The recent case of Ridge v HM Land Registry, the EAT confirmed the position that a reduction in an employee's wages to recover an over-payment is a deduction and should be clearly itemised in the employee's payslip in accordance with section 8 of the Employment Rights Act 1996. This may not be the most exciting case on the face of it, but it does raise some interesting points for employers to consider in order to avoid costly mistakes, so keep on reading!

Legal Position

Employee's have the right to receive an itemised statement, which must contain certain specific information, including gross and net salary, as well as details of any deductions and the reason these have been made. Failure to provide a properly itemised statement entitles an employee to bring a claim, which can result in the tribunal issuing a declaration that the payslip does not contain the particulars of a deduction, and ordering the employer to pay the employee the total amount of the unexplained deductions made in the 13 weeks before the application to the tribunal.

Facts

Mr Ridge was a software engineer who became unwell and had significant periods of sickness absence. He exhausted his sick pay entitlement but continued to take time off due to his illness. Some absences were not reported or processed before the end of the month which coincided with pay day. As such, he was overpaid for these months and his employer deducted this overpayment from his salary. The deductions in Mr Ridge's payslip were shown by a figure with a minus sign next to it and no further details were given. Mr Ridge raised the issue with his employer and the reasons for the deductions were explained to him. However, no changes were made to Mr Ridge's payslips and he brought a tribunal claim under section 8 of the Employment Rights Act 1996.

Decision

The EAT held that the reduction was a deduction for the purposes of section 8 of the Employment Rights Act 1996 and his employer had failed to set out the amount and reason for the deduction and made a declaration to this effect. There was no award for damages as the EAT considered it would be disproportionate to do so, as Mr Ridge knew deductions were being made and the reasons were explained to him prior to him bringing a claim.

This case highlights the need for employers to itemise payments and deductions on payslips, even in situations where the employee knows why the deduction is being made. Failure to do so puts employers at risk of punitive damages, even where the employer has the right to make the deduction.

Practical steps

When making deductions from pay it is essential that employers ensure they have the right to make such deductions. Without the right to make deductions employers are exposed to the risk of claims for unlawful deductions of wages, which can be extremely costly where there is a series of deductions over time.

When making deductions from salary, employers should consider the following:

1. General Consent – ensure that all contracts of employment give the express right to make deductions from pay.

2. Specific Consent – as well as having a general contractual clause, it is recommended that consent is obtained for specific types of deduction. You may wish to consider deductions for the following:

  • Excess holiday taken by an employee over and above what they have accrued;
  • Pension contributions;
  • Loans to employees, for example, a season ticket loan;
  • Payments that are conditional on continued employment for a certain period, such as training/exam costs or return to work bonuses where the employee leaves shortly after receiving the benefit; and
  • Deductions on account of a cash shortage or stock deficiency (common in the retail industry).

3. Formalities – where these clauses are inserted into a contract of employment, you should ensure that the employee has signed this document before you start making any deductions. With respect to deductions for cash shortage or stock deficiency, you should ensure that you notify the employee in writing of their total liability and make a written demand for payment on one of the employee's pay days.

4. Separate Agreement – for one-off deductions that are not specifically covered in the contract of employment, it is advisable to enter into a separate agreement that sets out the terms and is signed by the employee.

Finally, ensure that you provide itemised payslips, setting out any deductions and what they relate to.

Please let us know if you require any assistance or if you would like us to review your contractual documentation and/or policies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.