Dos and Don’ts of Calculating Final Salaries
Regardless of how an employee is exiting a business, there are certain dos and don’ts when dealing with final salaries to avoid disgruntled ex-employee’s claiming unlawful deduction of wages. We set out a simple guide as to how to tackle a final salary.
As a method of good practice, employers should ensure that the exiting employee understands how their final pay has been calculated and it should be clear from their payslip what each payment or deduction is practice.
Salary for work done
Employees should receive a salary for the days they have worked in the relevant pay period. If the employee’s last day is halfway through the working month, they would be entitled to pay for the days they have worked up to their last day. Similarly, any over overtime the employee has worked in this period should be paid to them in the normal way.
An employee’s final salary will generally be paid on their usually pay date. If an employee leaves at the very start of the month and pay day is at the end of the month, the exiting employee can expect to be paid at the end of the month in the normal way.
Accrued but untaken holiday
The employee will continue to accrue holiday entitlement up to their last day at work. If the employee has accrued but untaken holiday they have not taken before the last day of their employment, they will be entitled to payment in lieu of this as part of their final pay.
Notice Pay
All exiting employee’s will be entitled to notice pay except if they are being summarily dismissed with immediate effect for gross misconduct. For all other employees, the amount of notice to be given will be determined by the statutory notice period or employee’s contract of employment (whichever is greater).
It is possible for employers to rely on a Payment in Lieu of Notice (‘PILON’) clause with the employee’s contract where they can ask the employee to stop working immediately and pay them for the notice period they would have been expected to work under the contract. For example, if an employee with 6 months service is dismissed with one week’s statutory notice on 1 December, the employer can confirm their last day to be 1 December and confirm they receive payment for the 1 week notice by way of PILON.
If the employee fails to complete their notice period, you will only pay the employee until the last day they worked.
Deductions
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.
Deductions relating to Income Tax and National Insurance Contributions are required by statute. Any other deductions are therefore required to be agreed in writing by the employee by way of their contract or some other written agreement prior to the deduction being made.
For example, before deducting the costs of specific equipment from an employee’s final wage, the employer needs to show that they employee has consented to this deduction either by his contract of employment or agreed to the deduction in writing prior to it being made.
It is important for agreements regarding deductions from employee’s wages to be clear. To ensure complete clarity on possible deductions from wages, we recommend these deductions are made clear from the onset. Failing to set this out clearly at the start of the working relationship or before a deduction is made could give rise to a claim for an unlawful deduction of wages.
There is an exception to this rule, which permits an employer to make a deduction from wages in respect of:
- An overpayment of wages; or
- An overpayment of expenses incurred by the worker in carrying out their employment.
Author: Shamaila Gul, Employment Law Solicitor at Howarths
