of a statutory requirement on the employer to deduct and pay over specified amounts to a statutory authority (for example, PAYE income tax payments to HM Revenue and Customs), the deduction is lawful under the legislation on unlawful deductions - provided that the employer deducts the amount specified by the authority. Any questions as to whether or not the authority has correctly calculated the amount due should be followed up with the authority itself.

The rules governing payments by an employee to their employer do not apply where the employer is receiving the money in a different capacity (for example, on a social occasion).

Complaints about unlawful deductions

Any worker who considers that they've suffered an unlawful deduction from wages can present a complaint to an employment tribunal. This applies regardless of the worker's length of service.

These complaints must be made within 3 months starting with (and including) the date of the unlawful deduction. They can also be made within 3 months starting with the last in a series of deductions. If this is not possible, these complaints can be made within a further period that the tribunal considers reasonable.

In England, Wales and Scotland, changes have been made to limit the scope of claims for unlawful deductions from wages. Employees are now limited to claiming no more than 2 years of unpaid wages.