Deducting employees wages

Occasionally, there are situations where an employer may need to make deductions from the wages of an employee (other than for PAYE purposes). It's important to know when such deductions are lawful and when they are not.

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When is an employer allowed to make deductions from wages?

Employees and workers are protected from any unlawful deductions from their wages.

There are three general situations in which an employer is lawfully permitted to make deductions from the wages of employees:

  • If they are required or authorised to make deductions by law (eg PAYE).

  • If this is permitted under the terms of the employee contract (the written part of this contract, together with an explanation, must have been provided to the employee).

  • If the employee has consented to the deductions in writing (in advance of any deduction - and also in advance of any act or omission on the part of the employee which has led to the deduction).

Additionally, an exception under law applies in the case of an overpayment of wages - this allows employers to make a deduction in order to correct the error. For further information read Overpayment of wages.

Can deductions be made if the employee owes the business money?

The terms of repayment of any money owed to an employer (eg in respect of loans) should be contained in any relevant written agreement; this may stipulate repayments through deductions of wages.

Small miscellaneous debts owed (eg personal calls made on a company mobile phone) can generally only be deducted if these were specifically agreed in writing.

What happens if deductions bring pay below the National Minimum Wage?

Deductions from wages must not reduce an employee's pay to below the National Minimum Wage rate (although there are some exceptions in respect of accommodation). This rule applies even if an employee has given explicit written permission.

What are the extra protections for retail workers?

In respect of workers in the retail sector, it is illegal for employers to deduct more than 10% from gross pay (ie before tax and NI contributions) if the deduction is made due to cash shortages or stock deficiencies (except in the case of final payment on termination of employment - in which case they can deduct the full amount).

What is the time limit for claims on underpayment?

Under the law, claims for backdated deductions from wages for holiday pay are subject to a two year time limit.

What should an employee do if they believe a deduction is unlawful?

The first step is to raise it with a line manager or HR manager and try and resolve the matter informally. If that does not work, a grievance can be raised through the normal channels and/or by talking to a union rep. Failing that, Ask a lawyer to find out about going to an Employment Tribunal.

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