You may have read in the papers about the recent case of a city trader who is suing his employer, Tradition Securities and Futures, for an extra £100,000 as an unlawful deduction from wages claim. The trader had been paid a bonus of £1.2 million but was suing for the additional £100,000 which the employer deducted from the bonus pool as a brokerage fee. The case illustrates the importance of getting bonus provisions right and of ensuring you have the legal entitlement to make any appropriate deductions. The case has not as yet been heard.  

The Legals  

The basic position is set out in the Employment Rights Act 1996 (‘ERA’) which states that it is unlawful to make a deduction from a worker’s wages unless:  

  • The deduction is required or authorised by statute or a provision in the worker’s contract; or  
  • The worker has given their prior written consent to the deduction.  

Required or authorised by statute  

Deductions for income tax and national insurance contributions under the PAYE system or deductions made in relation to an attachment of earnings order are ‘required or authorised’ by statute.  

Contract  

It is important to ensure there is a provision in the worker’s contract which allows deductions to be made. The employer must also be able to demonstrate that the worker has seen the term and that the event giving rise to the deduction has arisen.  

Some examples  

Deduction from salary for failure to achieve sales target  

In the case of Duckworth v Coupers Partnership 1995 a provision was stated in the contract of employment that if the employee did not achieve a sales target of £1500 then a clearly defined deduction would be made from the salary. The tribunal found that the employer was entitled to make the deduction.  

Deductions clause should be in the contract not on the notice board  

In Kerr v The Sweater Shop (Scotland) Limited 1996 a tribunal found that if the deduction is made under a provision of the worker’s contract then the worker must have seen the term. A notice in a factory on the notice board was not a sufficient way to communicate a lawful deductions clause.  

Written consent  

The final way a deduction may be permitted is if the worker has agreed in writing in advance of the deduction being made  

Get it right or lose it forever!  

If an employment tribunal finds that a deduction was made unlawfully, the employer cannot later recover from the worker any part of the unlawful deduction. For example, in Potter v Hunt Contracts Ltd 1992 the worker owed the employer £523 under a loan. The employer therefore (unlawfully) refused to pay his £278.50 wages when his employment terminated. The employer was ordered to pay the £278.50 wages to the employee and was entitled to recover only the excess of the loan (£244.50) in the civil courts.  

Overpayment of Salaries  

There are a handful of specific exceptions in the ERA to the basic provision set out above, most notably a deduction may be made by an employer in respect of an overpayment of wages or an overpayment in relation to expenses.  

So if an employer discovers that an overpayment has been made they may simply deduct the sum from a subsequent month’s pay and the employee will not have an unlawful deductions from wages claim (in theory!).  

Wages could be withheld in respect of a fraudulent expenses claim  

In SIP Industrial Products Limited v Swinn 1994 the EAT held that an employer was entitled to withhold wages in response to a fraudulent expenses claim put in by the employee. The employer successfully argued that the monies were being withheld in respect of overpayment of expenses. The fact that the employee’s dishonesty led to the overpayment made no difference.  

Genuine mistake  

In the case of Addo-Kwabi v London Borough of Waltham Forest 1995 the EAT found that an employer was entitled to deduct an overpayment of wages which had been made by accident.  

The EAT found the claimant to be an intelligent woman who knew the mistake had been made and had decided to keep quiet about it.  

Employee already spent the money!  

However in the case of County v Council of Avon v Howlett 1983 an employee was able to argue the defence of estoppel to prevent the employer recovering the entire overpayment of sick pay. In this case the employee had acted honestly and had queried the overpayments and had been told by his employer that the payments were correct. When the employer subsequently realised their mistake, the employee had already spent the money. The Court of Appeal found that it would be unfair to make the employee pay all of the sums back.  

Holiday pay on termination  

The situation often arises whereby the proportion of annual leave taken by a worker exceeds the proportion of the annual leave year which has expired at the date of termination of employment. The case of Hill v Chappell 2003 highlights the importance of having a clause in the contract of employment allowing the employer to claw back any overpayment of holiday pay on termination of employment.  

There is no statutory right for the employer to claim back this money and so the employer should enter into a relevant agreement under the Working Time Regulations forcing the worker to compensate the employer for any excess holiday taken.