Unlawful Deduction of Wages – When is Withholding Salary Illegal?

Unlawful deduction of wages arises when employers withhold worker’s salaries without legal or contractual justification. There are limited scenarios in which employers can make wage deductions without the agreement of employees.

Making wage deductions without proper basis can leave employers in a problematic legal position. There are significant legal protections for workers. The relevant laws are the Employment Rights Act (1996), and the National Minimum Wage Act 1998.

Our guide will explain the scenarios where wage deductions are lawful, and what can be done to address the situation if you are subjected to unlawful deduction of wages.

What Counts as Wages?

The Employment Rights Act, defines wages as “any sums payable to the worker in connection with their employment”. This means that anything a worker does in return for payment should class as wages. The employee’s contract will usually stipulate all details surrounding wages, including when they are paid and how much.

Some examples of wages are:-

  • Hourly, weekly or monthly amounts.
  • Fixed payments such as an annual salary.
  • Employee benefits
  • Bonuses
  • Supplemental wages
  • Overtime
  • Commission
  • Holiday pay
  • Maternity and paternity pay.
  • SSP

Source: Employment Rights Act 1996, Section 27.

Are Bonus Payments Wages?

Bonus payments are generally classed as wages. The Employment Rights Act broadly defines wages as “any fee, bonus, commission, holiday pay, or other emolument referable to the workers employment.”

However, a bonus may not be treated as wages depending on your contract of employment, and the nature of the bonus itself.

In some situations, bonuses may not be treated as wages:-

  • Discretionary Bonuses or Non Contractual Bonuses – if an employer is free to decide whether to award a bonus or not, it may not be considered wages. How this type of payment is treated will depend upon the wording of your employment contract.
  • Payments in Kind – if a bonus is paid in the form of goods rather than money, it may not be treated as wages.

Specific definitions can vary, and the classification of a bonus can be complex to determine for the purposes of unlawful deduction of wages. If you’re concerned about this particular issue, you may be advised to seek legal advice about your situation.

Lawful Wage Deductions

UK law allows employers to make lawful wage deductions under defined circumstances. Employers have a legal right or obligation to deduct money from employees salaries in the following broad categories:-

  • Statutory Deductions: An employer is legally obliged to deduct payments such as tax, national insurance, and student loan repayments.
  • Deductions Agreed in Writing: A deduction is lawful if an employee has agreed to it. This agreement must be obtained in writing.
  • Overpayment of Wages: If the employer has overpaid the employee in error, they are entitled to deduct future wages to repay the money. However, they must not act unreasonably and should give the employee a statement of the overpayment, and provide them notice of intent to deduct wages. If it’s a large sum, both parties should agree how it will be paid back.
  • Retail Deductions: Till shortfalls or stock loss can be deducted from retail staff wages. However this can be no more than 10% of staff wages in a single pay day.

Employers should make it clear what constitutes lawful deductions so that there are no misunderstandings.

Providing this information within the employment contract is the most logical way to make this information readily available.

What is Unlawful Deduction of Wages?

Any wage deduction that does not fall under the limited scenarios above, may be classed as an unlawful deduction.

When money has been deducted from wages unexpectedly and without an agreement, an employee can raise a grievance.

There are usually 3 scenarios that make a salary deduction unlawful:-

  • It is not a legal deduction and is not covered in the scenarios above.
  • There is no mention of such deductions in your contract.
  • No consent was sought before the deduction.

Unlawful deductions could be situations including:-

  • Being paid under the national minimum or living wage (unless it is for a lawful reason, such as tax).
  • Withholding pay due to an employee resigning or being dismissed.
  • Denying staff their holiday pay.
  • Refusing to pay out any contractual or implied bonuses.
  • Salary reductions with no discussion or consent.
  • Your employer is late paying wages.

Unlawful Deduction FAQs

Understanding unlawful deductions can be a daunting task, given its complexities. To assist you in this process, we’ve compiled a list of frequently asked questions.

Can an Employer Deduct Wages Without Consent?

Under specific, limited circumstances, an employer may legally deduct wages without the explicit consent of the employee. For instance, deductions required by law, such as income tax and National Insurance contributions, can be made without an employee’s agreement.

For most other types of deductions, however, the employer does need consent. This typically means such deductions should be clearly stated in the employment contract. Remember, apart from certain exceptions, employers generally require consent for wage deductions.

Can an Employer Reduce Your Salary?

When an employer wishes to reduce employees salaries, this needs to be done following the correct protocols. This means having staff sign a new contract which means requiring their consent before doing so.

There may be a variation clause in the contract, however, there should still be communication and notice. Where there is no agreement, staff may opt to begin working under protest. Any reductions to salaries should never take the minimum or living wage below the legal hourly amount.

See Also: Can an Employer Reduce Your Pay?

Are Self Employed Workers Protected?

Unfortunately, self employed workers are not protected by the same UK laws as employed staff. This is why the self employed must take out insurance to cover non payments or other monetary disputes.

They would need to explore the small claims route to solve such issues.

See Also: Self Employed & Not Getting Paid for Work Done?

Can Employers Recover Overpayments?

Yes, employers in the UK have a legal right to recover overpayments made in error, and these are not considered unlawful deductions. However, proper procedures should be followed to ensure fairness and legality.

Firstly, the employer should promptly notify the employee of the overpayment and explain the intended course of action. Employers should not deduct the overpayment without first discussing it with the employee.

Secondly, it is generally considered unreasonable to recover large overpayments in a single lump sum, particularly if this would cause financial hardship for the employee. In such cases, a reasonable repayment plan should be agreed upon, spreading the recovery over several pay periods.

In all cases, communication and fairness are key. Employees should be given notice and a clear understanding of the repayment process.

See Also: Overpaid by Employer – What Are My Rights?

Can Employers Take Money from Wages for Mistakes?

Employers are permitted to deduct money from an employee’s wages due to mistakes, but this is subject to certain conditions. Firstly, the potential for such deductions must be explicitly stated in the employee’s contract. If not, the employer must obtain the employee’s written consent to the deduction.

Additionally, a proposed repayment plan should ideally be discussed and agreed upon. Importantly, even after such a deduction, an employee’s wages must not fall below the National Minimum Wage.

For those working in the retail sector, specific rules apply. Retail workers may be held financially responsible for damages or cash register shortfalls, but such deductions can constitute no more than 10% of their gross pay for any single pay period.

See Also: Can My Employer Take Money From My Wages For Mistakes?

How to Bring an Unlawful Deduction of Wages Claim

Should you find yourself faced with a case of unlawful deduction of wages, then it is vital to know your rights.

  • Your claim must be based on an unlawful deduction, not just a threat to do so.
  • Initially, attempt to address the issue directly with your employer. Misunderstandings can occur, and many disputes can be resolved at this level.
  • If this doesn’t rectify the issue, it may be wise to seek legal advice to understand your options better.
  • Before taking further legal action, you must engage in early conciliation through the Advisory, Conciliation and Arbitration Service (ACAS). This is a mandatory step designed to facilitate resolution outside of the courts.
  • If conciliation does not lead to a resolution, you may consider engaging a solicitor to help recover the deducted wages.
  • As a last resort, you can take the matter to an employment tribunal.
  • In extreme cases, if the unlawful deduction of wages is part of a pattern of poor treatment, you might have grounds to claim constructive dismissal.

Time Limits for Claims

You should submit an ET1 form to an employment tribunal within three months less one day from the date of the last unlawful deduction.

For other matters such as non-payments, the limit for making a claim is considerably longer, typically up to six years.

To prevent any payment disputes, it’s crucial to thoroughly understand your employment contract. Pay special attention to any variation clauses that allow the employer the right to make changes. Additionally, regularly compare your payslip against your actual bank balance to spot any discrepancies swiftly.

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