Deduction from wages
The problem
A hotel manager gave an employee who works in the gift shop a loan of £30 to buy himself a bus pass. She has now just discovered that the till is £20 short and intends to deduct £50 from his wages this month to cover both repayment of the loan and the cash shortage.
The law
The Employment Rights Act 1996 (ERA) imposes restrictions on employers making deductions from workers' wages. An employer must not make a deduction unless:
It is authorised by statute (eg, PAYE);
It is permitted by a provision in the worker's contract; or
The worker has previously agreed in writing to the deduction.
In retail employment, there are additional rules for employers making deductions on account of cash shortages or stock deficiencies. The maximum permitted deduction is one-tenth of gross wages payable on a particular day. The employer must make such a deduction within 12 months of the date the deficit was discovered - or should reasonably have been discovered. If a series of deductions is to be made to cover a shortage, the first must be made within the 12-month period.
On termination of a worker's employment, the 10% limit on deductions does not apply to the final instalment of wages (ie, the last wage packet) or any payment made to the worker afterwards, such as money in lieu of notice.
The restrictions on wage deductions also apply to payments made by workers to their employer. It is not possible for employers to "contract out" of these rules by putting a term in workers' contracts saying that they do not apply.
Quite apart from the ERA provisions outlined above, an employer will be in breach of contract if it makes a deduction from wages without having a contractual right to do so.
Expert advice
The manager would first need to check whether the employee's contract provides a clear right to make the £50 deduction. If so, the ERA requires that she should notify the relevant contractual term to the employee in writing before making the deduction. As far as the £20 till shortage is concerned, she would need to check that this amount did not exceed one-tenth of the employee's gross wages due this month.
If there is no such provision in the contract, the manager might be able to rely on a separate agreement by the employee for the deduction to be made. However, the agreement must be in writing and must be given not just prior to the deduction but before the event giving rise to it. So, in our example, the employee must have given written consent before the loan was made and before the till was discovered to be short.
If the employee has at least one year's service, and the deduction is made in breach of his contract, he might complain to an employment tribunal of "constructive" dismissal. This is a form of unfair-dismissal claim where the employer breaches the contract in such a serious way that the employee can resign and treat himself as dismissed.
Check list
Include a right to make deductions from wages in workers' contracts, and give them a copy of the term before making deductions.
Otherwise, try to get workers to sign a separate written agreement in advance authorising deductions in appropriate circumstances.
Make sure deductions from retail workers for stock or cash shortages are made within 12 months of the shortfall being discovered and do not exceed 10% of wages payable on a particular pay day. As an alternative to wage deductions, make a demand for payment within the 12-month period.
Contacts
Lewis Silkin 020 7074 8000
bethan.carney@lewissilkin.com
Employment Law and Industrial Relations Helpline
020 7396 5100
Beware!
If an employment tribunal finds that an employer has made an unlawful deduction from wages, it will not only order that the employee is reimbursed but also debar the employer from recovering the money in any other way - even if it is a legal debt.
In our example, even though the employee clearly owes the employer money, an unauthorised deduction could result in the employer never being able to recover it.
A successful complaint of unfair constructive dismissal potentially entitles the employee to compensation comprising a basic award (the amount depending on age and length of service) plus a compensatory award of up to £52,600.
Finally, note that employers are barred from bringing legal proceedings against a retail worker to recover a cash shortage or stock deficiency unless they make a demand for payment within 12 months of the date they discovered the shortfall, or ought to have done so.
