Unlawful deduction from wages

Employment law- unlawful deduction of wages

What is an unlawful deduction of wages?

If your employer has failed to pay you, or paid you less than you are entitled to, you may have a claim for an unlawful deduction from your wages. The deduction will be unlawful if any of the following applies:-

  • it is not required or authorised by legislation;
  • it was not authorised in your contract of employment;
  • you did not consent in writing before it was taken.

There are some limited exceptions where a deduction will be lawful, such as if you were previously overpaid or where you have taken part in a strike or industrial action.

If you work in the retail industry or in a restaurant, your employer can take up to 10% of your gross wages to cover any shortfall in your till. They may, however, then make deductions over a course of many weeks/months, as long as they don’t take more than 10% of that pay period. If you leave employment, they are then allowed to deduct the full outstanding amount from your last paycheck.

As the law currently stands, if you work in a restaurant, your employer cannot count any tips you receive as part of your wages for the purpose of the National Minimum Wage. However, tips do count as wages for the purpose of unlawful deductions claims. Therefore, your employer is generally not permitted to make deductions from staff tips unless this is in your contract or you have agreed in writing.

You can only make a claim for actual deductions from your wages. You cannot make a claim if your employer only threatens to make deductions from your wages, although this might give rise to a claim of constructive dismissal, depending on the circumstances.

Paying your wages late would still technically count as an unlawful deduction, however the tribunal would not make an order to pay your wages again. If your employer persistently and repeatedly pays your wages late, this might also constitute a constructive dismissal type scenario.

What counts as “wages” for the purposes of an unlawful deduction claim?

Wages are widely defined in the Employment Rights Act and include sums that are payable to the employee in relation to their employment. The following are examples of ‘wages’:

  • any salary, holiday pay, bonus or commission whether contractual or otherwise;
  • pay that you are entitled to under statute (e.g. statutory sick pay or statutory maternity, paternity, adoption or shared parental pay);
  • statutory payments that are paid in lieu of wages (e.g. for time off to look for work, guarantee payments, time off to go to antennal payments or for trade union duties;
  • payment of “protective awards” for failure of an employer to adhere to minimum consultation time periods.

Benefits you receive as part of your employment are likely to be wages as long as they have a monetary value.

Any claim for wages must be for a specific and quantifiable sum of money. If the payment is uncertain, and not quantifiable (or is a general sum claimed by way of damages), then the claim will not be able to be made in the Employment Tribunal, but will need to be  brought in the County Court, or High Court instead.

Bonus payments

The Employment Rights Act specifies that non-contractual bonuses are converted into wages on the day they are paid.

Discretionary bonuses are trickier and will depend on the nature of your employer’s bonus scheme. These can become wages (that the employer is legally obliged to pay) once the employer has awarded them, even if not yet actually paid.

Employers sometimes include ‘clawback provisions’ stating that the employee will have to pay back the bonus in certain circumstances, for example if the employee leaves the company within 6 months of payment. Any conditions are only likely to be effective if they are imposed before the bonus is awarded and/or paid. If your employer retrospectively imposes such a condition for you keeping the bonus, then tries to claw back the bonus by deducting it from your wages because you have not fulfilled the condition, then you may have a claim.

Please note that in order to claim bonus payments as an unlawful deduction of wages claim, the amount should generally be ascertainable and easily quantifiable, for example, through set performance targets and achievements. If you are claiming a bonus that is entirely discretionary in nature and one that cannot easily be referred back to a set formula, then such a claim would need to be one of “breach of contract” instead, which is a different type of claim.

There is no financial cap on bringing an unlawful deduction of wages claim in the employment tribunal, unlike in breach of contract claims, where the cap is £25,000.

What is not covered?

There are also specific exclusions to the definition of ‘wages’, including the following:

  • an advance of wages by an employer, or where a loan is taken from the company;
  • expenses incurred in connection with employment;
  • payments due under a pension scheme or in connection with retirement;
  • compensation for loss of office or in relation to a redundancy.

If the sum that you are due falls within one of the above exclusions, you may be able to, instead, make a claim for breach of contract in the employment tribunal or county court. You would need to be able to show that you have a contractual entitlement to this amount, or that the entitlement is implied.

How do I make an unlawful deduction of wage claim?

If you are owed sums from your employer, the best way to retrieve this is to lodge a claim with the Employment Tribunal or County Court (after first having tried to recover the same either directly or via solicitors threatening legal action).

You might be able to recover amount deducted, plus any sums that the tribunal “considers appropriate” to compensate you for any financial losses sustained because of the deduction, for example any bank charges you have incurred because you have not received the correct amount of wages.

How long do you have to bring a claim?

In order to bring a claim in the Employment Tribunal, you must submit an “ET1” within 3 months less one day from the last day that there was an unlawful deduction of payment.  It is now mandatory to go through ACAS’s early conciliation scheme before you can submit a claim to the tribunal.

The starting day of the time limit depends on which kind of deduction there has been:

  • for a deduction or shortfall of wages due, the time limit starts running from the date on which payment was due;
  • where there has been no payment at all, the date runs from when the contractual obligation to the payment arose;
  • where there has been a series of deductions, the time limit starts running from the last deduction or payment in the series.

A claim for breach of contract in the civil courts, however, has a time limit of six years from the breach (i.e. the non-payment).

Please note that a gap of more than three months between non-payments or underpayments of wages breaks the ‘series’ of deductions for the purpose of bringing an unlawful deduction from wages claim.

You can seek to recover deductions made over the period of two years before the date you start the claim. In most cases, you cannot claim any deductions that took place more than two years before you start your claim, unless you are claiming statutory sick pay, statutory maternity pay and other statutory payments. For these payments, there is no limit on how far the claim can ‘look back’, as long as you start your claim in time from the last deduction.

What if you are not paid your salary for the month, whilst you are still working?

Technically speaking a failure to pay wages whilst you are still working would be in breach of contract and as such an unlawful deduction. However, a one-off breach will not normally justify resignation and a claim for constructive dismissal. At first instance, you should raise a grievance with your employer to try and resolve the matter. If you continue to not be paid, this will almost certainly go to the root of the contract and entitle you to take a claim for an unlawful deduction of wages.

What is the position if I am not paid by notice?

A claim for unpaid notice or pay in lieu of notice should be made as a breach of contract claim rather than one for an unlawful deduction from wages. The breach of contract claim is otherwise known as wrongful dismissal. Such claims can be made to the employment tribunal where you are claiming compensation up to £25,000. If the sum is higher than this, it would need to be made in the court. You should note that the time period to make a claim in the tribunal is much shorter (only 3 months from the date the payment is due) whereas you have a period of 6 years to make the claim in the court.

We are a leading firm of employment law solicitors, acting for employees and senior executives in the City and throughout the UK. For more information on unlawful deductions of wages and a free consultation, please get in contact on 020 7100 5256 and ask to speak to Philip Landau or any member of the employment team, or email us.

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