News & Views

Deductions from Wages In Retail – Getting it Right

In the second of a series of retail law blog posts looking at legal matters of particular interest to the retail sector, our employment team focuses on making deductions from wages.

Workers in the retail sector are among the lowest paid in the country. In our last retail post, we looked at the National Minimum Wage in the retail sector and explained how certain deductions from wages might push the worker’s income to below that of the legal minimum.

Retailers need to ensure deductions are made legally

The law on deductions from wages is quite stringent – retail employers need to ensure they get it right

Further, if deductions are made unlawfully, employers may find themselves faced with a costly Tribunal claim, which can have adverse effects both financially and in relation to the reputation of the business.

The law on deductions from wages is quite stringent. Get it wrong, and the employer may be liable to repay those deductions and be prevented from claiming them back from the worker. Below is an overview of the law in this area.

Why Deductions Might Be Made

Deductions might be made for various reasons, including:

  • Repayment of loans or advances of wages
  • Pension contributions
  • Overpaid holiday or salary payment
  • Payment for tools, uniforms etc.

Also, for many retail businesses, shortfalls in stock or cash (for example, in the tills) are a serious problem and can really affect profitability, particularly given that margins are often already tight. Employers frequently try to claw back these shortfalls from their workers by deducting the sums from their wages.

Getting It Right

To avoid falling foul of the law, employers should pay particular attention to the following:

  • Any deduction from wages must be authorised either by (1) statute; (2) the worker’s contract of employment or (3) a written agreement. Examples of deductions authorised by statute include tax and national insurance, or deductions made to comply with an attachment of earnings order made by a court. All other deductions must, effectively, be authorised by the worker – either under the contract of employment or in a written agreement.
  • It is good practice – and may, depending on the circumstances, be a legal requirement – to notify the worker in advance that (a) the deduction is going to be made (and the reason for it) and (b) how much will be deducted.
  • In circumstances when authorisation from the worker is required, it must be obtained from the worker before the deduction is made – it cannot be given retrospectively.
  • Care should be taken when including “deduction from wages” clauses in employment contracts. The clause must be specific enough to rely upon. A clause authorising the employer to deduct “any sums due to the employer from the employee for whatever purpose” will be unenforceable.
  • Even if there is authorisation in place, make sure that the deduction is, in fact, justified. Deducting £50 from a worker’s pay packet to reimburse the employer for £10 damage is unlikely to be justified.
  • Special rules apply to retail workers. Deductions can be made from the wages of workers in retail employment to compensate the employer for cash shortages or stock deficiencies. Some of the relevant restrictions are:

– “Retail employment” has a specific meaning but generally includes retail transactions with members of the public (i.e. the sale or supply of goods or services)
– Any deduction from the wages payable on any pay day must not exceed 1/10th of the gross amount of the wages payable on that day
– Any deduction must be made within 12 months of discovering the shortage or deficiency
– The deduction must still be authorised in accordance with the general principles outlined above. In addition, the employer must notify the worker in writing of the worker’s total liability before receiving or demanding any payment.
– Once the employment comes to an end, there is no limit on the amount that can be deducted from the final instalment of wages to cover cash shortages or stock deficiencies
– It is worthwhile, particularly for retail employers, getting a properly drafted contract (and, ideally, Employee Handbook) in place setting out the circumstances in which deductions can be made, and providing the necessary authorisation.

Many thousands of pounds are lost to employers each year because of inadequate employment documentation. Speak to a member of Sherrards’ Employment Team, led by Joanne Perry and Mark Fellows and based in St Albans, Hertfordshire, to understand how the team can help you get the necessary documentation and procedures in place.

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