part two: 'You owe me!'

Adam Bernstein continues his look into the the pitfalls of making deductions from staff wages

Published:  02 May, 2019

By Adam Bernstein

There are countless cases on the government’s Employment Tribunal website, a number for garages, that relate to situations where employers have unlawfully deducted monies from employee’s pay packets. The rules are quite clear – employers need prior permission or a legal basis to deduct monies.
    
Andrew Rayment, a Partner in the employment department of law firm Walker Morris, says that even late payment of wages still counts as a deduction. “However,” he says, “if the employer subsequently pays the wages in full, a tribunal would not order the sum to be paid again, although it may order the employer to compensate the worker for consequential loss, such as bank overdraft charges caused by the late payment.”

How to make deductions lawfully
So, given all of the above, how can an employer make deductions from wages lawfully?
    
The first ‘permission’ Andrew notes relates to deductions required or authorised by statute. “This,” he says, “would include deductions for income tax and national insurance contributions under the PAYE system; and deductions made pursuant to the Attachment of Earnings Act 1971 (i.e. where the courts have made an attachment of earnings order).”
    
The next reason for a lawful deduction would be if it has been authorised by a provision of the worker’s contract. This means one that is set out in a written contract which has been given to the worker before the deduction was made. Here Andrew says: “The contractual provision must make it clear that the deduction may be made from the worker's wages and, obviously, the employer must also be able to demonstrate that the event justifying the deduction has occurred.”
    
It’s for this reason that employers should always make sure that their employment contracts contain a specific clause to authorise deductions from wages or other payments due to the employee in the event that the employee owes money to the company.
    
But there is a third ‘permission’ – where a worker has given prior written consent. In this instance, a deduction will not be unlawful if, as the law details, the worker has previously signified in writing his agreement or consent to the making of the deduction. On this Andrew says: “The written consent must be given before the event giving rise to the deduction (this rules out getting the worker to sign it minutes before the deduction is made) and the written consent must make it clear that the deduction may be made from the worker's wages.”
    
From a legal standpoint, it is always advisable to obtain prior written consent from the employee in cases where, for example, the employer pays enhanced maternity, paternity, shared parental or adoption pay but reserves the right to recover the enhanced payment if, for example, the employee does not return to work; loans the employee a sum of money (for example a season ticket loan); or pays an employee’s course fees or the cost of training but reserves the right to recover all or some of the cost if, for example, the employee does not complete or fails the course.
    
Going back to the case of the loan to the worker outlined in part one of this story (Aftermarket, March issue), the employer should have obtained prior written consent from the employee before loaning the money. It would then have been able to rely on this to deduct the loan from the employee’s wages.

In summary
So, to finish, except for deductions made under PAYE or under a court order, it is vital that you ensure that you have workers written consent to make a deduction from wages before attempting to do so. Similarly, ensure that there is an appropriate deduction from wages provision in your employees contracts. And where you make an enhanced payment, offer a loan or cover course fees, it is advisable, before making the payment, to require the employee to sign a form giving their written consent to the conditions of payment and the specific circumstances in which deductions can be made from sums due to the employee.
    
Planning ahead and ensuring all know where they stand will prevent much upset later on.


Related Articles

  • part ONE: ‘You owe me!’ 

    As an employer, have you ever found yourself in a situation where you need to make a deduction from an employee’s wages? Are you confident that you know the legal rules in this area? Andrew Rayment, a Partner in the employment department of law firm Walker Morris, has seen this question arise many times with employers who have made the wrong decision.
        
    He offers an example to illustrate the point. A worker has had to take three weeks off work because of a bad back. He is paid statutory sick pay but there is no company sick pay scheme to top this up. He has three young children to support and the employer knew he was going to struggle to make ends meet. The employer ‘topped him up’ to his full wages for the three weeks as a ‘loan’ to help him out. It was agreed, however, that the loan was to be repaid when the worker was in a better situation. The payment was through payroll so the money was received as ‘wages’.
      
     “The problem in this case was that everything was done on trust, so nothing was written down or confirmed in writing,” and as Andrew continued, “a year later the worker resigned after a disagreement. During the interregnum, the period between handing in his notice and his departure, he didn’t repay the money, so it was simply deducted from his final wages payment.” The agreement for the loan was verbal and there was nothing written into his employment contract for the employer to make deductions from his wages.
        
    As if to inflame the situation, the worker subsequently filed a claim in the Employment Tribunal for unlawful deductions from wages and the employer was ordered to repay the sums deducted.
        
    As Andrew says: “It seems unjust, but these were the actual facts of an Employment Tribunal case. But there is a further sting in the tail. Once an Employment Tribunal has ordered an employer to pay back an amount that has been deducted unlawfully the employer cannot attempt to recover that money later in another way, for example by bringing a civil action in the county court.” This rule, he adds, applies even though the sum may have been properly due from the employee to the employer. The fact that the employer has sought to recover it unlawfully effectively extinguishes the previous debt and the employer does not get a second bite at the cherry.

    What does the law say?
    Section 13 of the Employment Rights Act 1996 sets out the provisions that protect workers from unauthorised deductions (known as unlawful deductions) being made from their wages.
      
     “Quite simply,” says Andrew, “the law says it is unlawful for an employer 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.”
        
    Worse still for employers, he says that unlike breach of contract claims which can only be brought after the employment has ended, employees can bring unlawful deductions claims in the Employment Tribunal while their employment is ongoing.

    Who is protected?
    The law applies to all workers and includes not only an employee, but an individual who has entered into ‘any other contract... to do or perform personally any work or services’, unless the individual is carrying on a ‘profession or business undertaking’ and the other party to the contract is ‘a client or customer’ of that undertaking. In practice, anyone who is on the payroll regardless of whether they are full-time, part-time, casual, direct agency hire or zero-hours will be protected.
        
    Andrew cautions employers that following a raft of recent cases on worker status many self-employed contractors may be deemed in law to be workers regardless of the parties’ intentions or the contractual paperwork.
        
    In essence, workers are protected from having deductions made from their wages except in certain specific circumstances. Says Andrew: “The law puts the onus firmly on employers to obtain authorisation from the worker to any deductions before they are made. The overriding aim is to protect staff from unscrupulous employers, but employers also need to protect themselves against falling victim to the strict legal rules.”



  • part two: Putting a contract out on your staff  

    Good contracts go to the heart of good business, and employment contracts are part of the story. In the last issue we noted the importance of having a written contract, how they are constructed and varied. But what other practical considerations should employers take notice of?
        
    The first is, according to Philip Richardson, a partner and head of employment at Stephensons Solicitors LLP, to understand what a breach of contract is. “This,” he says, “is where either party breaks an express or implied term of a contract. Examples of an employee’s breach include violence, theft, fraud and gross negligence. If the employer finds this has happened they may be entitled to dismiss the individual immediately.” However, he adds that it is important that the employer has genuine grounds for taking such action otherwise it could face a legal claim from the departing employee for unfair dismissal and breach of contract. He offers examples of an employer’s breach that include demoting an employee or failing to pay them without good reason – “if this happens then it may give the employee the entitlement to bring a claim against the employer in the Employment Tribunal.”
        
    At the outset of the employment relationship, disputes aren’t usually envisaged. However, Philip says “a shrewd employer will often put mechanisms in place in the employment contract to protect its position should a dispute arise.” Common clauses that can offer assistance to the employer include the following:

    Garden leave
    If the employer gives an employee notice of dismissal it may decide to place them on garden leave. Philip says the benefit here is that during this period, the employee is usually prohibited from attending work for the duration of their notice period and prevented from contacting other employees or key clients of the business during the interregnum. “This,” he says, “gives the employer the opportunity to deal with employees whose contract has been terminated in acrimonious circumstances and also allows them to protect confidential information and prevent the employee from using it against the company in the future.”
        
    He warns that if an employer wants to utilise this then it is important to include a clause to this effect in the contract of employment otherwise the employer may have difficulty in exercising it. It is also important to note that employees maintain all their contractual and statutory rights and benefits until the end of the garden leave period.

    Restrictive covenants
    This can be a particularly useful clause to include in the employment contract as it sets down the obligations on the employee after his contract is terminated. Philip says the most common types of restrictive covenant prevents the employee for working for a competitor, usually within six months to one year of leaving the business and “can prove extremely useful to protect confidential information and trade secrets.”
        
    Another common form of a restrictive covenant is a non-poaching clause. This prevents the former employee from enticing the employer’s staff away from the business to join him/her in working for a new employer.
        
    However, Philip says that it can be difficult to enforce a restrictive covenant against a former employee, “especially if the clause is unreasonable and does not protect a legitimate business interest as the court may declare the clause void.” He explains that this is because the courts are reluctant to place too great of a restriction on employees after termination. But in practice Richardson thinks that the mere existence of the clause may make the employee think twice before acting in breach, meaning “that a restrictive covenant can be a valuable contractual clause for an employer despite the concerns about its enforceability.”

    Deductions from salary
    A last, but useful, clause for the employer to include, at least from Philip’s perspective, is one that entitles it to make deductions from the employee’s salary in certain circumstances. He says that the most common types of deduction usually contained in the contract of employment include where the employee has caused financial loss to the employer because of their negligence or misconduct, or where the employee leaves shortly after having incurred substantial training costs. However, he cautions employers to “exercise caution in drafting and exercising this clause as any deduction that is not permitted by the clause could be considered unlawful.”



  • part one: Putting a contract out on your staff  

    There is a common belief amongst employers that if an employee does not have a written contact there is no contract in place, leaving the employee without any rights.
        
    However, from a legal perspective, Philip Richardson, a partner and head of employment at Stephensons Solicitors LLP, says: “a contract of employment will be in place at the point where the prospective employee accepts an unconditional offer of employment.”
        
    This means, quite simply, that a contract and the obligations under it are often in existence prior to the employee’s first day or signature on a written contract; employers should be mindful of how they conduct themselves from the moment the offer is made.
     
    Fundamental terms
    Philip says that while it’s true that there is no legal obligation for the employer to provide a written contract of employment, “the employer is under a duty to give employees a written statement of employment particulars. This sets out the fundamental terms of the employment contract such as the names of the employer and employee, brief job description and hours of work along with other key terms of the employment relationship.”
        
    It’s worth pointing out that an employee’s right to a written statement arises where the contract lasts for at least one month; the written statement must be given within two months of the start of employment. If the employer fails to provide the written statement within the stipulated period Philip says the employee may be able to obtain an award of up to four weeks for compensation from the Employment Tribunal.
        
    “In practice,” says Philip, “it’s beneficial for the employer to draft a full contract of employment as soon as possible so that it can clearly set down its expectations of how the relationship will progress.”

    Express and implied
    There are two types of contractual term – express and implied. Philip says that an express contractual term is one that is explicitly agreed upon by the parties and as such is binding on both – “the terms included in the written statements or terms referred to above would all be considered to be express terms of the contract.”
        
    An implied term is one that has not been expressly stated but is considered to be included in the employment contract. Philip explains that these are often clauses that are implied by law for example the employee’s right to the minimum wage. He says that other terms are implied where they are too obvious to mention, including the duty of care owed by the employer and employee, the duty of mutual trust and confidence, the duty to pay the employee and the employee’s duty to provide the work personally.
        
    This is where Philip sees problems for employers, as some believe that providing the term is not in writing, it isn’t relevant. “However, this isn’t the case and the employer ought to have regard to the terms mentioned.” He adds that implied terms are usually based on the perceived intention of the parties and notions of good practice and reasonable conduct.

    Variation
    Any variation of a contract must be agreed by both parties in order to be valid. However, as Philip notes, this does not mean that the employer’s hands are tied in varying the contract. “One way in which the employer may be permitted to make changes is if the contract includes a carefully drafted flexibility clause. Employment relationships often naturally develop and evolve over time and such a clause gives the employer capacity to make changes to the employment contract without the need to obtain the employee’s consent.” That said, he says a fundamental point to note with a flexibility clause is that there is an underlying duty for the clause to exercise reasonably: “If the clause is drafted too widely or the employer unreasonably exercises the right to vary the contract then the employee may argue this has broken the mutual trust and confidence in the relationship and could resign, taking legal action against the employer.”

    From a practical perspective if the employer is seeking to vary the contract of employment it is also important to discuss the changes with the employee first. Often employees will be in agreement with the changes if they fully understand the reasons behind them.



  • part TWO: Employers in the firing line  

    Following a recent Supreme Court case employees wanting to bring claims against their employers can do so without having to pay any fees. So what steps do firms need to take to protect themselves?

  • Part ONE: Employers in the firing line  

    Before July 2013 individuals were free to bring Employment Tribunal claims. However, in July 2013 the government introduced Employment Tribunal fees for anyone wanting to make a claim or appeal a judgment.

    The fee to lodge a claim was £160 or £250 (dependent upon the nature of the claim) and the fee to pursue the matter to a final hearing was a further £230 or £950 (again dependent upon the nature of the claim). If employees won their claim, the tribunal judge could order the employer to pay any fees incurred.

    According to Chloe Themistocleous, an associate at Eversheds Sutherland (International) LLP, after the introduction of tribunal fees the number of claims being brought fell by 80%, but the ratio of claims being successful did not change and so the introduction of fees did little to deter spurious claims. “Clearly,” says Chloe, “some individuals were deterred from making claims due to the cost. Whilst a remission system was in place to help the poorest people, by reducing or waiving the fees, those who missed out on a remission had no choice but to pay the fees or not make a claim; many simply did not want to take the risk.”

    Supreme Court decision
    It appears that while claim numbers were dropping, unrest in trade unions was growing and so Unison decided to challenge the government’s implementation of the fee regime, claiming not only that it was unlawful but that it indirectly discriminated against women.

    Chloe says this was not by any means an easy task as both the High Court and Court of Appeal rejected the claim. “However, at the end of July 2017, the Supreme Court quashed the tribunal fee regime giving judgment that it was both unlawful and indirectly discriminatory.” Effectively the Supreme Court decided that the government acted outside its powers when it introduced fees at current levels, because the fees effectively prevent access to justice.

    What does this mean?
    The ruling means a number of things. Chloe explains: “As a result of the judgment no further fees can be charged by the Employment Tribunal until a replacement scheme is introduced.” This means new claims can now be brought for free again and no hearing fees will be charged claims already lodged.

    She adds that as for those who have already paid tribunal fees, the Ministry of Justice has undertaken to reimburse fees already paid.

    Of course, without the deterrent effect of fees, employers now face an increased risk of employment-related claims from current and former staff. Worryingly, Chloe says it is also possible that some individuals might now try to claim they should be permitted to bring out-of-time claims in respect of past alleged breaches of their rights, “arguing that the now found to be high and unlawful
    fees prevented them from bringing a claim.”

    When a replacement system will be debated and passed by parliament is unknown - it could be months or even longer. The Supreme Court ruling gives parliament a lot of ‘food for thought’, but so far, it is unclear
    what shape a replacement scheme would take.

    As Chloe sees it, while there is a window of opportunity to submit a claim without paying a fee, it is likely that employees will take it. “Claim numbers are expected to rise, but whether they will rise to the levels they were at prior to the introduction of tribunal fees is unknown. If they do, it is unlikely that the current tribunal system, with a reduced number of hearing centres, judges and clerks, could cope.”

    With time, if a new fees regime is introduced and once the media attention has died down, the number of claims will level, but, in the meantime, employers must watch and wait.



     


Search

Sign Up

For the latest news and updates from Aftermarket Magazine.


Poll

Where should the next Automechanika show be held?



Facebook


©DFA Media 1999-2019