Employment Law

Can I deduct from my employee’s wage if they make a mistake and it costs the business money?

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Can I deduct from my employee’s wage if they make a mistake and it costs the business money?

Everybody makes mistakes, but what happens if an employee makes a mistake at work and it costs the business money?
The answer to this question is not as straightforward as one would hope.
The starting point is that an employee has a right to be paid wages in full and the circumstances in which an employer can legally make deductions from an employee’s wage are limited.
An employer cannot make a deduction lawfully, unless:

  1. It is required by law, for example, to make national insurance and PAYE deductions.
  2. It is permitted under the employee’s written contract.
  3. The employee agrees to the deduction in writing before the deduction is made.

Generally, unless you have a contractual right to make the deduction for the mistake, or the employee agrees in writing before making the deduction, the deduction will be unlawful. In this circumstance, the employee could pursue a claim to recover the amount they have been underpaid. They could also resign and claim constructive unfair dismissal, if they have 2 years continuous service.
To mitigate against this risk, any provision in the contract must be precisely worded and specifically refer to the circumstances in which you intend to make a deduction in order for the deduction to be lawful and enforceable. For instance, if the contractual clause states that you have a right to make a deduction where the loss was sustained as a result of the employee’s breach of the Company’s rules, you would need to be able to evidence that the loss was caused this way. To gather evidence, you should investigate into the loss and establish the cause of such loss to justify any reliance on a contractual clause, including a record of the Company’s rule and it being communicated to the employee. It should also be addressed through a disciplinary process.
In addition, the amount that you are seeking to deduct must relate to the losses you have incurred and not exceed those. If the amount of deduction exceeds the loss suffered, this will be considered as a penalty.
There are also national minimum wage implications to consider too. Before making any deductions, you must ensure that you do not fall foul of the national minimum wage rules.
In essence, before any deduction is made from an employee’s wages for loss incurred by their mistakes, you should ask yourself the following questions:

  1. Does the employee’s contract specify an instance which would permit me to make deductions for the loss incurred? If not, has the employee agreed in writing to the deduction before the deduction is made?
  2. Is the amount I plan to deduct from the employee equal to the loss I incurred?
  3. Have I carried out an investigation into the loss and can provide evidence to justify the deduction?
  4. Will the employee still receive a wage in line with the national minimum wage?

If all of the answers to the above are ‘yes’, then you can make a deduction from the employee’s wage. There are of course practical commercial considerations when deciding whether it is appropriate to make deductions from an employees wages and many instances of mistakes resulting in minor losses may not warrant a deduction even if all of the above criteria are satisfied.

Author: Anna Schiavetta, Employment Law Solicitor at Howarths
At Howarths we can provide expert advice in relation to the legal aspects of making a deduction and help you consider the practical/commercial benefits of the same. Please give our team a call on 01274 864 999.

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