When Can You Make Deductions from Wages?

Deductions from Wages are governed by the Employment Rights Act 1996, which states an employer may not make any deduction or receive a payment from a worker’s wages unless:

• The deduction or payment is required or permitted to be taken by statute (e.g. income tax) or by a relevant provision in the worker’s contract; or
• The worker has given prior written consent that the deduction or payment be made from their wages.

Deductions Required or Permitted by Statute

These include deductions for tax purposes as well as sums ordered by the court such as Attachment of earnings or Arrestment of earnings in Scotland. These could include things like child maintenance orders, judgement debts over £50, payments under an administration order, sums ordered to be paid on conviction of a criminal offence, legal aid contribution orders.

Student loans are another deduction required by statute, the P45 or HMRC Starter checklist usually provides information as to whether a student loan deduction is required.

Deductions on Prior Written Agreement

Prior written agreement is most commonly included in the employment contract and specifically states that a deduction will be made. Crucially agreement must be gained prior to the event that leads to the deduction, for example a deduction for damage to equipment should be made prior to any damage, this ensures the employee is aware of the consequence and freely gives their agreement.

In addition to prior written agreement, the employer must be able to justify the deduction. As an example, an employer cannot deduct for the cost of training if the employer has not incurred any material cost, e.g. because training has been provided on-the-job.

A contract of employment should detail common reasons for deductions from wages, such as losses incurred due to negligence, deductions for holiday taken but not accrued upon leaving and deductions because of cash errors or stock deficiency in the case for retail workers. Due to the specific written agreement needed for deductions it is often useful to have specific agreements in place, for example a training fee agreement detailing the amount and nature of the training as well as a sliding scale of deductions, therefore enabling the employer to justify the deduction.

Consequence of an Unlawful Deduction from Wages for the Employer

An employee can bring a claim in the employment tribunal usually within 3 months of an unlawful deduction. That claim will be to recover the amount that has been deducted but may also include appropriate amounts to cover financial losses such as bank charges resulting from the non-payment of wages.

Preventing Unlawful Deduction from Wages Claims

Unlawful deductions from wages are a very strong reason to have good quality employment contracts drafted for your business with a strong deduction from wages clause. In addition training fee agreements and agreements for the issue of equipment such as mobile phones or uniforms which also make clear when deductions will be made.

We have seen cases where employees have left, not returned equipment or repeatedly damaged uniforms and employers cannot recover the costs because the employment contracts or other agreements are not in place for a lawful deduction. The only way to prevent this is to have the right documentation in place at the start, if you’re not sure if you have the right agreements in place book a free advice call and we’ll happily take a look.

Article last updated: 17 November 2022