Pay - an overview of obligations
Making deductions
Ensure that any deductions you make from a worker's pay are allowed
for in their contract. Otherwise they may claim for breach of contract.
Deductions are unlawful unless:
- They are legally authorised, eg PAYE income tax and National
Insurance contributions.
- It is allowed by the worker's contract - they have a copy of
the relevant term or a written explanation before you make the
deduction.
- Workers have agreed in writing before you deduct pay for other
reasons, eg as loan repayments or pension contributions.
For information, see our guides on how to manage student
loans, payroll and other deductions and operate
a year-round PAYE system.
These conditions do not always have to be met, eg if you make deductions
to refund an overpayment of wages, or the employee is on strike
or if the deduction is to satisfy a court order, eg to recover debts.
However, the worker must have agreed in advance, in writing.
If your workers do retail work, you may make deductions
from wages to recover cash shortages or stock deficiencies only
if, in addition to the above, you:
- inform the worker, in writing, of the total shortfall you are
recovering before the deduction is made
- issue a written demand on a pay day for the repayment
- make the deduction - or the first in a series - no sooner than
their first pay day after telling them of the shortfall, or, if
you tell them on a pay day, not before that day
- do not deduct more than one tenth of the worker's gross pay
on any given pay day - any remaining shortfall can be recovered
on future pay days
- make the first deduction within 12 months of discovering the
shortage
What counts as pay
The following count as pay:
- fees
- bonuses
- holiday pay
- statutory payments, ie Statutory Sick Pay, Maternity, Paternity
and Adoption Pay
See the pages in this guide on Statutory Maternity,
Paternity and Adoption Pay and Statutory Sick Pay.
Pay does not include:
- loans to the employee
- refunds for expenses
- pensions
- redundancy payments
- tips paid directly to the employee
Subjects covered in this guide
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