When can employers make deductions from pay?

By Danielle Ayres, Employment Law Partner

More than half of UK employees have been paid incorrectly at some point. Whether it be an overpayment or an underpayment, employers need to ensure all employees are paid the correct amount.

Pay and benefits come in all shapes and sizes.  There is never a “one size fits all” approach.  Some employees receive only salary, whilst others receive car allowances, bonus’, commissions, and benefits on top such as pension and private health care.

If done correctly, there should be documentation such as contracts in place to ensure that both parties understand what is to be paid, when and how. For employees, that means knowing what their employers are allowed to deduct and what they’re not.

For employers, there are certain rules that they are required to follow by law. If they aren’t followed, employers could be guilty of making illegal deductions and find themselves faced with Employment Tribunal proceedings.

We recently saw an interesting example of this, where a teacher noticed a £10 deduction on their payslip with the code ‘HTLGC.’ Upon further investigation, it was found that the same deduction had been made to all members of staffs’ wages as a ‘Head Teacher’s Leaving Gift Contribution.’  This had been done without their knowledge or consent.

On the back of that case, we thought we’d outline the basics.

What is a payslip?

Whether staff are full time, part time, an agency worker or on a zero-hours contract, an employer is required to issue a payslip on or before each pay day.

A payslip should include:

• Earnings before any deductions
• Earnings after any deductions
• The exact amount of any deductions
• The total number of hours worked (if pay varies)

As an employer, it’s essential you’re prepared in advance of pay day. There are some exceptions to this, which can be found on the Gov.UK website.

What are pay deductions?

Deductions on a payslip refer to any sum of money that is ‘deducted’ or taken from the pay an employee is expecting.

Deductions required by law are also referred to as PAYE deductions on a payslip. PAYE is essentially HMRC’s system to collect National Insurance and Income Tax from employees.

There are also other deductions that an employer can make, however, whether these need prior approval will come down to an employee’s contract.  For example, to correct an overpayment of wages, or where an employee has taken over and above their holiday entitlement.

In those cases, an employer can only make the deductions without prior consent of the employee if:

• the employee’s contract specifically allows for the deduction to be made;
• the employee has agreed it in writing beforehand;
• an employee misses work due to being on strike
• the deductions are due to the employee being part of an agreed scheme or having a recognised membership – eg. pension, the Bike2Work scheme, Trade Union

Unclear deductions

Sometimes, pay deductions can simply appear on a payslip with the title ‘Deduction,’ rather than with a particular tax code or reason.

Employees have the right to know exactly what any deductions relate to and how their employer has worked it out, so it’s essential to be prepared for this. If an employee isn’t satisfied that a deduction is fair, they’d then check the employment contract to see if you have a contractual right to make the deduction without consulting with them first.

If there is a deduction clause in your employment contract, then (depending upon the wording of that clause) as an employer you generally have the right to deduct monies from an employee’s pay . If there isn’t such a clause included, you could be risking a claim for unlawful deduction from wages.

For example, if it’s laid out in an employment contract that a deduction can be made from an employee’s wages if there was an overpayment the previous month, as an employer you’re contractually entitled to deduct the full amount of the overpayment in one go.

It’s essential to clearly set out a deductions clause in your employment contracts, ie whether you will simply make them without consent, whether you will notify the employee first, how much you can take (all of the amount, or by agreed instalments with the employee), in order to avoid any potential Employment Tribunal proceedings by taking amounts when you aren’t legally entitled to do so.

Deductions with caveats and discretion

Within employment contracts, employers can also include a deduction clause with certain caveats.

For example, some contracts state that if an employee owes them money, they can deduct this amount from their pay, (with/without agreeing it with them first), so long as it doesn’t place them in financial hardship.

Caveats like this allow an employer to reclaim any debts owed to them, while protecting their employees from unwelcome stress or financial burden

For overpayments, while in most instances it would make sense to immediately recover the owed amount by deducting it from the next month’s pay, employer discretion should be encouraged as well as communicating exactly what the deduction is for and how it has been calculated.

For example, where a woman is on maternity leave and receiving statutory maternity pay but is paid her full salary by mistake.  While the employer could deduct this money from her next pay check in full, they could also wait until she is back from leave and once again receiving full pay, before deducting the sum.  Subject to whether there is a deductions clause, it may be up to the employer to decide how they handle this.

The basics

All UK employers will make pay deductions relating to their staff’s wages, so it’s essential any employment documents clearly set out a deductions clause, stating the right to make the deduction and whether it will be made in part or in full and with or without the employee’s consent.

As always, open and honest communication is key to keeping employees informed and happy.

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If you’ve got any doubts or queries surrounding pay deductions, contact me directly on danielle.ayres@primaslaw.co.uk.