By Paul Tew, an author of Wolters Kluwer’s Croner-i Human Resources,

An employer is not legally entitled to make a deduction from the wages or salary of a worker in employment, unless:

• the deduction is required or authorised to be made by virtue of a statutory provision or a relevant provision of the worker’s employment contract, or
• the worker has previously signified in writing his or her agreement or consent to the making of the deduction.

Any agreement between the employer and employee must be made in such a way that it is clear that the money is deducted from the employee's pay and is not a general agreement allowing the employer to reclaim a sum of money from the employee. If the employer is likely to seek recovery by means other than a deduction rom salary, the express clause which allows the deduction must be drafted as such.

If an employer is required by an employment tribunal to repay sums unlawfully deducted from a worker's wages it will never be able to recover those sums, even if they are properly due to the employer.

Penalty clause issues

Many deductions are made by employers from workers’ final payment of wages or salary and employment contracts may contain a clause that permits an employer to make deductions from a worker’s pay if the employee leaves without working the appropriate period of notice.

Many employers are reluctant to enforce this clause, because taking such an action can be regarded as imposing a penalty clause, with the intention of punishing the worker, such that the clause is not necessarily related to probable loss to the employer at all. A penalty clause is unenforceable in law.

In contrast, if the employment contract provides for a sum equivalent to the notice period to be payable upon breach of contract, and the sum reflects a genuine pre-estimate of the employer’s losses as liquidated damages, fixed to obviate the need to prove loss in a claim for damages, it is more likely to be regarded as compensating the employer and therefore enforceable against the employee.

Employment contracts should be constructed on an objective basis with the reality of the employment circumstances in mind.

An employee’s failure to work his or her notice period can cause severe disruption to the activities of a business, as well as resulting in additional costs. An accurate and well-constructed contractual clause should make clear that the purpose of the provision is to deal with the additional expenses of replacing the key worker, resulting from early termination of the employment. This should avoid some of the problems that deduction from wages clauses can cause employers.

The employer need not be overly concerned with precise calculations, but, nevertheless, consideration of the likely losses, supported by some workings as to how this amount was arrived at, will support any employer argument that a clause is valid and enforceable. If the differential between the losses the employer could recover in an action for breach of contract and the amount in the repayment clause is “unconscionable”, the courts may consider this to be a penalty clause and unenforceable.