Deductions from wages clause

A deductions from wages clause enables you to make deductions from an employee’s pay in the event that the employee fails to work out their notice period or where they otherwise owe you money.

Unauthorised deductions

Subject to certain exceptions (for example, income tax and National Insurance deductions), no deduction may be made from an employee’s pay unless it is authorised by a relevant provision in the employee’s contract of employment or the employee has previously agreed in writing to the deduction being made. If you make a deduction from pay without the requisite authority, you will be in breach of the law. If the employee is then successful at employment tribunal in a claim for unauthorised deductions from wages, you are liable not only to repay the amount of the deduction made but also you will be unable to recover the amount in question by any other means and you could be liable to compensate the employee for any financial loss they suffered as a result of the unauthorised deduction, for example bank charges.

Not a disproportionate penalty

In addition, a deductions clause should ideally be drafted in such a way that it represents a genuine pre-estimate by you of the loss you believe you will suffer as a result of the employee’s breach of contract or acts or omissions. If the clause is drafted so that it acts as an extravagant penalty on the employee out of all proportion to your loss, it is unenforceable. You should consider using our Deductions from Wages Clause for all employees. Firstly, it enables you to recoup any actual losses which you suffer, subject to a maximum of one day’s pay for each day not worked, as a result of the employee failing to work out the whole or part of their notice period. This might cover, for example, the additional costs of having to hire temporary staff, when compared to the wages the employee would have been paid during the notice period. Of course, you cannot recover costs such as those relating to the recruitment of a permanent replacement, because these are costs that you would have had to incur regardless of whether the employee worked out their notice period. Neither can you recover costs for the inconvenience the employee may have caused you. Secondly, it allows you make various other deductions that you might need to make from an employee’s wages or final wage payment, including in respect of the repayment of loans or overpayments of wages, to recoup annual leave taken in excess of accrued entitlement on termination of employment and to cover the financial cost of loss or damage to your property as a result of the employee’s carelessness, negligence or wilful default. What you should do is check the employee’s contract of employment and any other documents which may refer to repayments (such as a staff handbook or policies) to see when payments may be due from your employee to you and then tailor our list to ensure you’ve included everything, so there can be no argument later that the agreement to deduct is not sufficiently clearly or precisely drafted to cover a particular deduction.